<PAGE> 1
PROSPECTUS
FEBRUARY 24, 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.)
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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"). HORIZON SHARES AND HORIZON SERVICE SHARES
MAY NOT BE PURCHASED BY INDIVIDUALS DIRECTLY, BUT INSTITUTIONAL INVESTORS MAY
PURCHASE SHARES FOR ACCOUNTS MAINTAINED BY INDIVIDUALS. THE FUNDS ARE DESIGNED
TO PROVIDE INSTITUTIONS WITH DAILY LIQUIDITY. THE TAX-EXEMPT MONEY FUND IS A
DIVERSIFIED INVESTMENT PORTFOLIO AND THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
IS A NON-DIVERSIFIED INVESTMENT PORTFOLIO.
THE INVESTMENT OBJECTIVE OF THE TAX-EXEMPT MONEY FUND IS TO PROVIDE AS HIGH A
LEVEL OF CURRENT INTEREST INCOME EXEMPT FROM FEDERAL INCOME TAXES AS IS
CONSISTENT WITH RELATIVE STABILITY OF PRINCIPAL. THE INVESTMENT OBJECTIVE OF THE
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS TO SEEK AS HIGH A LEVEL OF CURRENT
INTEREST INCOME FREE OF FEDERAL INCOME TAX AND CALIFORNIA STATE PERSONAL INCOME
TAX AS IS CONSISTENT WITH THE PRESERVATION OF CAPITAL AND RELATIVE STABILITY OF
PRINCIPAL. THE FUNDS SEEK TO ACHIEVE THEIR OBJECTIVES BY INVESTING PRIMARILY IN
U.S. DOLLAR-DENOMINATED OBLIGATIONS THE INTEREST ON WHICH IS EXEMPT FROM REGULAR
FEDERAL INCOME TAX, AND IN THE CASE OF THE CALIFORNIA TAX-EXEMPT MONEY MARKET
FUND, IS ALSO EXEMPT FROM TAXATION UNDER THE LAWS OR CONSTITUTION OF CALIFORNIA.
PORTFOLIO SECURITIES HELD BY EACH FUND HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND. PORTFOLIO SECURITIES WHICH
HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY THE FUND WITHIN THIRTEEN
MONTHS (AS WELL AS CERTAIN U.S. GOVERNMENT OBLIGATIONS WITH FLOATING OR VARIABLE
INTEREST RATES) AND SECURITIES HELD AS COLLATERAL FOR REPURCHASE AGREEMENTS MAY
HAVE LONGER MATURITIES.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA") ACTS
AS INVESTMENT ADVISER TO THE FUNDS. CONCORD FINANCIAL GROUP, INC. SPONSORS THE
FUNDS AND ACTS AS THEIR DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS
THEIR ADMINISTRATOR, NEITHER OF WHICH IS AFFILIATED WITH BANK OF AMERICA.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUNDS DESCRIBED
HEREIN THAT INVESTORS SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUNDS IS
CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 24, 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.
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Shares of the Funds are not bank deposits or obligations of or guaranteed or
endorsed by, Bank of America National Trust and Savings Association or any of
its affiliates, and are not federally insured by, guaranteed by, obligations of
or otherwise supported by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental agency. Each
Fund seeks to maintain its net asset value per share at $1.00 for purposes of
purchases and redemptions, although there can be no assurance that it will be
able to do so on a continuous basis. Investment in the Funds involves investment
risk, including the possible loss of principal amount invested.
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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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<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION 2
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVES AND
POLICIES 6
MUNICIPAL SECURITIES 8
OTHER INVESTMENT PRACTICES 9
SPECIAL CONSIDERATIONS AND RISKS 11
INVESTMENT LIMITATIONS 12
INVESTMENT DECISIONS 13
MANAGEMENT OF THE FUNDS 13
PURCHASE AND REDEMPTION OF SHARES 15
DIVIDENDS, DISTRIBUTIONS
AND TAXES 17
DESCRIPTION OF SHARES 18
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
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</TABLE>
<PAGE> 3
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>
<S> <C> <C> <C> <C>
CALIFORNIA
TAX-EXEMPT TAX-EXEMPT
MONEY MONEY MARKET
--------------- ---------------
HORIZON HORIZON
HORIZON SERVICE HORIZON SERVICE
SHARES SHARES* SHARES SHARES*
----- ----- ----- -----
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
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
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............... .20% .20% .20% .20%
----- ----- ----- -----
All Other Expenses............ .08% .33% .10% .35%
----- ----- ----- -----
Shareholder Service
Payments.................. -- .25% -- .25%
Other Expenses.............. .08% .08% .10% .10%
Total Operating Expenses...... .28% .53% .30% .55%
===== ===== ===== =====
</TABLE>
- -------------------------------------------
* The Company understands that institutions that enter into agreements
("Shareholder Service Agreements") with the Company ("Shareholder
Organizations") under the Company's Shareholder Services Plan (the "Plan")
may charge fees to their Customers who are the beneficial owners of Horizon
Service Shares in connection with their accounts. Each Fund's Horizon
Service Shares bear fees paid to Shareholder Organizations under the Plan at
the annual rate of up to .25% of the average daily net asset value of each
Fund's Horizon Service Shares.
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<TABLE>
<CAPTION>
EXAMPLES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end
of each time period:
Tax-Exempt Money-Horizon Shares................................ $3 $ 9 $16 $36
Tax-Exempt Money-Horizon Service Shares........................ $5 $17 $30 $66
California Tax-Exempt Money Market-Horizon Shares.............. $3 $10 $17 $38
California Tax-Exempt Money Market-Horizon Service Shares...... $6 $18 $31 $69
</TABLE>
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The foregoing Expense Summary and Examples are intended to assist investors in
Horizon Shares and Horizon Service Shares in understanding the expenses their
class will pay. Investors bear these expenses indirectly since they reduce the
amount of income paid by the Funds to investors as dividends. 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.
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURNS AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS
AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
<PAGE> 4
FINANCIAL HIGHLIGHTS
The Tax-Exempt Money Fund commenced operations on July 10, 1987 as a separate
investment portfolio (the "Predecessor Tax-Exempt Fund") of The Horizon Funds,
a Massachusetts business trust. On January 19, 1990, the Predecessor Tax-Exempt
Fund was reorganized as a new portfolio of the Company.
The table below sets forth certain information concerning (i) the investment
results of the Predecessor Tax-Exempt Fund for the periods ended on or before
April 30, 1989, (ii) the combined investment results of the Predecessor
Tax-Exempt Fund and the Tax-Exempt Money Fund for the period May 1, 1989 through
February 28, 1990, (iii) the investment results of the Tax-Exempt Money Fund for
the fiscal years ended February 28, 1991, February 29, 1992, February 28, 1993,
February 28, 1994 and February 28, 1995, (iv) and the investment results of the
Tax-Exempt Money Fund for the six-month period ended August 31, 1995. Except for
the period ended August 31, 1995, the information contained in the Financial
Highlights has been audited by Price Waterhouse LLP, independent accountants of
both the Predecessor Tax-Exempt Fund and the Tax-Exempt Money Fund. Price
Waterhouse LLP's unqualified report on the financial statements containing such
information, insofar as it relates to the five year period ended February 28,
1995, 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 Horizon Share Outstanding Throughout Each of the Periods
Indicated:
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<TABLE>
<CAPTION>
TAX-EXEMPT MONEY FUND
-----------------------------------------------------------------------------------------------
SIX YEAR ENDED MAY 1, YEAR
MONTHS ---------------------------------------------------------------- 1989 ENDED
ENDED FEBRUARY FEBRUARY FEBRUARY THROUGH APRIL
AUGUST 28, 28, 28, FEBRUARY FEBRUARY FEBRUARY 30,
31, 1995 1995+++ 1994+++ 1993+++ 29, 1992 28, 1991 28, 1990 1989++
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
-----------
<S> <C> <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 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income from
Investment
Operations:
Net investment
income............ 0.0184 0.0285 0.0225 0.0269 0.0410 0.0557 0.0503 0.0577
Less Dividends from
net investment
income.............. (0.0184) (0.0285) (0.0225) (0.0269) (0.0410) (0.0557) (0.0503) (0.0577)
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net
asset value per
share............... 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value per
share, end of
period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= =========
Total return......... 2.14%- 2.89% 2.27% 2.72% 4.18% 5.71% 5.15%- 5.93%
Ratios/Supplemental
Data:
Net assets, end of
period (000)...... $330,701 $381,811 $514,663 $383,848 $345,221 $428,127 $355,656 $178,586
Ratio of expenses to
average net
assets............ 0.31%+ 0.28% 0.28%** 0.28% 0.28% 0.27%** 0.21%**+ 0.21%**
Ratio of net
investment income
to average net
assets............ 3.65%+ 2.81% 2.25%** 2.69% 4.12% 5.54%** 5.96%**+ 5.84%**
<CAPTION>
PERIOD
ENDED
APRIL
30,
1988*++
--------
<S> <C>
HORIZON SHARES
Net asset value per
share, beginning of
period.............. 1.00
--------
Income from
Investment
Operations:
Net investment
income............ 0.0392
Less Dividends from
net investment
income.............. (0.0389)
--------
Net change in net
asset value per
share............... 0.0003
--------
Net asset value per
share, end of
period.............. $ 1.00
=========
Total return......... 3.92%-
Ratios/Supplemental
Data:
Net assets, end of
period (000)...... $104,358
Ratio of expenses to
average net
assets............ 0.20%**+
Ratio of net
investment income
to average net
assets............ 5.17%**+
</TABLE>
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3
<PAGE> 5
* For the period July 10, 1987 (commencement of operations) through April 30,
1988.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.01%, 0.02%, 0.07% (annualized), 0.19% and 0.23%
(annualized) for the years or periods ended February 28, 1994, February 28,
1991, February 28, 1990, April 30, 1989 and April 30, 1988, respectively.
+ Annualized.
++ This information represents the results of operations of the former Horizon
Tax-Exempt Money Fund, the assets and liabilities of which were transferred
to the Pacific Horizon Funds, Inc. -- Tax-Exempt Money Fund on January 19,
1990. See Note 1 to the financial statements which are incorporated by
reference 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.
Selected Data for a Horizon Service Share Outstanding Throughout Each of the
Periods Indicated:
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<TABLE>
<CAPTION>
TAX-EXEMPT MONEY FUND
SIX --------------------------------------------------------------------------------------------
MONTHS YEAR ENDED MAY 1, YEAR
ENDED -------------------------------------------------------------- 1989 ENDED
AUGUST FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY THROUGH APRIL
31, 28, 28, 28, 29, 28, FEBRUARY 30,
1995 1995+++ 1994+++ 1993+++ 1992 1991 28, 1990 1989++
-------- ------- ------- ------- ------- ------- -------- --------
(UNAUDITED)
-----------
<S> <C> <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 $ 1.00
------- ------- ------- ------- ------- ------- -------- --------
Income from
Investment
Operations:
Net investment
income.......... 0.0172 0.0260 0.0200 0.0244 0.0385 0.0532 0.0482 0.0552
Less Dividends from
net investment
income............ (0.0172) (0.0260) (0.0200) (0.0244) (0.0385) (0.0532) (0.0482) (0.0552)
------- ------- ------- ------- ------- ------- -------- --------
Net change in net
asset value per
share............. (0.0000) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
------- ------- ------- ------- ------- ------- -------- --------
Net asset value per
share, end of
period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========== ==========
Total return....... 1.99%- 2.63% 2.02% 2.47% 3.92% 5.45% 4.93% 5.66%
Ratios/Supplemental
Data:
Net assets, end of
period (000)...... $49,311 $39,158 $48,328 $49,695 $47,230 $53,732 $ 36,538 $178,586
Ratio of expenses
to average net
assets.......... 0.56%+ 0.53% 0.53%** 0.53% 0.53% 0.52%** 0.46%**+ 0.46%**
Ratio of net
investment
income to
average net
assets.......... 3.41%+ 2.57% 2.04%** 2.42% 3.88% 5.29%** 5.73%**+ 5.70%**
<CAPTION>
PERIOD
ENDED
APRIL
30,
1988*++
--------
<S> <C>
HORIZON SERVICE
SHARES
Net asset value per
share, beginning
of period......... $ 1.00
--------
Income from
Investment
Operations:
Net investment
income.......... 0.0090
Less Dividends from
net investment
income............ (0.0090)
--------
Net change in net
asset value per
share............. 0.0000
--------
Net asset value per
share, end of
period............ $ 1.00
==========
Total return....... 0.90%
Ratios/Supplemental
Data:
Net assets, end of
period (000)...... $104,358
Ratio of expenses
to average net
assets.......... 0.45%**+
Ratio of net
investment
income to
average net
assets.......... 4.54%**+
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period February 18, 1988 (initial offering day) through April 30, 1988.
** Net of expense reimbursements which had the effect of reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.04%, 0.02%, 0.07% (annualized), 0.19% and 0.16% (annualized) for
the years or periods ended February 28, 1994, February 28, 1991, February 28, 1990, April 30, 1989 and April 30, 1988,
respectively.
+ Annualized.
++ This information represents the results of operations of the former Horizon Tax-Exempt Money Fund, the assets and liabilities
of which were transferred to the Pacific Horizon Funds, Inc. -- Horizon Tax-Exempt Money Fund on January 19, 1990.
+++ Security Pacific National Bank served as investment adviser through April 21, 1992. Bank of America National Trust and
Savings Association served as investment adviser commencing April 22, 1992.
- Not annualized.
</TABLE>
4
<PAGE> 6
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. As
of the date of this prospectus, the California Tax-Exempt Money Market Fund
began offering a third series of shares known as the Horizon Shares.
The table below sets forth certain information concerning the investment results
for Horizon Service Shares of the California Tax-Exempt Money Market Fund for
the fiscal years ended February 28, 1994 and February 28, 1995 and the period
ended August 31, 1995. Except for the period ended August 31, 1995, the
information contained in the Financial Highlights has been audited by Price
Waterhouse LLP, independent accountants of the California Tax-Exempt Money
Market Fund, whose unqualified report thereon is incorporated by reference 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 in the Statement of Additional Information.
Selected Data for a Horizon Service Share Outstanding Throughout the Period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT MONEY MARKET
FUND
------------------------------------
SIX
MONTHS
ENDED YEAR YEAR
AUGUST ENDED ENDED
31, 1995 FEBRUARY FEBRUARY
(UNAUDITED) 28, 1995 28, 1994
--------- --------- ---------
<S> <C> <C> <C>
HORIZON SERVICE SHARES
Net Asset Value per share, Beginning of Year.............. $ 1.00 $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income................................... 0.0170 0.0256 0.0198
Net realized loss on securities......................... (0.0001) (0.0001) (0.0001)
--------- --------- ---------
Total income from investment operations................... 0.0169 0.0255 0.0197
Less dividends: from net investment income................ (0.0170) (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.............................................. 1.71%- 2.59% 2.00%
Ratios/Supplemental Data:
Net assets, end of period (000)......................... $ 114,240 $ 88,003 $ 123,746
Ratio of expenses to average net assets................. 0.54%+ 0.55% 0.53%*
Ratio of net investment income to average net assets.... 3.36%+ 2.50% 1.98%*
</TABLE>
- ---------------
* Net of fee waivers and expense reimbursements by the Adviser and the
Administrator which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.07%.
+ Annualized.
- Not Annualized.
YIELD INFORMATION. From time to time the "yield," "effective yield" or
"tax-equivalent yield" of a Fund may be quoted in advertisements or reports to
shareholders. Each yield figure is based on historical earnings and is not
intended to indicate future performance. The "yield" of a Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement or report). This income is then
"annualized" -- that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the
5
<PAGE> 7
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. A Fund's "tax-equivalent yield"
shows the level of taxable yield needed to produce an after-tax equivalent to
the Fund's tax-free yield. This is done by increasing the Fund's yield
(calculated as above) by the amount necessary to reflect the payment of Federal,
and in the case of the California Tax-Exempt Money Market Fund, California
income tax at a stated tax rate. A Fund's "tax-equivalent yield" will always be
higher than its "yield."
Additionally, the yields of a Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Funds' yields may be compared to Donoghue's Tax-Free Money Fund Average and
Donoghue's Money Fund Averages, which are averages compiled by Donoghue's Money
Fund Report. Yield data as reported in national financial publications,
including Money, Forbes, Barron's, Wall Street Journal and New York Times, or in
publications of a local or regional nature, may also be used in comparing the
yields of a Fund. A complete listing of the indices, rankings and publications
discussed above is contained in the Statement of Additional Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the shares of a Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Bank of America or Shareholder Organizations (defined below)
directly to their customer accounts in connection with investments in shares of
a Fund (which fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income) will not be included in the Fund's calculations of yield.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
This section describes the investment objectives and policies of the Funds.
Assets of the Funds will be invested in dollar-denominated debt securities with
remaining maturities of thirteen months or less as defined by the Securities and
Exchange Commission (the "SEC"), and the dollar-weighted average portfolio
maturity of each Fund will not exceed 90 days. All securities acquired by the
Funds will be determined by the investment adviser, under guidelines established
by the Company's Board of Directors, to present minimal credit risks. Securities
acquired by the Tax-Exempt Money Fund will, under normal market conditions, be
"First Tier Securities" (as defined by the SEC), of the types described below.
During temporary defensive periods or if in the investment adviser's opinion
suitable First Tier Securities are not available for investment, however, the
Tax-Exempt Money Fund may also acquire "Eligible Securities" (as defined by the
SEC) of the types defined below. Securities acquired by the California
Tax-Exempt Money Market Fund will be Eligible Securities. First Tier Securities
consist of instruments that are rated at the time of purchase in the top rating
category by one (if rated by only one) or more unaffiliated nationally
recognized statistical rating organizations ("NRSROs") including Standard and
Poor's Ratings Group, Division of McGraw Hill ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. ("Duff & Phelps")
or Fitch Investors Service, Inc. ("Fitch") or issued by issuers with such
ratings. Eligible Securities consist either of instruments that are rated at the
time of purchase in
6
<PAGE> 8
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 no short-term ratings) purchased by a
particular Fund will be of comparable quality to the rated instruments that the
Fund may purchase, as determined by the Funds' investment adviser pursuant to
guidelines approved by the Board of Directors.
TAX-EXEMPT MONEY FUND. The Tax-Exempt Money Fund's investment objective is to
provide as high a level of current interest income exempt 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. These
obligations are described further in the Statement of Additional Information.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND. The California Tax-Exempt Money Market
Fund's investment objective is to seek as high a level of current interest
income free of Federal income tax and California state personal income tax as is
consistent with the preservation of capital and relative stability of principal.
The Fund's assets are primarily invested in Municipal Securities issued by or on
behalf of the State of California and other governmental issuers. Municipal
Securities acquired by the Fund will generally have remaining maturities of
thirteen months or less.
As a matter of fundamental policy, under normal market conditions at least 80%
of the Fund's net assets will be invested in Municipal Securities, the interest
on which is exempt from taxation under the California Constitution or the laws
of California ("California Municipal Securities"). So long as at least 50% of
the Fund's total assets are invested in debt obligations, the interest on which
is exempt from taxation by the state of California ("California Exempt
Securities," which are generally limited to California Municipal Securities and
certain U.S. Government and U.S. Possession obligations) as of the end of each
quarter, dividends paid by the Fund which are derived from interest on
California Exempt Securities will be exempt from California state personal
income tax; if this policy is not achieved, no portion of the Fund's dividends
will be exempt from California state personal income tax. Dividends derived from
interest on Municipal Securities other than California Municipal Securities will
be subject to California state personal income tax. See "Taxes."
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The Fund may hold uninvested cash reserves pending investment, during temporary
defensive periods, or if, in the opinion of the Fund's investment adviser,
suitable tax-exempt obligations are unavailable. In accordance with the Fund's
investment objective, and subject to the Fund's fundamental policy that under
normal market conditions 80% of its net assets be invested in California
Municipal Securities, investments may be made in taxable obligations of up to
thirteen months in maturity if, for example, suitable tax-exempt obligations are
unavailable or if acquisition of U.S. Government or other taxable securities is
deemed appropriate for temporary defensive purposes. Such taxable obligations
will be limited to those that may be acquired by the Tax-Exempt Money Fund.
Under normal market conditions, the Fund anticipates that not more than 5% of
its net assets will be invested in any one category of taxable securities.
Additionally, the Fund will not invest more than 10% of its total assets in
securities that are illiquid because of absence of a readily available market or
otherwise, including repurchase agreements providing for settlement more than
seven days after notice.
MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held by
the Funds are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Private activity bonds are generally revenue securities, which are not
payable from the unrestricted revenues of the issuers, and the credit ratings of
such bonds are usually directly related to the credit ratings of the users of
the facilities involved. The Funds may also acquire "moral obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues it may draw on a reserve fund, the restoration
of which is a moral commitment but not a legal obligation of the state or
municipality which created the issuer.
Municipal Securities include debt obligations issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from regular Federal
income tax. Municipal Securities also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loan obligations. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
revenues. The Funds may also purchase tax-exempt commercial paper.
Securities acquired by the Funds may be in the form of custodial receipts
evidencing rights to receive a specific future interest payment, principal
payment or both on certain Municipal Securities. Such obligations are held in
custody by a bank on behalf of holders of the receipts. These custodial receipts
are known by various names, including "Municipal Receipts," "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS") and "Municipal
Zero-Coupon Receipts." A Fund may also purchase from time to time participation
interests in debt securities held by trusts or financial institutions. A
participation interest gives the Fund involved a specified undivided interest
(up to 100%) in the underlying obligation. Participation interests purchased by
a Fund may have fixed, floating or variable
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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 participation interest, plus accrued
interest; as to these instruments, the Funds intend to exercise their right to
demand payment as needed to provide liquidity, to maintain or improve the
quality of their respective investment portfolios or upon a default (if
permitted under the terms of the instrument). Although a participation interest
may be sold by a Fund under normal circumstances they will be held until
maturity.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from regular Federal income tax (and, with respect to
California Municipal Securities, California state personal income tax), are
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Funds nor their investment adviser will review the proceedings
relating to the issuance of Municipal Securities or the bases for such opinions.
OTHER INVESTMENT PRACTICES
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the Funds may
include variable and floating rate instruments, which may have a stated maturity
in excess of the Funds' maturity limitations but which will, in such event and
except with respect to certain U.S. Government obligations purchased by the
Tax-Exempt Money Fund, permit the Fund involved to demand payment of the
principal of the instrument at least once every thirteen months upon not more
than thirty days notice. Such instruments may include variable amount master
demand notes that permit the indebtedness thereunder to vary, in addition to
providing for periodic adjustments in the interest rate. There may be no active
secondary market with respect to a particular variable or floating rate
instrument. Nevertheless, the periodic readjustments of their interest rates
tend to assure that their value to a Fund will approximate their par value.
Illiquid variable and floating rate instruments (instruments which are not
payable upon seven days notice and do not have an active trading market) that
are acquired by a Fund are subject to a Fund's percentage limitations on
illiquid investments. The Fund's investment adviser will continuously monitor
the creditworthiness of issuers of variable and floating rate instruments in
which the Funds invest, and their ability to repay principal and interest.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed settlement" basis. When-issued
and forward commitment transactions, which involve a commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Fund to lock in a
price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates. Delayed settlement describes securities
transaction in the secondary market for which settlement will occur sometime in
the future. When-issued, forward commitment and delayed settlement transactions
involve the risk, however, that the yield or price obtained in a transaction may
be less favorable than the yield or price available in the market when the
securities delivery takes place. A Fund's forward commitments, when-issued
purchases and delayed settlements are not expected to exceed 25% of the value of
its total assets absent unusual market conditions. A Fund's liquidity and the
ability of the investment adviser to manage its portfolio may be adversely
affected in the event its forward commitments, commitments to
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<PAGE> 11
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 Municipal Securities held in their respective portfolios. Under a
stand-by commitment, a dealer agrees to purchase at the Fund's option specified
Municipal Securities at a specified price. The Funds will acquire stand-by
commitments solely to facilitate portfolio liquidity and 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 will pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities).
REPURCHASE AGREEMENTS. The Funds may agree to purchase securities from
financial institutions, such as banks and broker-dealers, as are deemed
creditworthy by the Company's investment adviser under guidelines approved by
the Board of Directors, subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Although the securities
subject to a repurchase agreement may bear maturities exceeding thirteen months,
the Funds intend only to enter into repurchase agreements having maturities not
exceeding 60 days. Securities subject to repurchase agreements are held either
by the Company's custodian, or sub-custodian, or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
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. 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.
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SPECIAL CONSIDERATIONS AND RISKS
In seeking to achieve their respective investment objectives the Funds may
invest in private activity bonds the interest on which, although exempt from
regular Federal income tax, may constitute an item of tax preference for
purposes of the Federal alternative minimum tax. See "Taxes." Investments in
such securities, however, will not exceed under normal market conditions 20% of
a Fund's total assets when added together with any taxable investments held by
the Fund. Moreover, although the Funds do not presently intend to do so on a
regular basis, they may invest more than 25% of their respective assets in
Municipal Securities the interest on which is paid solely from revenues of
similar projects if such investment is deemed necessary or appropriate by the
investment adviser. Additionally, although the Tax-Exempt Money Fund may invest
more than 25% of its assets in Municipal Securities the issuers of which are
located in the same state, it does not presently intend to do so on a regular
basis other than issuers located in California. To the extent a Fund's assets
are concentrated in Municipal Securities payable from revenues on similar
projects or issued by issuers located in the same state, the Fund will be
subject to the peculiar economic, political and business risks presented by the
laws and economic conditions relating to such states and projects to a greater
extent than it would be if its assets were not so concentrated.
The California Tax-Exempt Money Market Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940. Investment return
on a non-diversified portfolio typically is dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio, and thereby subject the market-based net asset value per share of the
non-diversified portfolio to greater fluctuations. In addition, a
non-diversified portfolio may be more susceptible to economic, political and
regulatory developments than a diversified investment portfolio with similar
objectives may be.
The Funds' concentration in California Municipal Securities raises additional
considerations. Payment of the interest on and the principal of these
obligations is dependent upon the continuing ability of California issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk
inherent in the Funds' concentration in such obligations versus the safety that
comes with a less geographically concentrated investment portfolio and should
compare the yield available on a portfolio of California issues with the yield
of a more diversified portfolio including non-California issues before making an
investment decision.
Many of the Funds' Municipal Securities are likely to be obligations of
California governmental issuers which rely in whole or in part, directly or
indirectly, on real property taxes as a source of revenue. "Proposition
Thirteen" and similar California constitutional and statutory amendments and
initiatives in recent years have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters in recent years, through limiting various other
taxes, have resulted in a substantial reduction in state revenues. Decreased
state revenues may result in reductions in allocations of state revenues to
local governments.
Because of the complex nature of the various initiatives mentioned above and
certain possible ambiguities and inconsistencies in their terms and the scope of
various exemptions and exceptions, as well as the impossibility of predicting
the level of future appropriations for state and local California governmental
entities, it is not presently possible to determine the impact of these
initiatives and related measures on the ability of California governmental
issuers to pay interest or repay principal on their obligations. There have,
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<PAGE> 13
however, been certain adverse developments with respect to Municipal Securities
of California governmental issuers over the past several years.
In addition to the various initiatives discussed above, economic factors such as
the reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the economy of California. These
economic factors have reduced revenues to the state government at a time when
expenses of state government such as education costs, various welfare costs and
other expenses have been rising. Such economic factors have also adversely
impacted the ability of state and local California governmental entities to
repay debt.
In addition to the risk of nonpayment of state and local California governmental
debt, if such debt declines in quality and is downgraded by the NRSROs, it may
become ineligible for purchase by the Funds pursuant to current Securities and
Exchange Commission regulations. Since there are large numbers of buyers of such
debt that are similarly restricted, the supply of Eligible Securities (as
defined above) could become inadequate at certain times. A more detailed
description of special factors affecting investments in California Municipal
Securities, of which investors should be aware, is set forth in the Statement of
Additional Information.
INVESTMENT LIMITATIONS
The investment objective of each Fund is a fundamental policy that may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding shares (as defined in the Investment Company Act of 1940). A Fund's
policies may be changed by the Company's Board of Directors without the
affirmative vote of the holders of a majority of such Fund's outstanding shares,
except that the investment limitations set forth below may not be changed
without such a vote of shareholders. A description of certain other fundamental
investment limitations is contained in the Statement of Additional Information.
The Tax-Exempt Money Fund may not:
1. Under normal circumstances invest less than 80% of its total assets in
Municipal Securities (other than private activity bonds the interest on which
may be subject to the federal alternative minimum tax).
2. Purchase any securities which would cause 25% or more of the value of its
total assets at the time of such purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry; provided, however, that (a) there is no limitation with
respect to investments in Municipal Securities or obligations issued or
guaranteed by the Federal Government and its agencies and instrumentalities:
(b) although there is no limitation with respect to investments in
certificates of deposit and bankers' acceptances issued by domestic branches
of United States banks, no more than 10% of the total value of the Fund's
assets at the time of purchase may be invested in certificates of deposit and
bankers' acceptances issued by domestic branches of foreign banks and no more
than 25% of the total value of the Fund's assets at the time of purchase may
be invested in certificates of deposit and bankers' acceptances issued by
domestic branches of foreign banks and foreign branches of domestic banks;
(c) each utility service (such as gas, gas transmission, electric and
telephone service) will be considered a single industry for purposes of this
policy; and (d) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of their parents.
3. Borrow money except from banks for temporary purposes and in amounts not in
excess of 10% of the value of the Fund's total assets at the time of such
borrowing, or mortgage, pledge or hypothecate any assets except in connection
with any such borrowing and in amounts not in excess of the lesser of the
dollar amounts borrowed or 10% of the value
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<PAGE> 14
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 a reverse repurchase agreement to meet redemptions or for
other temporary purposes in amounts up to 10% of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser
of the dollar amounts borrowed or 10% of its total assets at the time of such
borrowing.
INVESTMENT DECISIONS
Investment decisions for each Fund are made independently from those for other
investment companies and accounts managed by Bank of America and its affiliated
entities. Such other investment companies and accounts may also invest in the
same securities as a Fund. When a purchase or sale of the same security is made
at substantially the same time on behalf of a Fund and another investment
company or account, available investments or opportunities for sales will be
allocated in a manner which Bank of America believes to be equitable. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold by a Fund. In
addition, in allocating purchase and sale orders for portfolio securities
(involving the payment of brokerage commissions or dealer concessions), Bank of
America may take into account the sale of shares of a Fund by broker-dealers and
other financial institutions (including affiliates of Bank of America and the
Funds' distributor), provided Bank of America believes that the quality of the
transaction and the amount of the commission are not less favorable than what
they would be with any other unaffiliated qualified firm.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS. The business of the Company is managed under the direction
of its Board of Directors. Information about the Directors and Officers of the
Company is included in the Statement of Additional Information.
INVESTMENT ADVISER. Bank of America National Trust and Savings Association
("Bank of America") serves as investment adviser to each Fund. Bank of America,
which has principal offices located at 555 California Street, San Francisco,
California 94104, is a national banking association formed in 1904 which
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states
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as well as corporate banking and business credit offices in major U.S. cities
and branches, corporate offices and representative offices in 37 countries. Bank
of America is the successor by merger to Security Pacific National Bank
("Security Pacific"), which previously served as investment adviser to the
Company since it commenced operations in 1984. Bank of America and its
affiliates have over $50 billion under management, including over $10 billion in
mutual funds. Bank of America is a subsidiary of BankAmerica Corporation, a
registered bank holding company.
As investment adviser Bank of America manages the Funds' investments and is
responsible for all purchases and sales of the Funds' portfolio securities. For
its investment advisory services Bank of America is entitled to receive a fee
accrued daily and payable monthly at the following annual rates: .10% of the
first $3 billion of each Fund's net assets, plus .09% of the next $2 billion of
each Fund's average daily net assets, plus .08% of each Fund's net assets over
$5 billion. For the fiscal year ended February 28, 1995, the Tax-Exempt Money
Fund and the California Tax-Exempt Money Market Fund paid Bank of America
advisory fees at the effective annual rates of .10% of their respective average
net assets.
In addition, Bank of America is also entitled to fees under the Company's
Shareholder Services Plan described below and may receive fees charged directly
to its customers' accounts in connection with investments in Fund shares.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator" ) serves as the
Company's administrator and assists generally in supervising the Funds'
operations. The Administrator is a wholly-owned subsidiary of The BISYS Group,
Inc. Its offices are located at 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 that are for the benefit of all series in the Funds,
including coordination of reports to shareholders and the Securities and
Exchange Commission; calculation of the net asset value of the Funds' shares and
dividends and capital gains distributions to shareholders; payment of the costs
of maintaining the Funds' offices; preparation of tax returns; provision of
internal legal and accounting compliance services; maintenance (or oversight of
the maintenance by others approved by the Board of Directors) of the Funds'
books and records; and the provision of various services for shareholders who
have made a minimum investment of at least $500,000 including the provision of a
facility to receive purchase and redemption orders for the accounts of such
shareholders.
For its administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7 billion of each Fund's average daily net assets,
plus .09% of the next $3 billion of each Fund's average daily net assets, plus
.08% of each Fund's average daily net assets over $10 billion. For the fiscal
year ended February 28, 1995, the Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund paid the Administrator administration fees at the
effective annual rates of .10% of their respective average daily net assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above -- e.g. calculating
the net asset value of Fund shares and dividends to shareholders and maintaining
the Funds' books and records. The Funds bear all fees and expenses charged by
The Bank of New York for these services.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the principal
underwriter and distributor of shares of the Funds. The Distributor is a
wholly-owned subsidiary of the Administrator organized to distribute shares of
mutual funds to institutional and retail investors. Its offices are
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located at 3435 Stelzer Road, Columbus, Ohio 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) 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 Ohio, Inc., (the "Transfer Agent"), 3435 Stelzer Road, Columbus, Ohio
43219-3035 serves as transfer agent and dividend disbursing agent for Horizon
Shares and Horizon Service Shares, of the Funds. The Company has also entered
into a Cash Management and Related Services Agreement with The Bank of New York
pursuant to which The Bank of New York receives and disburses funds in
connection with the purchase and redemption of, and the payment of dividends and
other distributions with respect to, the Funds.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service contractors bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations. From time to time during the course of the Funds' fiscal year,
the Administrator and/or Bank of America may voluntarily not receive payment of
fees and/or assume certain expenses of a Fund, while retaining the ability to be
reimbursed by that Fund for such amounts prior to the end of the fiscal year
and, subject to the expense limitations of certain states, to stop such fee
waivers and expense reimbursement at any time. This will have the effect of
increasing yield to investors at the time such fees are not received or amounts
are assumed and decreasing yield when such fees or amounts are reimbursed.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES. Fund shares are sold at the net asset value per share next
determined after receipt of a purchase order by the Transfer 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 the Funds only on a day on which both
the Fund's custodian and the New York Stock Exchange (the "Exchange") are open
for business (a "Business Day"), and must be transmitted to the Transfer 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 the investor to purchase Fund shares, subject to the
minimum described below, without charge, by telephone unless they indicate in a
written notice to the Transfer 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
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<PAGE> 17
in its discretion reject any order for shares. Payment for orders which are not
received or paid for in a timely manner or are not accepted by a Fund will be
returned after prompt notification to the sending institution.
Payment for shares may be made only in Federal funds or other funds immediately
available to the Transfer 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 10:30
a.m., Eastern time (with respect to the California Tax-Exempt Money Market Fund)
or Noon Eastern time (with respect to the Tax-Exempt Money 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 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 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 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
16
<PAGE> 18
redeem shares in any account at their net asset value if the value of the
account is less than $500,000 as a result of redemptions. The shareholder having
the account will first be notified in writing that its account has a value of
less than $500,000 and will be allowed 60 days to make additional investments to
bring the value of its account to $500,000 before the redemption is processed by
a Fund. In addition, a Fund may redeem shares involuntarily under certain
special circumstances described in the Statement of Additional Information under
"Purchase and Redemption of Shares."
NET ASSET VALUE. The net asset value per share of each Fund is determined on
each Business Day as of Noon Eastern time. In computing net asset value, each
Fund uses the amortized cost method of valuation as described in the Statement
of Additional Information under "Purchase and Redemption of Shares." The net
asset value per share for each Fund for purposes of pricing purchase and
redemption orders is determined independently.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The shareholders of a Fund are entitled to
dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments held by the Fund involved.
Generally, each Fund's net income is declared daily as a dividend. Shares begin
accruing dividends on the day the purchase order for the shares is executed and
continue to accrue dividends through and including the day before the redemption
order for the shares is executed. Dividends are paid within five business days
after the end of each month. Although the Funds do not expect to realize net
long-term capital gains, any such capital gains as may be realized will be
distributed no more than twice a year after reduction for any available capital
loss carry forward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the net asset
value of such shares on the payment date, unless the shareholder elects to
receive dividends in cash. Reinvestment dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to Pacific Horizon Funds, Inc.-- [specify the name of the Fund],
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, Pennsylvania
15222, and will become effective with respect to dividends paid after its
receipt by the dividend disbursing agent.
TAXES. Management of the Company believes that each Fund qualified separately
for its last taxable year as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"), and it is intended that each Fund
will continue to qualify as a regulated investment company as long as such
qualification is in the best interest of its shareholders. Such qualification
generally relieves a Fund of liability for Federal income taxes, to the extent
its earnings are distributed in accordance with the Code. The policy of each
Fund is to pay to shareholders at least 90% of its exempt-interest income, net
of certain deductions, for each taxable year. Dividends derived from interest on
Municipal Securities (known as exempt-interest dividends) and paid to
shareholders typically will not be subject to regular federal income tax.
With respect to the California Tax-Exempt Money Market Fund, if, at the close of
each quarter of its taxable year, at least 50% of the value of the Fund's total
assets consists of California Exempt Securities and if the Fund qualifies as a
regulated investment company under the Code, then the Fund will be qualified to
pay dividends exempt from California state personal income tax to its
shareholders. If the Fund so qualifies, dividends derived from interest
attributable to California Exempt Securities will be exempt from California
state personal income tax. (Such treatment may not apply, however, to investors
who are "substantial users" or "related
17
<PAGE> 19
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.
Except as noted with respect to the California state personal income tax,
distributions of net investment income may be taxable to investors under state
or local law as dividend income even though all or a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. Moreover, to the
extent, if any, that dividends paid to shareholders are derived from taxable
interest or from capital gains, such dividends will be subject to federal income
tax and California state personal income tax, whether or not such dividends are
reinvested.
The portion of dividends (if any) attributable to interest on certain private
activity bonds issued after August 7, 1986 must be included by shareholders as
an item of tax preference for purposes of determining liability (if any) for the
26% to 28% federal alternative minimum tax applicable to individuals and the 20%
federal alternative minimum tax and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified federal alternative minimum taxable income over
$2,000,000. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax
liability on such benefits.
Dividends declared in December of any year payable to shareholders of record on
a specified date in December will be deemed for federal tax purposes to have
been paid by a Fund and received by its shareholders on December 31, if such
dividends are paid during January of the following year.
OTHER STATE AND LOCAL TAXES. Investors are advised to consult their tax
advisers concerning the application of state and local taxes generally, which
may have different consequences from those of the Federal income tax and, with
respect to the California Tax-Exempt Money Market Fund, the California state
personal income tax described above. Exempt-interest dividends generally will be
exempt from state and local taxes as well. However, except as noted with respect
to California state personal income tax, dividends paid by the Funds may be
taxable to investors under state or local law as dividend income even though all
or a portion of such dividends may be derived from interest on obligations that,
if realized directly, would be exempt from such taxes.
GENERAL. Shareholders will be advised at least annually as to the federal income
tax and, with respect to the California Tax-Exempt Money Market Fund, the
California state personal income tax consequences of dividends and distributions
made each year. The foregoing is only a brief summary of some of the important
tax considerations generally affecting the respective Funds and their
shareholders. Additional tax information of relevance to particular investors,
including investors who may be "substantial users" or "related persons" with
respect to facilities financed by Municipal Securities, is contained in the
Statement of Additional Information. Potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situation.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation, and is
registered under the Investment Company Act of 1940 as an open-end management
investment company. The Predecessor Tax-Exempt Fund originally
18
<PAGE> 20
commenced operations on July 10, 1987 as a separate portfolio of The Horizon
Funds. On January 10, 1990, the Predecessor Tax-Exempt Fund was reorganized as
the Tax-Exempt Money Fund of the Company. 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,
and as of the date of this prospectus, the California Tax-Exempt Money Market
Fund also began offering Horizon Shares.
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify and
reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series. Pursuant to such authority, the Board of
Directors has authorized the issuance of 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 and one billion Pacific
Horizon Shares. Pacific Horizon Shares of the Funds are described in a separate
Prospectus available from the Distributor at the telephone number on the cover
of this Prospectus. The Board of Directors has also authorized the issuance of
additional classes and series of shares representing interests in other
investment portfolios of the Company, which are likewise described in separate
Prospectuses available from the Distributor. This Prospectus relates primarily
to the Horizon Shares and Horizon Service Shares of the Funds and describes only
the investment objectives and policies, operations, contracts and other matters
relating to such shares.
Each Horizon Share, Horizon Service Share and Pacific Horizon Share in a Fund
has a par value of $.001, and, except as noted below, is entitled to participate
equally in the dividends and distributions declared by the Board of Directors
with respect to such Fund and in the net distributable assets of such Fund on
liquidation. Holders of a Fund's Horizon Service Shares bear the fees described
in the following section that are paid to Shareholder Organizations by the Fund
under the Company's Shareholder Services Plan. Similarly, holders of a Fund's
Pacific Horizon Shares bear the fees described in the Prospectus for such shares
that are paid to Bank of America and the Administrator by the Fund under the
Company's Administrative Services Plan for Pacific Horizon Shares. The fees paid
under the Administrative Services Plan are for services related to investor
programs and facilities that are offered in connection with Pacific Horizon
Shares. Holders of Horizon Shares are not subject to fees such as those paid
under the Shareholder Services Plan or the Administrative Services Plan. As a
result, at any given time, the net yield on a Fund's Horizon Service Shares is
expected to be approximately .07% higher than the yield on the Fund's Pacific
Horizon Shares and the net yields on the Fund's Horizon Shares are expected to
be approximately .32% higher than the yield on the Pacific Horizon Shares.
Standardized yield quotations will be computed separately for each series of
shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class or series except as otherwise required by law or when class voting is
permitted by the Board of Directors. It is contemplated that all shareholders of
a Fund will vote together as a single class on matters relating to the Fund's
investment advisory agreement and on any change in its fundamental investment
limitations, and that only holders of Horizon Service Shares of a Fund will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Fund's arrangements with Shareholder Orga-
19
<PAGE> 21
nizations. 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 or Pacific Horizon Shares. During the fiscal year ended
February 28, 1995, the Tax-Exempt Money Fund and the California Tax-Exempt Money
Market Fund made payments under the Plan at the effective annual rates of .25%
of each such Fund's average daily net asset value.
The services provided by Shareholder Organizations may include the following:
aggregating and processing purchase and redemption requests from Customers for
Horizon Service Shares and placing net purchase and redemption orders with the
Distributor; providing Customers with a service that invests the assets of their
accounts in Horizon Service Shares pursuant to specific or preauthorized
instructions; processing dividend payments from a Fund on behalf of Customers;
providing information periodically to Customers regarding their position in
Horizon Service Shares; arranging for bank wires; responding to Customer
inquiries regarding services performed by the Shareholder Organizations;
providing subaccounting 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
20
<PAGE> 22
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.
21
<PAGE> 23
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPITXM496P
<PAGE> 24
HORIZON SHARES
AND
HORIZON SERVICE SHARES
OF THE
TAX-EXEMPT MONEY FUND
AND THE
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
PROSPECTUS
February 24, 1996
NOT FDIC INSURED
<PAGE> 25
PACIFIC HORIZON FUNDS, INC.
HORIZON SHARES AND
HORIZON SERVICE SHARES
OF THE
PRIME FUND, TREASURY FUND, GOVERNMENT FUND,
TREASURY ONLY FUND, TAX-EXEMPT MONEY FUND AND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
FEBRUARY 24, 1996
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objectives and Policies . . . . . . . . . . . . . . . . . 3
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . 42
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . 46
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Yield Information . . . . . . . . . . . . . . . . . . . . . . . . . . 68
General Information . . . . . . . . . . . . . . . . . . . . . . . . . 70
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
-------------------------
This Statement of Additional Information applies to the Horizon Shares
and Horizon Service Shares of the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund, Tax-Exempt Money Fund and California Tax-Exempt Money Market
Fund (the "Funds") of Pacific Horizon Funds, Inc. (the "Company"). This
Statement of Additional Information is meant to be read in conjunction with the
prospectus dated July 1, 1995 with respect to Horizon Shares and Horizon Service
Shares of the Prime, Treasury, Government and Treasury Only Funds, and the
prospectus dated February 24, 1996 for Horizon Shares and Horizon Service Shares
of the Tax-Exempt Money and California Tax-Exempt Money Market Funds, as the
same may from time to time be revised (individually, a "Prospectus" and
collectively, the
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<PAGE> 26
"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 Horizon and Horizon Service Shares may be obtained by calling Concord
Financial Group, Inc. at (800) 426-3863. Capitalized terms used but not defined
herein have the same meanings as in the Prospectuses.
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<PAGE> 27
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland corporation
and commenced operations on March 30, 1984. On January 19, 1990 the Prime Fund
and Treasury Fund of The Horizon Funds, a Massachusetts business trust
(sometimes called the "Predecessor Prime Fund" and "Predecessor Treasury Fund,"
respectively), were combined with the Money Market Portfolio and Government
Money Market Portfolio, respectively, of the Company; the Company changed the
names of its resulting portfolios to "Prime Fund" and "Treasury Fund"; and the
Company began offering Horizon Shares and Horizon Service Shares in such Funds.
On January 19, 1990 the Tax-Exempt Money Fund of The Horizon Funds (the
"Predecessor Tax-Exempt Fund") was reorganized as a new portfolio of the
Company. Each of these three Predecessor Funds originally commenced operations
on July 10, 1987. The California Tax-Exempt Money Market Fund commenced
operations on December 6, 1989 by offering a single series of shares known as
Pacific Horizon Shares, began offering Horizon Service Shares on March 1, 1993,
and as of the date of this Statement of Additional Information began offering
Horizon Shares. The Government Fund and Treasury Only Fund commenced operations
on June 4, 1990 as separate investment portfolios (the "Predecessor Government
Funds" and "Predecessor Treasury Only Funds," respectively) of First Cash Funds
of America and First Funds of America, which were organized as Massachusetts
business trusts. On March 1, 1993, the Predecessor Government Funds and
Predecessor Treasury Only Funds were reorganized as new portfolios of the
Company. Prior to this reorganization, these Predecessor Funds offered and sold
shares of beneficial interest that were similar to the Company's Horizon Service
and Pacific Horizon Shares.
The Company offers other classes and series of shares, including
Pacific Horizon Shares, in the aforementioned Funds and in other investment
portfolios which are described in separate Prospectuses and Statements of
Additional Information. For information concerning these other shares contact
the Distributor at the telephone number stated on the cover page of this
Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment objective of the
Fund to which it applies. The following information supplements the descriptions
of the investment objective and policies in the Prospectuses for the Funds.
-3-
<PAGE> 28
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of Directors,
Bank of America National Trust and Savings Association ("Bank of America") is
responsible for, makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for each Fund. Securities purchased
and sold by each Fund are generally traded in the over-the-counter market on a
net basis (i.e., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. During their last three
fiscal periods, the Prime Fund, Treasury Fund, Government Fund, Treasury Only
Fund, Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund did not
pay any brokerage commissions. The cost of securities purchased by the Funds
from underwriters generally includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers,
it is the Company's policy to seek the best overall terms available. The
investment advisory agreement between the Company and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the investment advisory agreement authorizes Bank of America, subject
to the approval of the Company's Board of Directors, to cause the Company to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America to the particular Fund and the Company.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities, and
(2) analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
The Directors will periodically review the commissions paid by the
Company to consider whether the commissions, if any, paid over representative
periods of time appear to be reasonable in relation to the benefits inuring to
the Company. It is possible that certain of the supplementary research or other
services received will primarily benefit one or more other
-4-
<PAGE> 29
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Company or any given Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other accounts or investment companies.
Brokerage or research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America by the Company. Such services
may be useful to Bank of America in serving both the Company and other clients
and, conversely, supplemental information obtained by the placement of business
of other clients may be useful to Bank of America in carrying out its
obligations to the Company. The Company will not acquire certificates of deposit
or other securities issued by Bank of America or its affiliates, and will give
no preference to certificates of deposit or other securities issued by
Shareholder Organizations. In addition, portfolio securities in general will be
purchased from and sold to Bank of America, Concord Financial Group, Inc. (the
"Distributor") and their affiliates acting as principal underwriter, syndicate
member, market-maker, dealer, broker or in any other similar capacity, provided
such purchase, sale or dealing is permitted under the investment Company Act of
1940 and the rules thereunder.
A Fund's annual portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the Fund's portfolio securities. The calculation excludes all
securities the maturities of which at the time of acquisition were thirteen
months or less. There is not expected to be any portfolio turnover for the Funds
for regulatory reporting purposes.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. Any such Fund will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Directors, believes such practice
to be in the Fund's interest.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Directors or Bank of America, pursuant to
guidelines established by the Board, will promptly consider such an event in
determining whether the Fund involved should continue to hold the obligation,
but will only continue to hold the obligation if retention is in accordance with
the interests of the Fund and
-5-
<PAGE> 30
applicable regulations of the Securities and Exchange Commission. In addition,
it is possible that unregistered securities purchased by a Fund in reliance upon
Rule 144A under the Securities Act of 1933 could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a period, uninterested in purchasing these securities.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for other investment companies or common trust funds in order to obtain best
execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act of
1940) or their parents held by the Company as of the close of its most recent
fiscal year. As of February 28, 1995: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $95,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $95,000,000; (b) the Prime Fund held
the following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $100,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $120,000,000; Morgan Stanley Group, Inc.,
Daily Variable Rate Master Note in the principal amount of $120,000,000; Bear
Stearns Co., Inc., Series B, Monthly Variable Rate Note in the principal amount
of $100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $120,000,000; and (c) the Government Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $40,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $40,000,000. Merrill Lynch & Co.,
Inc., Goldman, Sachs & Co., Bear Stearns Co., Inc., Morgan Stanley & Co.
Incorporated, Shearson Lehman Brothers, Inc., Dean Witter Reynolds, Inc. and
Paine Webber are considered to be regular brokers and dealers of the Company.
PORTFOLIO INSTRUMENTS
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, COMMERCIAL PAPER AND
SHORT-TERM NOTES. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specific return. Bankers' acceptances are negotiable deposits or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank (meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument at maturity).
Certificates of
-6-
<PAGE> 31
deposit and bankers' acceptances acquired by a Fund will be dollar-denominated
obligations of domestic or foreign banks having total assets at the time of
purchase (including assets of both domestic and foreign branches) in excess of
$2.5 billion. Commercial paper consists of unsecured promissory notes issued by
corporations. Short-term notes acquired by a Fund may be issued by commercial or
investment banking firms, financing companies or industrial or manufacturing
concerns. Commercial paper and short-term notes, except for variable and
floating rate instruments, will normally have maturities of nine months or less
and fixed rates of return, although such instruments may have maturities of up
to thirteen months. Commercial paper and short-term notes will consist of issues
which, with respect to the Prime, Treasury and Tax-Exempt Money Funds are "First
Tier Securities" as defined by the Securities and Exchange Commission and, with
respect to the California Tax-Exempt Money Market Fund are "Eligible Securities"
as defined by the Securities and Exchange Commission. During temporary defensive
periods or if in the investment adviser's opinion suitable First Tier Securities
are not available for investment, the Tax-Exempt Money Fund may also acquire
"Eligible Securities" as defined by the Securities and Exchange Commission.
First Tier Securities consist of instruments that are either rated at the time
of purchase in the top rating category by one or more unaffiliated nationally
recognized statistical rating organizations ("NRSROs") or issued by issuers with
such ratings. Eligible Securities consist of instruments that are either rated
at the time of purchase in the top two rating categories by one or more
unaffiliated NRSROs or issued by issuers with such ratings. See the Appendix to
this Statement of Additional Information for a description of the applicable
NRSRO ratings. Unrated instruments (including instruments with long-term but no
short-term ratings) purchased by a Fund will be of comparable quality as
determined by Bank of America pursuant to guidelines approved by the Board of
Directors and Bank of America.
A Fund holding Euro CDs, Yankee CDs, Yankee BAs, commercial paper or
other obligations of foreign issuers may be subject to investment risks that are
different in some respects from those incurred by a Fund which invests only in
obligations of domestic issuers. Such risks include future political and
economic developments, the possible imposition of withholding taxes by the
particular country in which the issuer is located on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and
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types of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry is dependent largely upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to the Euro CDs, Yankee CDs, Yankee BAs
and other foreign bank obligations that a Fund may acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S. Government and its
agencies and instrumentalities include Treasury bills, certificates of
indebtedness, notes and bonds, Treasury strips, and issues of such entities as
the Federal Home Loan Banks, Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, Resolution Funding Corporation, Tennessee
Valley Authority and Federal National Mortgage Association. The Prime, Treasury,
Tax-Exempt Money and California Tax-Exempt Money Market Funds will not acquire
obligations issued by the International Bank for Reconstruction and Development,
the Asian Development Bank or the Inter-American Development Bank; however, the
Government and Treasury Only Funds may acquire such obligations in accordance
with their investment policies.
Government National Mortgage Association ("GNMA") certificates are U.S.
Government agency mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. GNMA
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of
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the loan rather than returned in a lump sum at maturity. GNMA certificates are
called "pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate. In
addition to GNMA certificates, mortgage-backed securities issued by the Federal
National Mortgage Association ("FNMA") and by the Federal Home Loan Mortgage
Corporation ("FHLMC") may also be acquired. Securities issued and guaranteed by
FNMA and FHLMC are not backed by the full faith and credit of the United States.
If either fixed or variable rate pass-through securities issued by the U.S.
Government or its agencies or instrumentalities are developed in the future, the
Prime, Government, Tax-Exempt Money and California Tax-Exempt Money Market Funds
reserve the right to invest in them, after making appropriate disclosure to
investors. Certain securities issued by all governmental agencies may be
prepaid. Prepayment of mortgages underlying most mortgage-backed securities may
reduce their current yield and total return. During periods of declining
interest rates, such prepayments can be expected to accelerate and the Funds
would be required to reinvest the proceeds at the lower interest rates then
available.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may acquire variable
and floating rate instruments as described in their Prospectuses. Variable and
floating rate instruments are frequently not rated by credit rating agencies;
however, unrated variable and floating rate instruments purchased by a Fund will
be determined by the investment adviser under guidelines established by the
Company's Board of Directors to be of comparable quality at the time of purchase
to rated instruments eligible for purchase by such Fund. In making such
determinations, the investment adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. There may not be an active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund. The absence of such an active secondary market
could make it difficult for a Fund to dispose of the variable or floating rate
instrument involved. In the event the issuer of the instrument defaulted on its
payment obligations, the Fund involved could, for this or other reasons, suffer
a loss to the extent of the default. Variable and floating rate instruments may
be secured by bank letters of credit and may have maturities of more than
thirteen months. In determining a Fund's average weighted maturity and whether a
variable or floating rate instrument has a remaining maturity of thirteen months
or less, each variable rate instrument having a demand feature that entitles the
Fund to receive the principal amount thereof at any time, or at specified
intervals not exceeding thirteen months, in each case on not more than thirty
days' notice, shall be deemed by the Company to have a maturity
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equal to the longer of the period remaining until its next interest rate
adjustment or the period remaining until the principal amount can be recovered
through demand; each variable rate instrument not having such a demand feature
but having a stated maturity of thirteen months or less or issued or guaranteed
by the U.S. Government or its agencies will be deemed to have a maturity equal
to the period remaining until the next interest rate adjustment; each floating
rate instrument having a demand feature that entitles the Fund to receive the
principal amount thereof at any time, or at specified intervals not exceeding
thirteen months, in each case on not more than thirty days' notice, shall be
deemed to have a maturity equal to the period of time remaining until the
principal amount owed can be recovered through demand. Variable and floating
rate instruments which are not payable upon seven days' notice and which do not
have an active trading market are considered illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, Division of McGraw
Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investors Service,
Inc. ("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA Limited and IBCA
Inc. ("IBCA") represent their opinions as to the quality of debt securities.
However, ratings are general and are not absolute standards of quality, and debt
securities with the same maturity, interest rate and rating may have different
yields while debt securities of the same maturity and interest rate with
different ratings may have the same yield.
An issuer's obligations under its debt securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code and laws which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its debt
securities may be materially adversely affected by litigation or other
conditions.
MUNICIPAL SECURITIES. Substantially all of the assets of the Tax-Exempt
Money Fund and primarily all of the assets of the California Tax-Exempt Money
Market Fund are invested in "Municipal Securities" (securities issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and their political subdivisions, authorities, agencies and
instrumentalities, the interest on which is exempt from regular Federal income
tax in the opinion of bond counselor to the issuer). The Tax-Exempt Money Fund
may
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concentrate more than 25% of its assets in California Municipal Securities and
the California Tax-Exempt Money Market Fund intends that under normal market
conditions at least 80% of its net assets will be invested in California
Municipal Securities. Although the Prime Fund is also authorized to invest in
Municipal Securities under certain circumstances, no more than 5% of the value
of such Fund's net assets will be so invested at any one time. (The purchase of
Municipal Securities by the Prime Fund may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield on such
securities, on a pre-tax basis, is comparable to that of other short-term money
market instruments that the Fund may purchase. Dividends paid by the Prime Fund
that are derived from interest on Municipal Securities would be taxable to the
Fund's shareholders for federal income tax purposes.)
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition certain types of private activity bonds
are issued by or on behalf of public authorities to finance various
privately-operated facilities. Municipal Securities also include short-term tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
other forms of short-term loan obligations. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues.
There are variations in the quality of Municipal Securities between
classifications (such as general obligation, revenue and moral obligation
issues) and within a particular classification, and the yields on Municipal
Securities depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. It should also be noted, with respect to
all Municipal Securities issued after August 15, 1986 (August 31, 1986 in the
case of certain bonds), that the issuer must comply with certain rules formerly
applicable only to "industrial development bonds" which, if the issuer fails to
observe them, could cause interest on the Municipal Securities to become taxable
retroactive to the date of issue.
The payment of principal and interest on most Municipal Securities
purchased by the Funds will depend upon the ability of the issuers to meet their
obligations. The District of Columbia, each state, each of their political
subdivisions, agencies, instrumentalities and authorities and each multi-state
agency of
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which a state is a member is a separate "issuer" as that term is used in this
Statement of Additional Information and the Prospectuses. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the relevant Funds' Prospectuses under
"Taxes.") The Funds cannot predict what legislation, if any, may be proposed in
Congress or in the California legislature in the future as regards the federal
and California state personal income tax status of interest on Municipal
Securities in general, or California Municipal Securities in particular, or
which proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of Municipal Securities (and
California Municipal Securities) for investment by the Tax-Exempt Money Fund and
the California Tax-Exempt Money Market Fund and the liquidity and value of such
Funds' portfolios. In such an event the Board of Directors would reevaluate the
Funds' investment objectives and policies and consider changes in their
structure or possible dissolution.
REPURCHASE AGREEMENTS. The Prime Fund, Treasury Fund, Government Fund,
Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund may enter into
repurchase agreements with respect to their portfolio securities as indicated in
their Prospectuses. Pursuant to such agreements, a Fund purchases securities
from financial institutions such as banks and broker-dealers which are deemed to
be creditworthy by the investment adviser under guidelines approved by the Board
of Directors, subject to the seller's agreement to repurchase and the Fund's
agreement to resell such securities at a specified date and price. No Fund will
enter into repurchase agreements with Bank of America or Bank of America's
affiliates, nor will any Fund give preference to repurchase agreements with
Shareholder Organizations. The repurchase price generally equals the price paid
by the Fund plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the Funds' custodian
or a sub-custodian or in the Federal Reserve/Treasury book-entry system, and a
Fund will make payment for such securities only upon receipt of evidence of
physical delivery of the securities or of such book entry. The seller under a
repurchase agreement will be required to deliver instruments the value of which
is 102% of the
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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 Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Funds may also enter into reverse
repurchase agreements with respect to their securities. Whenever a Fund enters
into a reverse repurchase agreement, it will place in a segregated account
maintained with its custodian cash, U.S. Government securities and other liquid
high-grade debt securities having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor the account for
maintenance of such equivalent value. Reverse repurchase agreements are
considered to be borrowings by a Fund under the Investment Company Act of 1940.
INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
The Funds may purchase securities on a "when-issued," forward commitment or
delayed settlement basis (i.e., for delivery beyond the normal settlement date
at a stated price and yield). When a Fund agrees to purchase securities on a
when-issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets (cash or liquid
securities) in the separate account so that the value of the account remains
equal to the amount of such Fund's commitment. The Funds do not intend to engage
in these transactions for speculative purposes but only in furtherance of their
investment objectives. Because a Fund will set aside cash or liquid investments
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and the ability of the investment adviser to manage it may be affected
in the event the Fund's forward commitments, commitments to purchase when-issued
securities and delayed settlements ever exceeded 25% of the value of its assets.
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A Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase, a
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
STAND-BY COMMITMENTS. The Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in their respective portfolios. Under a "stand-by
commitment," a dealer agrees to purchase from a Fund, at the Fund's option,
specified Municipal Securities at a specified price.
The amount payable to the Tax-Exempt Money Fund or the California
Tax-Exempt Money Market Fund upon its exercise of a "stand-by commitment" is
normally the amortized cost of the underlying instruments plus accrued interest,
if any. "Stand-by commitments" can be acquired when the remaining maturity of
the underlying Municipal Securities is not greater than thirteen months, and are
exercisable by a Fund at any time before the maturity of such obligations. In
determining net asset value, a Fund values Municipal Securities on the basis of
amortized cost without reference to the presence of the "stand-by commitment,"
as described below. A "stand-by commitment" may be sold, transferred or assigned
by a Fund only with the instrument involved.
The Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for a "stand-by commitment" either separately in cash
or by paying a higher price for portfolio securities which
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are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held by a Fund will not exceed 1/2
of 1% of the value of its total assets calculated immediately after each
"stand-by commitment" is acquired.
The Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
intend to enter into "stand-by commitments" only with dealers, banks and
broker-dealers which, in the investment adviser's opinion, present minimal
credit risks. A Fund's reliance upon the credit of these dealers, banks and
broker-dealers is secured by the value of the underlying Municipal Securities
that are subject to a commitment.
The Tax-Exempt Money Fund or California Tax-Exempt Money Market Fund
would acquire "stand-by commitments" solely to facilitate portfolio liquidity
and do not intend to exercise their rights thereunder for trading purposes. The
acquisition of a "stand-by commitment" would not affect the valuation or assumed
maturity of the underlying Municipal Securities, which would continue to be
valued at amortized cost in accordance with the ordinary method of valuation
employed by a Fund. "Stand-by commitments" which would be acquired by a Fund
would be valued at zero in determining net asset value. Where a Fund paid any
consideration directly or indirectly for a "stand-by commitment," its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund. "Stand-by commitments" would not affect a
Fund's average weighted maturity.
LOANS OF SECURITIES. The Prime Fund, Government Fund and Treasury Only
Fund may lend their securities to brokers, dealers and financial institutions,
provided (1) the loan is secured continuously by collateral consisting of U.S.
Government securities (U.S. Treasury securities with respect to the Treasury
Only Fund) or cash or letters of credit which is marked to the market daily to
ensure that each loan is fully collateralized at all times; (2) the Fund
involved may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) the Fund will receive any interest or
dividends paid on the securities loaned; and (4) the aggregate market value of
securities loaned will not at any time exceed 30% of the total assets of the
Fund (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
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risk that the borrower may fail to return the securities or may fail to provide
additional collateral.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information drawn from
official statements and prospectuses relating to securities offerings of the
State of California and various local agencies in California, available as of
the date of this Prospectus. While the Company has not independently verified
such information, it has no reason to believe that such information is not
correct in all material respects.
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on
January 8, 1993, proposed general fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, projected the State would have an accumulated deficit of about $2.75
billion by June 30, 1993, essentially unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month period. Unlike
previous years, the Governor's Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and expenditure forecasts and
proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed approximately $71 million in spending.
The 1993-94 Budget Act was predicated on general fund revenues and
transfers estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991--a half cent temporary sales tax, a deferral of operating
loss carryforwards, and repeal by initiative of a sales tax on candy and snack
foods.
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The 1993-94 Budget Act also assumed special fund revenues of $11.9
billion, an increase of 2.9 percent over 1992-93.
The 1993-94 Budget Act included general fund expenditures of $38.5
billion (a 6.3 percent reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues. The
1993-94 Budget Act also included special fund expenditures of $12.1 billion, a
4.2 percent increase. The 1993-94 Budget Act reflected the following major
adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts, thereby reducing general
fund support by an equal amount. About $2.5 billion is permanent, reflecting
termination of the State's "bailout" of local governments following the property
tax cuts of Proposition 13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).
The property tax revenue losses for cities and counties were offset in
part by additional sales tax revenues and mandate relief.
2. The 1993-94 Budget Act projected K-12 Proposition 98 funding on a
cash basis at the same per-pupil level as 1992-93 by providing schools a $609
million loan payable from future years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692 million of aid
to the State from the federal government to offset health and welfare costs
associated with foreign immigrants living in the State, which would reduce a
like amount of General Fund expenditures. About $411 million of this amount was
one-time funding. Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs and $400
million in support for higher education (partly offset by fee increases at all
three units of higher education) and various miscellaneous cuts (totalling
approximately $150 million) in State government services in many agencies, up to
15 percent.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund ($339 million)
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and a change in accounting for debt service from accrual to cash basis, saving
$107 million.
The 1993-94 Budget Act contained no general fund tax/revenue increases
other than a two year suspension of the renters' tax credit. The 1993-1994
Budget Act suspended the 4 percent automatic budget reduction trigger, as was
done in 1992-1993, so cuts could be focused.
Administration reports during the course of the 1993-1994 Fiscal Year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-1994 Budget Act was adopted. Overall, revenues for the
1993-1994 Fiscal Year were about $800 million lower than original projections,
and expenditures were about $780 million higher, primarily because of higher
health and welfare caseloads, lower property taxes which required greater State
support for K-14 education to make up the shortfall, and lower than anticipated
federal government payments for immigration-related costs. The reports in May
and June, 1994, indicated that revenues in the second half of the 1993-1994
Fiscal Year were very close to the projections made in the Governor's Budget of
January 10, 1994, which is consistent with a slow turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the final
June receipts, reported that June revenues were $114 million (two and one-half
percent) above projections, with final end-of-year results at $377 million
(about one percent) above the May Revision projections. Part of this result was
due to end-of-year adjustments and reconciliations. Personal income tax and
sales tax continued to track projections. The largest factor in the higher than
anticipated revenues was from bank and corporation taxes, which were $140
million (18.4 percent) above projections in June. While the higher June receipts
were reflected in the actual 1993-94 Fiscal Year cash flow results, and helped
the starting cash balance for the 1994-95 Fiscal Year, the Department of Finance
did not adjust any of its revenue projections for the 1994-95 or 1995-96 Fiscal
Years.
During the 1993-94 Fiscal Year, the State implemented the deficit
retirement plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 Fiscal
Year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $2 billion.
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Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on
the Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties, which
were declared as State and federal disaster areas by January 18. Current
estimates of total property damage (private and public) are in the range of $20
billion, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in
the areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.
Damage to state-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Major highways have now been reopened. The campus of California State
University at Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in temporary closure of the campus. It has now
reopened. There was also some damage to the University of California at Los
Angeles and to an office building in Van Nuys (now open after a temporary
closure). Overall, except for the temporary road and bridge closures, and
CSU-Northridge, the earthquake did not significantly affect State government
operations.
The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government provide
substantial earthquake assistance totalling in excess of $9.5 billion.
The 1994-95 Fiscal Year represented the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment to
produce a balanced budget. The Governor's Budget proposal, as updated in May and
June, 1994,
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recognized that the accumulated deficit could not be repaid in one year, and
proposed a two-year solution. The budget proposal projected revenue and
expenditure forecasts and revenue and expenditure proposals which resulted in
operating surpluses for the budget for both 1994-95 and 1995-96, and lead to the
elimination of the accumulated budget deficit, estimated at about $1.8 billion
at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projected revenues and transfers of $41.9 billion, $2.1 billion higher
than revenues in 1993-94, reflecting the Administration's forecast of an
improving economy.
The 1994-95 Budget Act projected Special Fund revenues of
$12.1 billion, a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projected General Fund expenditures of
$40.9 billion, an increase of $1.6 billion over 1993-94. The 1994-95 Budget Act
also projected Special Fund expenditures of $12.3 billion, a 4.7% decrease from
1993-94 estimated expenditures. The principal features of the 1994-95 Budget Act
were the following:
1. Receipt of additional federal aid in 1994-95 of about $400
million for costs of refugee assistance and medical care for
undocumented immigrants, thereby offsetting a similar General Fund
cost. These funds ultimately were not budgeted by the Federal
Government.
2. Reductions of approximately $1.1 billion in health and
welfare costs. A 2.3% reduction in Aid to Family with Dependent
Children payments (equal to about $56 million for the entire fiscal
year) has been suspended by court order.
3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for California
State University. It anticipated that student fees for both the
University of California and the California State University would
increase up to 10%.
4. Proposition 98 funding for K-14 schools was increased by
$526 million from 1993-94 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 past three years.
5. Legislation enacted with the Budget clarifies laws passed
in 1992 and 1993 which require counties and other local agencies to
transfer funds to local school districts,
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thereby reducing State aid. Some counties had implemented a method of
making such transfers which provided less money for schools if there
were redevelopment agency projects. The new legislation banned this
method of transfer. If all counties had implemented this method,
General Fund aid to K-12 schools would have been $300 million higher in
each of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provided funding for anticipated
growth in the State's prison inmate population, including provisions
for implementing recent legislation (the so-called "Three Strikes" law)
which requires mandatory life prison terms for certain third-time
felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund
transfers ($255 million) totalling in the aggregate approximately $755
million.
The 1994-95 Budget Act contains no tax increases. Under
legislation enacted for the 1993-94 Budget, the renters' tax credit was
suspended for two years (1993 and 1994). A ballot proposition to permanently
restore the renters' tax credit after this year failed at the June, 1994
election. The Legislature enacted a further one-year suspension of the renters'
tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumed that the State would use a cash
flow borrowing program in 1994-95 which combined one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allowed the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal
year included the issuance of $4.0 billion of revenue anticipation warrants on
July 26, 1994, to mature on April 25, 1996, as part of a two-year plan to retire
the accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96
Fiscal Year necessarily entails greater risks of variance from assumptions, and
because the Governor's two-year budget plan assumes receipt of a large amount of
federal aid in the 1995-96 Fiscal Year for immigration-related costs which is
uncertain, the Legislature enacted a backup budget adjustment mechanism to
mitigate possible deviations from projected revenues, expenditures or internal
borrowable resources which might reduce available cash resources during the
two-year plan, so as to assure repayment of the warrants.
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Pursuant to Section 12467 of the California Government Code,
enacted by Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the
State Controller was required to make a report by November 15, 1994 on whether
the projected cash resources for the General Fund as of June 30, 1995 would
decrease more than $430 million from the amount projected by the State in its
Official Statement in July, 1994 for the sale of $4,000,000,000 of Revenue
Anticipation Warrants. On November 15, 1994, the State Controller issued the
report on the State's cash position required by the Budget Adjustment Law. The
report indicated that the cash position of the General Fund on June 30, 1995
would be $581 million better than was estimated in the July, 1994 cash flow
projections and therefore, no budget adjustment procedures will be invoked for
the 1994-95 Fiscal Year. As explained earlier, the Law would only be implemented
if the State Controller estimated that borrowable resources on June 30, 1995
would be at least $430 million lower than projected.
The State Controller's report identified a number of factors
which have led to the improved cash position of the State. Estimated revenues
and transfers for the 1994-95 Fiscal Year other than federal reimbursement for
immigration costs were up about $650 million. The largest portion of this was in
higher bank and corporation tax receipts, but all major tax sources were above
original projections. However, most of the federal immigration aid revenues
projected in connection with the 1994-95 Budget Act and in the July, 1994 cash
flows will not be received, as indicated above, leaving a net increase in
revenues of $322 million.
On the expenditure side, the State Controller reported that
estimated reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for federal aid) of
$672 million. However, the July, 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of
balances in special funds available for internal borrowing resulted in an
estimated reduction of such borrowable resources of $6 million. The combination
of these factors results in the estimated improvement of the General Fund's cash
position of $581 million. The State Controller's revised cash flow projections
for 1994-95 have allocated this improvement to two line items:
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an increase from $0 to $427 million in the estimated ending cash balance of the
General Fund on June 30, 1995, and an increase in unused borrowable resources of
$154 million.
The State Controller's report indicated that there was no
anticipated cash impact in the 1994-95 Fiscal Year for recent initiatives on
"three strikes" criminal penalties and illegal immigration which were approved
by voters on November 8, 1994. At a hearing before a committee of the
Legislature on November 15, 1994, both the Legislative Analyst and the
Department of Finance concurred in the reasonableness of the State Controller's
report. (The Legislative Analyst had issued a preliminary analysis on November
1, 1994 which reached a conclusion very close to that of the State Controller.)
The State Controller's report makes no projections about whether the Law may
have to be implemented in 1995-96. However, both the State Controller and the
Legislative Analyst in the November 15 hearing noted that the July, 1994 cash
flows for the 1995-96 Fiscal Year place continued reliance on large amounts of
federal assistance for immigration costs, which did not materialize this year,
indicating significant budget pressures for next year. The Department of Finance
indicated that the budgetary issues identified in the hearing would be addressed
in the Governor's Budget proposal for the 1995-96 Fiscal Year, which was
released in early January, 1995.
The 1995-96 Governor's Budget, discussed below, contains a
reforecast of revenues and expenditures for the 1994-95 Fiscal Year. The
Department of Finance Bulletins for February and March 1995 report that combined
General Fund revenues for February, 1995 were about $356 million below forecast,
but combined revenues for January and February were only about $82 million (or
0.3 percent) below the 1995-96 Governor's Budget forecast. The largest component
of the decrease is attributable to personal income tax receipts, which were
about $131 million (or 1.1 percent) below the two months' forecast. This
decrease in personal income tax receipts appears to be largely attributable to
fourth quarter 1994 activity, probably in the anticipation of tax reform, with
some taxpayers shifting income into 1995 to the extent possible. The withholding
component comprised $77 million of this shortfall, but the Department of Finance
does not yet view this as significant. Additionally, sales and use tax receipts
were very close to forecast for the two-month period, while bank and corporation
tax receipts were about $42 million (or 1.5 percent) below the two months'
forecast. Miscellaneous revenues were about $117 million (or 6.2 percent) above
forecast for the two months, but the Department of Finance is not yet able to
determine whether this gain is real, or is instead attributable to cash flow
factors.
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Initial analysis of the federal Fiscal Year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-95
Budget Act. Because of timing considerations in applying for these federal
funds, the Department estimates that about $33 million of these funds will be
received during the State's 1994-95 Fiscal Year, with the balance received in
the following fiscal year. It does not appear that the federal budget contains
any of the additional $400 million in funding for refugee assistance and health
costs which were also assumed in the 1994-95 Budget Act, but the Department
expects the State to continue its efforts to obtain some or all of these federal
funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal
Year Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates
General Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent
over 1994-95). This increase from the 1994-95 Fiscal Year reflects the
Governor's realignment proposal (a proposal to shift various state obligations
to local government) and the first year of a tax cut proposal of personal income
and corporate taxes. Neither of such proposals was approved by the Legislature.
The 1995-96 Budget was signed by the Governor on August 3, 1995, 34 days
following the commencement of the State's fiscal year, resulting in a revised
projection of General Fund revenues of $44.1 billion, or an increase of 3.5
percent over 1994-95. Expenditures are budgeted at $43.4 billion (a four percent
increase over 1994-95). Special Fund revenues are estimated at $13.5 billion
(10.7 percent higher than 1994-95) and Special Fund expenditures are estimated
at $13.8 billion (12.2 percent higher than 1994-95). The Budget projects that
the General Fund will end the fiscal year at June 30, 1996 with a budget surplus
in the Special Fund for Economic Uncertainties of about $28 million, or less
than 1 percent of General Fund expenditures, and will have repaid all of the
accumulated budget deficits.
The following are the principal features of the Budget:
1. Proposition 98 funding for schools and community colleges
will increase by about $1.2 billion, reflecting strong General Fund
revenue growth. Per-pupil expenditures are projected to increase by
$126 to $4,435. For the first time in several years, a cost-of-living
increase (2.7 percent) is added to the enrollment growth factor. The
Governor proposed to set aside about $514 million of the Proposition 98
funding increase to repay prior years' loans from the General Fund to
schools. As the legality of these loans is currently being challenged
in a lawsuit, the
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Governor proposed to set the amount aside in escrow until the
litigation is resolved.
2. Further cuts in health and welfare costs totaling about
$0.9 billion. Some of these cuts (approximately $500 million) would
require federal legislative approval.
3. Increases in funding for the University of California ($90
million General Fund) and the California State University system ($3
million General Fund). The Governor has proposed a four-year funding
"company" for the higher education units which includes both annual
increases in State funding and increases in student fees.
4. Assumes receipt of $473 million in new federal aid for
costs of undocumented and refugee immigrants, above commitments already
made by the federal government. This amount is substantially less than
an estimated $2.8 billion which had been included in the Governor's
pro-forma two-year plan from last summer.
5. General Fund support for the Department of Corrections was
increased approximately eight percent, reflecting estimates of increased prison
population; however, funding was less than proposed in the original budget.
Subsequent Developments - Reports from the Department of
Finance indicate that General Fund revenues through the first three months of
the fiscal year were about $525 million, or 5.3%, above projections made for the
enactment of the Budget Act. For the first quarter, personal income tax
(primarily estimated tax payments) were $224 million (5.1%) above projection,
sales and use taxes were $99 million (2.9% above projection) and bank and
corporation taxes (also primarily estimated tax payments) were $154 million
(12.5%) above projection.
The State Controller's "October Trigger Report," while finding
no need to impose automatic budget cuts, noted a number of areas where there was
likely to be a divergence from the original budget estimates. (See "STATE
FINANCES--The Budget Process--Budget Adjustment Law" above.) On the positive
side, the State Controller noted that improving economic conditions were leading
to improved cash receipts. On the negative side, the State Controller's Report
estimated that federal actions to allow health and welfare cuts and to reimburse
the State for illegal immigrant costs were not likely to provide as much money
as had been planned, and the Proposition 98 expenditures for K-14 schools had
been underestimated. In addition, the State Controller reported that an annual
review of internal borrowable resources resulted in a $705 million increase of
estimated
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available internal borrowable resources. In total, therefore, the State
Controller estimated that the State's cash position on June 30, 1996 would be
about $500 million worse than the estimate of $1.9 billion of available internal
cash resources included in the original budget, but still large enough to avoid
the Budget Adjustment Law cuts.
The Budget contains a cash flow projection (based on all the
assumptions described above) which shows approximately $1 billion of unused
borrowable resources at June 30, 1996, providing this amount of "cushion" before
the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in
February, 1995 notes that the Proposed Budget is subject to a number of major
risks, including receipt of the expected federal immigration aid and other
federal actions to allow health and welfare costs, and the outcome of several
lawsuits concerning previous budget actions which the State has lost at the
trial court level, and which are under appeal. This Analyst's Report also
estimates that, despite more favorable revenues, the two-year budget estimates
made in July, 1994 are about $2 billion out of balance, principally because
federal immigration aid appears likely to be much lower than previously
estimated. This shortfall is much smaller than the State has faced in recent
years, and has been addressed in the Governor's Budget.
The Director of Finance is required to include updated
cash-flow statements for the 1994-95 and 1995-96 Fiscal Years in the May
revision to the 1995-96 Fiscal Year budget proposal. By June 1, 1995, the State
Controller must concur with these updated statements or provide a revised
estimate of the cash condition of the General Fund for the 1994-95 and the
1995-96 Fiscal Years. For the 1995-96 Fiscal Year, Chapter 135 prohibits any
external borrowing as of June 30, 1996, thereby requiring the State to rely
solely on internal borrowable resources, expenditure reductions or revenue
increases to eliminate any projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996 cash shortfall
identified by the State Controller. If such legislation is not enacted, within
five days thereafter the Director of Finance must reduce all General Fund
appropriations for the 1995-96 Fiscal Year, except the Required
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Appropriations, by the percentage equal to the ratio of said 1996 cash shortfall
to total remaining General Fund appropriations for the 1995-96 Fiscal Year,
excluding the Required Appropriations.
On December 6, 1994, Orange County, California and its
Investment Pool (the "Pool") filed for bankruptcy under Chapter 9 of the United
States Bankruptcy Code. Approximately 187 California public entities,
substantially all of which are public agencies within the County, invested funds
in the Pool. Many of the agencies have various bonds, notes or other forms of
indebtedness outstanding, in some instances the proceeds of which were invested
in the Pool. Various investment advisors were employed by the County to
restructure the Pool. Such restructuring led to the sale of substantially all of
the Pool's portfolio, resulting in losses estimated to be approximately $1.7
billion or approximately 22% of amounts deposited by the Pool investors,
including the County. It is anticipated that such losses may result in delays or
failures of the County as well as investors in the Pool to make scheduled debt
service payments. Further, the County expects substantial budget deficits to
occur in Fiscal Year 1995 with possibly similar effects upon operations of
investors in the Pool.
Investor access to monies in the Pool subsequent to the filing
was pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i) established
a formula for distribution of all available cash and securities from the Pool to
the Pool investors, including the County, (ii) established formulas for
distribution among certain settling Pool investors of several tranches of new
County obligations to be payable from, and in some instances secured by, certain
designated sources of potential recoveries on Pool related claims, and (iii)
designated certain outstanding short term note obligations of the County to be
senior to or on a parity with certain of the new County obligations. By order
dated May 22, 1995, following distribution of all available cash and securities
from the Pool to the Pool investors, including the County, the Bankruptcy Court
dismissed the bankruptcy filing of the Pool based upon the Court's finding that
the Pool was not eligible for relief under Chapter 9 of the Bankruptcy Code
because it is not a municipality and it has not been specifically authorized to
file under Chapter 9 as required by the Bankruptcy Code. In negotiations
regarding a plan of arrangement for the County, many municipal investors in the
Pool have indicated a willingness to subordinate their remaining claims against
the County to those of other creditors and to make their further recovery
contingent on recovery by the County in litigation with brokerage houses,
investment advisors and other defendants regarding the Pool's investments.
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Following its bankruptcy filing, the County has, with
Bankruptcy Court approval, made payments of scheduled principal and interest on
its outstanding obligations where no alternative source of payment (such as
reserve funds on deposit with indenture trustees, letters of credit, municipal
bond insurance policies or other alternative payment sources) were available.
The County has not replenished such reserve funds or reimbursed the issuers of
such letters of credit or municipal bond insurance policies. In addition, the
County ceased making set aside deposits for repayment of certain of its short
term indebtedness. The Bankruptcy Court subsequently ruled that the rights of
the holders of such short term indebtedness to require the set aside deposits
from County revenues received following the filing were cut off by operation of
the Bankruptcy Code. In addition, the County has failed to satisfy its
obligation to accept tenders of its $110,200,000 aggregate principal amount of
Taxable Pension Obligation Bonds, Series B used to finance County pension
obligations. Interest at a rate set pursuant to the bond documents has been
timely paid on such Pension Bonds. The failure to satisfy the contractual
obligations discussed above may constitute defaults under the documents
governing such securities.
To June 30, 1995 there had been no default in payment of
scheduled interest and principal (excluding the tender payment described above
and the Note Debt hereinafter described) to holders of County securities,
although certain securities are scheduled to mature at various times thereafter
and the Fund is unable to predict whether or to what extent such securities will
be timely paid by the County. On June 27, 1995, the Bankruptcy Court approved a
Stipulation and an Extension Agreement that, offered to holders of certain short
term note obligations of the County ("Note Debt") who elected to be treated
thereunder: (i) extension of maturity dates to June 30, 1996; (ii) payment of
monthly interest at a rate below existing contract rates; (iii) accrual of
monthly interest equal to the difference between the amount paid and the
contract rate, plus a settlement adjustment of 0.95%; (iv) waiver of
post-bankruptcy interest recapture or disallowance; (v) waiver of defenses to
repayment of the Note Debt claims based on California limitations on municipal
indebtedness; and (vi) allowance of the Note Debt claims, subject to certain
reserved rights. The holders of in excess of 90% of the outstanding aggregate
principal amount of all Note Debt elected such treatment. On July 7, 1995
certain of the holders did not approve the agreement and those notes, in the
amount of $2.8 million were defaulted upon by the County on July 18, 1995.
Both Standard & Poor's and Moody's Investors Service have
suspended or downgraded ratings on various debt securities of the County and
certain of the investors in the Pool and, following the defeat of the
proposition submitted to the voters
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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, Standard & Poor's
declared the Note Debt in default in spite of the approval of the Stipulation
and Extension Agreement. Standard & Poor's 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.
The California Tax-Exempt Money Market Fund currently holds an
Orange County Note, with a par value of $4,500,000 that matures on June 30,
1996. The Orange County Note is supported by a Letter of Credit issued by PNC
Bank, National Association ("PNC"). BankAmerica Corporation has agreed to
reimburse PNC for any payments PNC may make under the Letter of Credit. The
Letter of Credit expires after June 30, 1996. On November 30, 1995, the Company,
on behalf of the California Tax-Exempt Money Market Fund, filed with the United
States Bankruptcy Court, Central District of California, a Proof of Claim with
respect to the Orange County Note.
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.
Certain California Municipal Securities in the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund may be obligations of
issuers which rely in whole or in part on California State revenues for payment
of these obligations. Property tax revenues and a portion of the State's general
fund surplus are distributed to counties, cities and their various taxing
entities and the State assumes certain obligations theretofore paid out of local
funds. Whether and to what extent a portion of the State's general fund will be
distributed in the future to counties, cities and their various entities, is
unclear.
In 1988, California enacted legislation providing for a
water's-edge combined reporting method if an election fee was paid and other
conditions met. On October 6, 1993, 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
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domestic disclosure spreadsheet and instead requiring an annual information
return. Significantly, the Franchise Tax Board can no longer disregard a
taxpayer's election. The Franchise Tax Board is reported to have estimated state
revenue losses from the Legislation as growing from $27 million in 1993-94 to
$616 million in 1999-2000, but others, including Assembly Speaker Willie Brown,
disagree with that estimate and assert that more revenue will be generated for
California, rather than less, because of an anticipated increase in economic
activity and additional revenue generated by the incentives in the Legislation.
Certain California Municipal Securities in the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8 and on June 3, 1986, the California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the 1%
limitation does not apply to ad valorem taxes or special assessments to pay the
interest and redemption charges on (i) any indebtedness approved by the voters
prior to July 1, 1978, or (ii) any bonded indebtedness for the acquisition or
improvement of real property approved on or 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.
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
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
At the November 8, 1988 general election, California voters
approved an initiative known as Proposition 98. This initiative amends Article
XIIIB to require that (i) the California Legislature establish a prudent state
reserve fund in an amount as it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision
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of tax rates or fee schedules, be transferred and allocated (up to a maximum of
4%) to the State School Fund and be expended solely for purposes of
instructional improvement and accountability. No such transfer or allocation of
funds will be required if certain designated state officials determine that
annual student expenditures and class size meet certain criteria as set forth in
Proposition 98. Any funds allocated to the State School Fund shall cause the
appropriation limits established in Article XIIIB to be annually increased for
any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 fiscal year, state monies to
support school districts and community college districts shall equal or exceed
the lesser of (i) an amount equalling the percentage of state general revenue
bonds for school and community college districts in fiscal year 1986-87, or (ii)
an amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition 111, was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculates spending
limits for the State and for local governments, allows greater annual increases
in the limits, allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removes the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limits the amount of State tax revenue over the limit which would
be transferred to school districts and community college districts, and exempts
increased gasoline taxes and truck weight fees from the State appropriations
limit. Additionally, Proposition 111 exempts from the State appropriations limit
funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to determine its
applicability to specific situations involving the
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<PAGE> 57
State and local taxing authorities. Depending upon the interpretation, Article
XIIIB may limit significantly a governmental entity's ability to budget
sufficient funds to meet debt service on bonds and other obligations.
On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative (i) requires that any tax for
general governmental purposes imposed by local governments be approved by
resolution or ordinance adopted by a two-thirds vote of the governmental
entity's legislative body and by a majority vote of the electorate of the
governmental entity, (ii) requires that any special tax (defined as taxes levied
for other than general governmental purposes) imposed by a local governmental
entity be approved by a two-thirds vote of the voters within that jurisdiction,
(iii) restricts the use of revenues from a special tax to the purposes or for
the service for which the special tax was imposed, (iv) prohibits the imposition
of ad valorem taxes on real property by local governmental entities except as
permitted by Article XIIIA, (v) prohibits the imposition of transaction taxes
and sales taxes on the sale of real property by local governments, (vi) requires
that any tax imposed by a local government on or after August 1, 1985 be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1988, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of property tax revenue allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition
87. Proposition 87 amended Article XVI, Section 16, of the California
Constitution by authorizing the California Legislature to prohibit redevelopment
agencies from receiving any of the property tax revenue raised by increased
property tax
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<PAGE> 58
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
Certain California Municipal Securities held by the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund may be obligations which
are payable solely from the revenues of health care institutions. Certain
provisions under California law may adversely affect these revenues and,
consequently, payment on those Municipal Securities.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation. California
law now provides that the State of California shall selectively contract with
hospitals to provide acute inpatient services to Medi-Cal patients. Medi-Cal
contracts currently apply only to acute inpatient services. Generally, such
selective contracting is made on a flat per diem payment basis for all services
to Medi-Cal beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions or limitations
may be imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
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
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contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These California Municipal Securities may also be insured by
the State of California pursuant to an insurance program implemented by the
Office of Statewide Health Planning and Development for health facility
construction loans. If a default occurs on insured California Municipal
Securities, the State Treasurer will issue debentures payable out of a reserve
fund established under the insurance program or will pay principal and interest
on an unaccelerated basis from unappropriated State funds. At the request of the
Office of Statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983, to evaluate the adequacy of the reserve fund
established under the insurance program and based on certain formulations and
assumptions found the reserve fund substantially underfunded. In September of
1986, Arthur D. Little, Inc. prepared an update of the study and concluded that
an additional 10% reserve be established for "multi-level" facilities. For the
balance of the reserve fund, the update recommended maintaining the current
reserve calculation method. In March of 1990, Arthur D. Little, Inc. prepared a
further review of the study and recommended that separate reserves continue to
be established for "multi-level" facilities at a reserve level consistent with
those that would be required by an insurance company.
Certain California Municipal Securities in the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund may be obligations which
are secured in whole or in part by a mortgage or deed of trust on real property.
California has five principal statutory provisions which limit the remedies of a
creditor secured by a mortgage or deed of trust. Two limit the creditor's right
to obtain a deficiency judgment, one limitation being based on the method of
foreclosure and the other on the type of debt secured. Under the former, a
deficiency judgment is barred when the foreclosure is accomplished by means of a
nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal
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action against the debtor. The fourth statutory provision limits any deficiency
judgment obtained by a creditor secured by real property following a judicial
sale of such property to the excess of the outstanding debt over the fair value
of the property at the time of the sale, thus preventing the creditor from
obtaining a large deficiency judgment against the debtor as the result of low
bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgement may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of mortgages or deeds of trust securing an issuer's
obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold that
the private-right-of-sale proceedings violate the due process requirements of
the Federal or State Constitutions, consequently preventing an issuer from using
the nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund may be obligations which
finance the acquisition of single family home mortgages for low and moderate
income mortgagors. These obligations may be payable solely from revenues derived
from the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage,
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regardless of whether the creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
INVESTMENT LIMITATIONS
The Prospectuses for each Fund sets forth certain fundamental
policies that may not be changed with respect to such Fund without the
affirmative vote of the holders of the majority of the Fund's outstanding shares
(as defined below under "Miscellaneous"). Similarly, the following enumerated
additional fundamental policies may not be changed with respect to a Fund
without such a vote of shareholders.
THE PRIME FUND MAY NOT:
1. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
In accordance with current regulations of the Securities
and Exchange Commission, the Prime Fund presently intends to limit its
investments in the securities of any single issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) to not
more than 5% of the Fund's total assets at the time of purchase, provided that
the Fund may invest up to 25% of its total assets in the securities of any one
issuer for a period that does not exceed three business days. This intention is
not, however, a fundamental policy of the Fund.
THE PRIME FUND, TREASURY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND MAY
NOT:
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1. Purchase or sell real estate (however, a Fund may, to the
extent appropriate to its investment objective, purchase securities issued by
companies investing in real estate or interests therein and the California
Tax-Exempt Money Market Fund may purchase Municipal Securities secured by real
estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of
exercising control.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets.
6. Make loans except that (i) a Fund may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies, and (ii) the Prime Fund may lend portfolio securities.
NEITHER THE GOVERNMENT FUND NOR THE TREASURY ONLY FUND MAY:
1. Purchase any security or evidence of interest therein on
margin, except that a Fund may obtain such short term credit as may be necessary
for the clearance of purchases and sales of securities.
2. Underwrite securities issued by other persons, except that
all of the assets of a Fund may be invested in a corresponding investment
company with the same investment objective and policies and except insofar as a
Fund may technically be deemed an underwriter under the Securities Act of 1933
in selling a security.
3. Make loans to other persons except (a) through the lending
of securities held by a Fund, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types commonly
distributed privately to financial institutions; for purposes of this investment
restriction the purchase of short-term commercial paper or a portion of an issue
of debt securities which are part of an issue to the public shall not be
considered the making of a loan.
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real
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estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts in the ordinary course of business (each Fund
reserves the freedom of action to hold and to sell real estate acquired as a
result of the ownership of securities by such Fund).
5. Issue any senior security (as that term is defined in the
Investment Company Act of 1940) if such issuance is specifically prohibited by
the Investment Company Act of 1940 or the rules and regulations promulgated
thereunder, except as appropriate to evidence a debt incurred without violating
Investment Restriction No. 2 as stated in the Funds' Prospectus regarding
borrowing.
6. Concentrate its investments in any particular industry
(excluding obligations of the U.S. Government, obligations of domestic banks,
and repurchase agreements), but if it is deemed appropriate for the achievement
of its investment objective, up to 25% of the assets of the Fund (taken at
market value at the time of each investment) may be invested in any one
industry; provided, that nothing in this investment restriction shall affect the
Fund's ability to invest a portion or all of its assets in a corresponding
investment company with the same investment objective and policies.
THE TAX-EXEMPT MONEY FUND MAY NOT:
1. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation. Securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities are not subject to this investment limitation. 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.
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3. Purchase or sell real estate, except that the Fund may, to
the extent appropriate to its investment objective, invest in securities issued
by companies which invest in real estate or interests therein.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof.
6. Purchase or sell commodities or commodity contracts, or
invest in oil, gas or mineral exploration or development programs, except that
the Fund may, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs.
7. Purchase securities of other investment companies, except
in connection with a merger, consolidation, acquisition or reorganization.
8. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations, and may enter into repurchase agreements with respect to
securities.
9. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in Municipal Securities or obligations issued or
guaranteed by the Federal Government and its agencies and instrumentalities; (b)
although there is no limitation with respect to investments in certificates of
deposit and bankers' 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.
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<PAGE> 65
THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND MAY NOT:
1. Invest in industrial revenue bonds where the payment of
principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation.
2. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs (however, the Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
3. Purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
4. Write or sell puts, calls, straddles, spreads, or
combinations thereof except that the Fund may acquire stand-by commitments with
respect to its Municipal Securities.
5. Purchase any securities which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that this limitation shall not apply to Municipal
Securities or governmental guarantees of Municipal Securities; and provided,
further, that for the purpose of this limitation only, industrial development
bonds that are backed only by the assets and revenues of a non-governmental user
shall not be deemed to be Municipal Securities.
* * *
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For purposes of Investment Limitation Paragraph 1 relating to
the Prime Fund in such Fund's Prospectus, Investment Limitation Paragraph 6
relating to the Government Fund and Treasury Only Fund in this Statement of
Additional Information, Investment Limitation Paragraph 9 relating to the
Tax-Exempt Money Fund in this Statement of Additional Information and Investment
Limitation Paragraph 5 relating to the California Tax-Exempt Money Market Fund
only in this Statement of Additional Information, these Funds treat, in
accordance with the current views of the staff of the Securities and Exchange
Commission and as a matter of non-fundamental policy that may be changed without
a vote of shareholders, all supranational organizations as a single industry and
each foreign government (and all of its agencies) as a separate industry.
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For purposes of Investment Limitation Paragraph 6 of this
Statement of Additional Information with respect to the Prime Fund, Treasury
Fund, and California Tax-Exempt Money Market Fund, Investment Limitation
Paragraph 3 of this Statement of Additional Information with respect to the
Government Fund and Treasury Only Fund and Investment Limitation Paragraph 8 of
this Statement of Additional Information with respect to the Tax-Exempt Money
Fund, the Funds may hold debt instruments whether such instruments are part of a
public offering or privately negotiated.
In order to permit the sale of shares in certain states, a
Fund may make commitments more restrictive than the investment policies and
limitations described above. To permit the sale of the shares of the Funds in
Texas, the Company has agreed to the following additional restrictions:
1. The Funds will not invest in oil, gas or mineral leases.
2. The Funds will not invest more than 5% of their net assets
in warrants (valued at the lower of cost or market), of which not more than 2%
may be warrants which are not listed on the New York or American Stock
Exchanges.
3. The Funds will not invest in real estate limited
partnerships.
4. Any Horizon Shares of the Funds offered for sale to Texas
residents will generally be issued for cash only. Transactions involving the
issuance of Horizon Shares of such Funds for securities or assets other than
cash will meet the requirements of Section 123.2(4) of the Texas Blue Sky
Regulations.
Should a Fund determine that these commitments or any other
commitments are no longer in the best interests of the Fund, it will revoke such
commitments by terminating sales of its shares in the state involved.
PURCHASE AND REDEMPTION OF SHARES
IN GENERAL
The Company or its transfer agent may require any information
reasonably necessary to evidence that a redemption has been duly authorized.
Under the Investment Company Act of 1940 any of the Funds may suspend the right
of redemption or postpone the date of payment upon redemption for any period
during which the New York Stock Exchange is closed (other than customary weekend
and holiday closings), during which trading on
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such Exchange is restricted, during which an emergency exists (as determined by
the Securities and Exchange Commission by rule or regulation) as a result of
which disposal or valuation of portfolio securities is not reasonably
practicable or for such other periods as the Securities and Exchange Commission
may permit. A Fund may also suspend or postpone the recordation of the transfer
of its shares upon the occurrence of any of the foregoing conditions.
In addition a Fund may redeem shares involuntarily in certain
instances if such redemption is appropriate to carry out the Company's
responsibilities under the Investment Company Act of 1940. If the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable, a Fund may make payment wholly or
partly in readily-marketable securities or other property. In such an event a
shareholder would incur transaction costs in selling the securities or other
property. See "Net Asset Value" below for an example of when such form of
payment might be appropriate. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the Company's net asset value at the beginning of such period.
Any institution purchasing shares on behalf of separate
accounts will be required to hold the shares in a single nominee name (a "Master
Account"). Institutions investing in more than one Fund must maintain a separate
Master Account for each Fund. Institutions may arrange with the Funds' transfer
agent for certain sub-accounting services (such as purchase, redemption and
dividend record keeping).
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
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Funds by such national banks acting on behalf of their fiduciary accounts is not
contrary to applicable regulations if consistent with the particular account and
proper under the law governing the administration of the account. Prospective
investors should consult their advisers regarding the law applicable to their
purchase of shares.
NET ASSET VALUE
IN GENERAL. Each Fund's net asset value per share is
calculated by dividing the total value of the assets belonging to the Fund, less
the value of any liabilities applicable to the Fund, by the total number of
outstanding shares of that Fund. Each Fund's net asset value is calculated
separately from each other Fund's net asset value. "Assets belonging to" a Fund
consist of the consideration received upon the issuance of shares representing
interests in the Fund together with all income, earnings, profits and proceeds
derived from the investment thereof, any proceeds from the sale, exchange or
liquidation of such investments, any funds or payments derived from any 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 the payments to Service
Organizations that are borne solely by Horizon Service Shares and certain
payments that are borne solely by Pacific Horizon Shares as described in the
Prospectuses for such Shares.
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 maturity of the
security. As a result the value of a portfolio security for purposes of
determining net asset value normally
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does not change in response to fluctuating interest rates. While the amortized
cost method seems to provide certainty in portfolio valuation it may result in
periods during which values, as determined by amortized cost, are higher or
lower than the amount such Fund would receive if it sold its portfolio
securities. The market value of the securities in the Funds can be expected to
vary inversely with changes in prevailing interest rates. Thus, if interest
rates have increased from the time a security was purchased, such security, if
sold, might be sold at a price less than its amortized cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its amortized cost. In
either instance, if the security is held to maturity, no gain or loss will be
realized.
In connection with their use of amortized cost valuation, the
Funds limit the dollar-weighted average maturity of their portfolios to not more
than 90 days and do not purchase any instrument with a remaining maturity of
greater than 397 calendar days. The Company's Board of Directors has also
established, pursuant to rules promulgated by the Securities and Exchange
Commission, procedures that are intended to stabilize each Fund's net asset
value per share for purposes of sales and redemptions at $1.00. Such procedures
include the determination, at such intervals as the Board deems appropriate, of
the extent, if any, to which a Fund's net asset value per share calculated by
using available market quotations deviates from $1.00 per share. In the event
such deviation exceeds 1/2 of 1% the Board will promptly consider what action,
if any, should be initiated. If the Board believes that the amount of any
deviation may result in material dilution or other unfair results to investors
or existing shareholders, it will take such steps as it considers appropriate to
eliminate or reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity, shortening a Fund's average portfolio maturity, withholding or
reducing dividends, reducing the number of a Fund's outstanding shares without
monetary consideration or determining net asset value per share by using
available market quotations. If a Fund reduces the number of its outstanding
shares without monetary consideration it will mail written notice to
shareholders at least three business days before the redemption and in the
notice will state the reason for the redemption and the fact that the redemption
may result in a capital loss to shareholders.
The Funds' administrator, Concord Holding Corporation (the
"Administrator"), may use a pricing service to value certain portfolio
securities where the prices provided are believed by the Administrator pursuant
to guidelines adopted by the Board of Directors to reflect the fair value of
such securities. In valuing a Fund's securities, the pricing service would
normally
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take into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely on quoted prices. The methods used by the
pricing service and the valuations so established will be utilized under the
general supervision of the Company's Board of Directors. Additionally, in
determining market-based net asset value per share all portfolio securities for
which market quotations (or appropriate substitutes that reflect current market
conditions) are not readily available shall be valued at their fair value as
determined by the valuation committee in accordance with procedures established
by the Board of Directors.
MANAGEMENT OF THE FUNDS
Directors and Officers
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust Series I
and Master Investment
Trust, Series II
(registered investment
companies) (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
</TABLE>
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<PAGE> 71
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated,
Newport Beach, CA 92660-2629 (registered
investment adviser) 1991
to date; Partner, Newport
Partners (private venture
capital firm), 1981 to
date; Chairman of the
Board and Chief Executive
Officer, First Pacific
Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from 1979
to 1991; Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1993); Director, Morgan
Grenfell Small Cap Fund
(since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989) (registered
investment companies);
former Trustee,
SunAmerica Fund Group
</TABLE>
-47-
<PAGE> 72
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988,
Pacific Rim Bankers
Program (a non-profit
educational institution);
Dean Emeritus, 1981 to
date, Dean, 1964-81,
Graduate School of
Business Administration,
University of Washington;
Director, Washington
Federal Savings & Loan
Association; Trustee,
Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of
Finance and Business
Economics of the
Graduate School of
Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
</TABLE>
-48-
<PAGE> 73
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Fremont General
Corporation (insurance
and financial services
holding company);
Director, Source Capital,
Inc. (closed-end
investment company);
Director of three
open-end investment
companies managed by
First Pacific Advisors,
Inc.; formerly Chairman
of the Board of Directors
(or Trustees) of nineteen
investment companies
managed by American
Capital Asset Management,
Inc.
Richard E. Stierwalt Executive Chairman of the Board
125 W. 55th Street 40 Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director, Managing
Director and Chief
Executive Officer of the
Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement Funds
(since 1993); First Vice
President, Trust
Operation Administration,
Security Pacific National
Bank, 1983-1987.
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.
</TABLE>
-49-
<PAGE> 74
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Irimga McKay 35 Vice Senior Vice President,
1230 Columbia Street President July 1993 to date, prior
5th FL thereto First Vice
San Diego, CA 92101 President of the
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1933 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement Funds
(since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
Stephanie L. Blaha 36 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
100 First Avenue, Suite 300 Administrator, March
Pittsburgh, PA 15222 1995 to date, prior
thereto Assistant Vice
President of the
Administrator and
Distributor, October 1991
to March 1995; Assistant
Vice President, Master
Investment Trust, Series
II (since 1996); Vice
President, Seafirst
Retirement Funds (since
1996): Account Manager,
AT&T American Transtech,
Mutual Fund Division,
July 1989 to October
1991.
</TABLE>
-50-
<PAGE> 75
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Mark E. Nagle 36 Treasurer Senior Vice
BISYS Fund Services President, Fund
3435 Stelzer Road Accounting Services,
Columbus, OH 43219 The BISYS Account Group,
Inc., September 1995 to
Present; Senior Vice
President Fidelity
Institutional Retirement
Services (1993 to
September 1995); Fidelity
Accounting & Custody
Services (1981 to 1993).
Martin R. Dean 31 Assistant Manager of Fund
BISYS Fund Services Treasurer Accounting of BISYS
3435 Stelzer Road Fund Services, May 1994
Columbus, OH 43219 to Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
II and Seafirst
Retirement Funds
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance Capital
Management, L.P.
</TABLE>
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
-51-
<PAGE> 76
The Audit Committee of the Board is comprised of all directors
and is chaired by Dr. Trefftzs. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $20,000 per annum for his
services as President; Mr. Collins, in consideration of his years of service as
President and Chairman of the Board, receives an additional $40,000 per annum in
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. The Funds, and each other fund of the Company, pays its proportionate
share of these amounts based on relative net asset values.
For the fiscal year ended February 28, 1995, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $334,168; of this amount, the following amounts of
directors' compensation were allocated to the following Funds: Treasury Fund -
$22,408; Prime Fund - $23,318; Government Fund - $23,093; Treasury Only Fund -
$22,179; Tax-Exempt Money Fund - $21,538; and California Tax- Exempt Money
Market Fund - $23,388. Each director is also reimbursed for out-of-pocket
expenses incurred as a director. Drinker Biddle & Reath, of which Mr. McConnel
is a partner, receives legal fees as counsel to the Company. As of the date of
this Statement of Additional Information, the directors and officers of the
Company, as a group, own less than 1% of the outstanding shares of each of the
Company's investment portfolios.
-52-
<PAGE> 77
Under a retirement plan approved by the Board of Directors,
including a majority of its directors who are not "interested persons" of the
Company, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer then
in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director provided as Chairman of the
Board.
Years of service for purposes of calculating the benefit
described above are based upon service as a director or Chairman after February
28, 1994. Retirement benefits in which a director has become vested may not be
reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer payable
to directors thereafter), and (ii) using the interest rate in effect as of the
date of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before March
1, 1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit 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
-53-
<PAGE> 78
as not more than ten annual payments (beginning the first anniversary of the
director's date of death or resignation and continuing for one or more
anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former
director is neither secured nor funded by the Company but shall be binding upon
its successors in interest. The payment of benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information about the
director/trustee fees of the Company as of February 28, 1995.
<TABLE>
<CAPTION>
================================================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX*
NAME OF PERSON/ FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $100,000 $0 $0 $110,000
Director+
- --------------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $57,500 $0 $0 $57,500
Vice Chairman of
the Board
- --------------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley** $57,500 $0 $0 $65,781
Director
- --------------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $57,500 $0 $0 $63,500
Director
- --------------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,500 $0 $0 $57,500
President and
Chairman of the
Board
- --------------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $57,500 $0 $0 $57,500
Director
================================================================================================================================
</TABLE>
- ------------------------------
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I and Master Investment Trust, Series
II.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Collins was President and Chairman of the Board of the Company
until August 31, 1995.
-54-
<PAGE> 79
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to each of the Funds, other than the Government and Treasury Only Funds,
since the commencement of their operations. In the investment advisory
agreement, Bank of America has agreed to provide investment advisory services as
described in the Prospectuses. Bank of America has also agreed to pay all
expenses incurred by it in connection with its activities under its agreement
other than the cost of securities, including brokerage commissions, if any,
purchased for the Company. In rendering its advisory services, Bank of America
may utilize Bank officers from one or more of the departments of the Bank which
are authorized to exercise the fiduciary powers of Bank of America with respect
to the investment of trust assets. In some cases, these officers may also serve
as officers, and utilize the facilities, of wholly-owned subsidiaries or other
affiliates of Bank of America or its parent corporation. For the services
provided and expenses assumed pursuant to the investment advisory agreement, the
Company has agreed to pay Bank of America fees, accrued daily and payable
monthly, at the following annual rates, with respect to the Funds: .10% of the
first $3 billion of each Fund's net assets, plus .09% of the next $2 billion of
each Fund's net assets, plus .08% of each Fund's net assets over $5 billion.
From time to time, Bank of America may waive fees or reimburse the Company for
expenses voluntarily or as required by certain state securities laws.
For the fiscal years ended February 28, 1993, February 28,
1994, and February 28, 1995, Bank of America (and Securities Pacific prior to
April 22, 1992) were paid in the aggregate, pursuant to the investment advisory
agreements applicable to them, advisory fees (net of waivers) of $8,106,253,
$11,293,545, and $2,330,203, respectively, by the Prime Fund, $2,841,285,
$2,717,321, and $2,140,125, respectively, by the Treasury Fund and $466,339,
$472,766, and $501,956, respectively, by the Tax-Exempt Money Fund. For the
fiscal years ended February 28, 1993, February 28, 1994, and February 28, 1995,
Bank of America (and Security Pacific prior to April 22, 1992) were paid in the
aggregate, pursuant to the investment advisory agreements applicable to them,
advisory fees (net of waivers and expense reimbursements) of $22,306, $269,869,
and $301,964, respectively, by the California Tax-Exempt Money Market Fund. For
the fiscal years ended February 28, 1993, February 28, 1994, and February 28,
1995, Bank of America (and Security Pacific prior to April 22, 1992) did not
effect any fee waivers or expense reimbursements with respect to the Treasury
Fund but did reimburse expenses or waive fees to the Prime Fund, in the
aggregate, in the amount of $0, $367,233, and $920,627, and the Tax-Exempt Money
Fund, in the amount of $3,692, $23,524, and
-55-
<PAGE> 80
$11,611, respectively. For the fiscal years ended February 28, 1993, February
28, 1994, and February 28, 1995, Bank of America (and Security Pacific prior to
April 22, 1992) in the aggregate, waived fees and reimbursed expenses with
respect to the California Tax-Exempt Money Market Fund in the amount of $82,350,
$22,998, and $0, respectively.
For the fiscal year ended February 28, 1994, the Government
Fund and Treasury Only Fund paid Bank of America investment advisory fees (net
of fee waivers) of $877,515 and $68,888, respectively. For that same period Bank
of America waived fees and reimbursed the Government Fund and Treasury Only Fund
in the amounts of $6,537 and $127,607, respectively. For the fiscal year ended
February 28, 1995, the Government Fund and Treasury Only Fund paid Bank of
America investment advisory fees (net of fee waivers or expense reimbursements)
of $321,634 and $293,305, respectively. For that same period, Bank of America
waived fees of $8,313 for the Treasury Only Fund and waived fees of $313,740 and
reimbursed expenses to the Government Fund in the amount of $14,000. For the
fiscal year ended March 31, 1992 and the period April 1, 1992 through February
28, 1993, the Predecessor Treasury Only Funds bore investment advisory fees
pursuant to the investment advisory agreement then in effect of $70,579 and
$61,676, respectively, and the Predecessor Government Funds bore investment
advisory fees of $361,035 and $308,729, respectively. All of these fees were
paid to Seattle Capital Management Company (the "Former Adviser"), which is a
wholly-owned, indirect subsidiary of BankAmerica Corporation. For the periods
and fiscal year referenced above, the Former Adviser waived additional
investment advisory fees of $194,089 and $169,608, respectively, with respect to
the Predecessor Treasury Only Funds, and $227,281 and $154,364, respectively,
with respect to the Predecessor Government Funds.
The Company's investment advisory agreement for the Funds
provides that Bank of America shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company in connection with the
performance of the investment advisory agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or negligence
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States
-56-
<PAGE> 81
Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a bank from operating a fund for the collective
investment of managing agency accounts. Subsequently, the Board of Governors of
the Federal Reserve System (the "Board") issued a regulation and interpretation
to the effect that the Glass-Steagall Act and such decision forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, but do not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent and
custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may perform the services for
the Company contemplated by the investment advisory agreement, the Prospectuses,
and this Statement of Additional Information without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether a bank may
perform services comparable to those performed by Bank of America and future
changes in either federal or state statutes and regulations relating to
permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
Bank of America from continuing to perform such services for the Company or from
continuing to purchase Company shares for the accounts of its customers.
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
-57-
<PAGE> 82
to perform some or all of the services now provided by the Administrator or the
Distributor. From time to time, legislation modifying such restriction has been
introduced in Congress which, if enacted, would permit a bank holding company to
establish a non-bank subsidiary having the authority to organize, sponsor and
distribute shares of an investment company. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by the Company's Board of Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with
principal offices at 3435 Stelzer Road, Columbus, Ohio 43219, is a wholly-owned
subsidiary of The BISYS Group, Inc. The Administrator also serves as
administrator to several other investment companies.
The Administrator provides administrative services for the
Funds as described in their Prospectuses pursuant to a Basic Administrative
Services Agreement. The agreement will continue in effect with respect to each
Fund until October 31, 1996 and thereafter will be extended with respect to each
Fund for successive periods of one year, provided that each such extension is
specifically approved (a) by vote of a majority of those members of the
Company's Board of Directors who are not interested persons of any party to the
agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) the Company's Board of Directors or by vote of a majority of
the outstanding voting securities of such Fund. The agreement is terminable at
any time without penalty by the Company's Board of Directors or by a vote of a
majority of a Fund's outstanding shares upon 60 days' notice to the
Administrator, or by the Administrator upon 90 days' notice to the Company.
For its services under the Basic Administrative Services
Agreement, the Administrator is entitled to receive an administration fee,
accrued daily and payable monthly, at the following annual rates: .10% of the
first $7 billion of each Fund's net assets, plus .09% of the next $3 billion of
each Fund's net assets, plus .08% of each Fund's net assets over $10 billion.
From time to time, the Administrator may waive fees or reimburse the Company for
expenses, either voluntarily or as required by certain state securities laws.
For the fiscal years ended February 28, 1993, February 28,
1994, and February 28, 1995 the Administrator was paid, pursuant to the
administration agreement then in effect, administration fees (net of waivers) of
$8,835,608, $12,158,419, and $2,366,035, respectively, by the Prime Fund,
$2,845,014,
-58-
<PAGE> 83
$2,717,606, and $2,140,125, respectively, by the Treasury Fund and $466,339,
$472,766, and $501,956, respectively, by the Tax- Exempt Money Fund. For the
fiscal years ended February 28, 1993, February 28, 1994, and February 28, 1995,
the Administrator was paid, pursuant to the administration agreement then in
effect, administrative fees (net of waivers) of $104,656, $269,869, and
$301,618, respectively, by the California Tax-Exempt Money Market Fund. For the
fiscal years ended February 28, 1993, February 28, 1994, and February 28, 1995,
the Administrator did not effect any fee waivers or expense reimbursements with
respect to the Treasury Fund but did reimburse the Prime Fund and Tax-Exempt
Money Fund for expenses or waive fees in the amount of $0, $381,513 and $949,233
and $3,692, $23,524, and $11,611, respectively. For the fiscal years ended
February 28, 1993, February 28, 1994, and February 28, 1995 aggregate fee
waivers and expense reimbursements by the Administrator with respect to the
California Tax-Exempt Money Market Fund were $0, $22,998, and $0, respectively.
For the fiscal year ended February 28, 1994, the Government
Fund and Treasury Only Fund paid the Administrator (net of fee waivers),
$877,515 and $68,888, respectively. For this same period the Administrator
waived fees due from the Government Fund and Treasury Only Fund in the amounts
of $6,537 and $127,607, respectively and reimbursed the Funds $0 and $0,
respectively. For the fiscal year ended February 28, 1995, the Government Fund
and Treasury Only Fund paid the Administrator (net of fee waivers), $463,641 and
$293,305, respectively. For this same period the Administrator waived fees due
from the Government Fund and Treasury Only Fund in the amounts of $185,733 and
$8,313, respectively and reimbursed the Funds $0 and $0, respectively. For the
fiscal year ended March 31, 1992 and the fiscal period April 1, 1992 through
February 28, 1993, pursuant to the administration agreement then in effect,
Signature Broker- Dealer Services, Inc., the former administrator of the
Predecessor Government and Treasury Only Funds (the "Former Administrator"),
accrued direct and indirect administrative fees of $252,708 and $187,981,
respectively, with respect to the Predecessor Government Fund of First Cash
Funds of America and $126,430 and $117,319, respectively, with respect to the
Predecessor Treasury Only Fund of First Cash Funds of America.
If total expenses borne by any Fund in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations, the
Company may deduct from the payments to be made with respect to such Fund to
Bank of America and the Administrator, respectively, or Bank of America and the
Administrator each will bear, the amount of such excess to the extent required
by such regulations. Such amount, if any, will be estimated and accrued daily
and paid on a monthly basis. As of the date of this Statement of Additional
Information, the most
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<PAGE> 84
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.
The Administrator will bear all expenses in connection with
the performance of its services under the Basic Administrative Services
Agreement for the Funds with the exception of fees charged by The Bank of New
York for certain fund accounting services which are borne by the Funds. See
"Custodian and Transfer Agent" below. Expenses borne by the Company include
taxes, interest, brokerage fees and commissions, if any, fees of directors who
are not officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or the Administrator or any of
their affiliates, Securities and Exchange Commission fees and state securities
qualification fees, advisory fees, administrative fees, fees payable to
Shareholder Organizations, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, outside auditing and legal
expenses, costs of maintaining corporate existence, costs attributable to
investor services, including without limitation telephone and personnel
expenses, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes, cost of shareholders' reports
and corporate meetings and any extraordinary expenses.
The Basic Administrative Services Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law or
any loss suffered by any Fund in connection with the matters to which the
agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence in the performance of the Administrator's duties or from the
reckless disregard by the Administrator of its obligations and duties
thereunder.
Bank of America has received an option entitling it to
purchase approximately 4% of the Administrator's authorized common stock on or
before December 31, 1998.
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<PAGE> 85
DISTRIBUTOR
The Distributor acts as the exclusive distributor of the
shares of each of the Funds pursuant to a distribution agreement with the
Company. Shares are sold on a continuous basis by the Distributor as agent,
although the Distributor is not obliged to sell any particular amount of shares.
No compensation is payable by the Funds to the Distributor for its distribution
services. The distribution agreement shall continue in effect with respect to
each Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement shall continue automatically for successive terms of one
year, provided that such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Directors of the
Company who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Directors of the Company or
by vote of a "majority of the outstanding voting securities" of the Funds as to
which the distribution agreement is effective; provided, however, that the
distribution agreement may be terminated by the Company at any time, without the
payment of any penalty, by vote of a majority of the entire Board of Directors
of the Company or by a vote of a "majority of the outstanding voting securities"
of such Funds on 60 days' written notice to the Distributor, or by the
Distributor at any time, without the payment of any penalty, on 90 days' written
notice to the Company. This Agreement will automatically and immediately
terminate in the event of its "assignment."
For the period June 4, 1990 (commencement of operations)
through March 31, 1991 (fiscal year end), the fiscal year ended March 31, 1992
and the period April 1, 1992 through February 28, 1993, Signature Broker-Dealer
Services, Inc., which also served as the former distributor of the Predecessor
Government and Treasury Only Funds' shares, was paid $2,814, $17,167 and $6,166,
respectively by the Predecessor Government Fund of First Cash Funds of America
and $5,148, $5,746 and $2,680, respectively by the Predecessor Treasury Only
Fund of First Cash Funds of America as reimbursement for expenses related to the
distribution of such Predecessor Funds' shares. No such fees will be charged to
the Government Fund or the Treasury Only Fund or to any other Fund.
CUSTODIAN AND TRANSFER AGENT
The Company has appointed The Bank of New York, 90 Washington
Street, New York, New York 10286, as custodian and Concord Financial Services,
Inc., a wholly-owned subsidiary of Concord Holding Corporation, located at First
and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222, as
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transfer and dividend disbursing agent for the Funds' Horizon Shares. BISYS Fund
Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035 serves as
transfer and dividend disbursing agent for the Funds' Horizon Service Shares.
The Bank of New York also provides the Company with certain accounting services
pursuant to a fund accounting services agreement with the Administrator. Under
the fund accounting services agreement, The Bank of New York has agreed to
provide certain accounting, bookkeeping, pricing, and dividend and distribution
calculation services with respect to the Company. The monthly fees charged by
the bank under the fund accounting agreement are borne by the Funds. The Company
and The Bank of New York have appointed Bank of America to act as sub-custodian
pursuant to a Sub-Custodian Agreement. As sub-custodian of the Company's assets,
Bank of America (i) maintains a separate account or accounts in the name of the
Company, (ii) holds and disburses portfolio securities on account of the
Company, (iii) makes receipts and disbursements of money on behalf of the
Company, (iv) collects and receives all income and other payments and
distributions on account of the Company's portfolio securities held by Bank of
America, (v) responds to correspondence from security brokers and others
relating to its duties, and (vi) makes periodic reports to the Company's Board
of Directors concerning its duties thereunder. Under the Sub-Custodian
Agreement, the Company will reimburse Bank of America for its costs and expenses
in providing services thereunder. Bank of America is the successor to Security
Pacific under the Sub-Custodian Agreement. For the fiscal years ended February
28, 1993, February 28, 1994 and February 28, 1995, Bank of America (and
Securities Pacific prior to April 22, 1992), in their capacity as sub-custodian,
did not hold any of the Company's assets and, accordingly, received no fees. For
its services as transfer and dividend disbursing agent to the Horizon Shares of
the Prime, Treasury, Government, Treasury Only, 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 and dividend disbursing agent. For the fiscal year ended
February 28, 1995, Concord Financial Services, Inc. received $27,063, $19,693,
$17,873 and $18,221 from the Prime Fund, Treasury Fund, Government Fund and Tax-
Exempt Fund, respectively, for services as transfer and dividend disbursing
agent for such funds Horizon Shares. Prior to the date of this Statement of
Additional Information, Horizon Shares of the California Tax-Exempt Money Market
Funds were not offered.
Bank of America and Seattle-First National Bank, an affiliate
of Bank of America, previously provided transfer agency, custodial and fund
accounting services for the Predecessor Government Funds and Predecessor
Treasury Only Funds. For the period June 4, 1990 (commencement of operations)
through
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March 31, 1991 (fiscal year end), the fiscal year ended March 31, 1992 and the
period April 1, 1992 through February 28, 1993, Bank of America and
Seattle-First National Bank received directly and indirectly for such services
$129,116, $254,824 and $200,624, respectively, with respect to the Predecessor
Government Funds and $38,761, $114,630 and $100,225, respectively, with respect
to the Predecessor Treasury Only Funds.
TAXES
The following is only a summary of certain additional
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectuses for the Funds. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their shareholders,
and the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning. Investors are advised to consult their tax advisers
with specific reference to their own tax situations.
ALL FUNDS
Each Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, each Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year a Fund of the Company does not
qualify for the special federal tax treatment afforded regulated investment
companies, all of the Fund's taxable income would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders). In
such event, the Fund's dividend distributions (including amounts derived from
interest on Municipal Securities in the case of the Tax-Exempt Money Fund and
California Tax- Exempt Money Market Fund) to shareholders would be taxable as
ordinary income to the extent of the current and accumulated earnings and
profits of the particular Fund and would be eligible for the dividends received
deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any) net of certain deductions for
each taxable year. In general, a Fund's investment company taxable income will
be its taxable income, subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any,
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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
capital gains are taxable at a maximum nominal rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35% (or at a maximum effective marginal rate of 39% in the case
of corporations having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income for each calendar year and capital gain net income
(excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or gross sale
proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the
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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 when required to do
so or that they are "exempt recipients."
At February 28, 1995, the Prime Fund, Treasury Fund,
Government Fund, Treasury Only Fund, Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund, had unused capital loss carryovers of
approximately $2,764,492 (of which $22,098 will expire in fiscal 1999,
$1,171,786 will expire in fiscal 2002 and $1,570,608 will expire in fiscal
2003), $239,007 (which will expire in fiscal 2002), $1,073,801 (of which
$129,811 will expire in fiscal 2002 and $943,990 will expire in fiscal 2003),
$113,421 (of which $21,276 will expire in fiscal 2002 and $92,145 will expire in
fiscal 2003), $156,373 (of which $35,348 will expire in fiscal 1997, $16,664
will expire in fiscal 1998, $14,011 will expire in fiscal 2000, $71,218 will
expire in fiscal 2002 and $19,132 will expire in fiscal 2003) and $12,116 (of
which $5,893 will expire in fiscal 2001 and $6,223 will expire in fiscal 2002)
and $293,460 (of which $3,571 will expire in fiscal 2002 and $289,889 will
expire in fiscal 2003), respectively, available for federal income tax purposes
to be applied against future capital gains, if any.
FEDERAL - TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
The policy of the Tax-Exempt Money Fund and the California
Tax-Exempt Money Market Fund is to pay each year as exempt-interest dividends
substantially all the respective Fund's Municipal Securities interest income net
of certain deductions. An exempt-interest dividend is any dividend or part
thereof (other than a capital gains dividend) paid by a Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by the Fund during the taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund for such year. In order for the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund to pay exempt-interest
dividends for any taxable year, at the close of each quarter of the Fund's
taxable year at least 50% of the aggregate value of the Fund's assets must
consist of exempt-interest obligations.
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Exempt-interest dividends may be treated by shareholders of
the Tax-Exempt Money Fund and the California Tax- Exempt Money Market Fund as
items of interest excludable from their gross income under Section 103(a) of the
Code. However, each shareholder is advised to consult his or her tax adviser
with respect to whether exempt-interest dividends would retain the exclusion
under Section 103(a) if such shareholder would be treated as a "substantial
user" or a "related person" to such user with respect to facilities financed
through any of the tax-exempt obligations held by the respective Funds. A
"substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who both (1) regularly uses a part of such facilities in his
or her trade or business and (2) whose gross revenues derived with respect to
the facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. A "related person"
includes certain related natural persons, affiliated corporations, partners and
partnerships and S corporations and their shareholders. Interest on indebtedness
incurred by a shareholder to purchase or carry shares of the Fund generally is
not deductible for federal income tax purposes.
Income itself exempt from federal income taxation will be
considered in addition to adjusted gross income when determining whether Social
Security payments received by a shareholder are subject to federal income
taxation.
CALIFORNIA - CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
As a regulated investment company, the California Tax- Exempt
Money Market Fund will be relieved of liability for California state franchise
and corporate income tax to the extent the Fund's taxable income is distributed
to its shareholders. The Fund will be taxed on its undistributed taxable income.
If for any year the Fund does not qualify as a regulated investment company, all
of its taxable income (including interest income on California Municipal
Securities for franchise tax purposes only) may be subject to California state
franchise or income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least
50% of the value of the total assets of a regulated investment company, or
series thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then the regulated investment company, or series of that company,
will be qualified to pay dividends exempt from California state personal income
tax to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this
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purpose, California Exempt Securities are generally limited to California
Municipal Securities and certain U.S. Government and U.S. Possession
obligations. "Series" of a regulated investment company is defined as a
segregated portfolio of assets, the beneficial interest in which is owned by the
holders of an exclusive class or series of stock of the company. The California
Tax-Exempt Money Market Fund intends to qualify under the above requirements so
that it can pay California exempt-interest dividends. If the Fund does not so
qualify, no part of its respective dividends to shareholders will be exempt from
the California state personal income tax.
Within sixty days after the close of its taxable year, the
California Tax-Exempt Money Market Fund will notify its respective shareholders
of the portion of the dividends paid by the Fund to each shareholder with
respect to such taxable year which is exempt from California state personal
income tax. The total amount of California exempt-interest dividends paid by the
Fund with respect to any taxable year cannot exceed the excess of the amount of
interest received by the Fund for such year on California Exempt Securities over
any amounts that, if the Fund were treated as an individual, would be considered
expenses related to tax exempt income or amortizable bond premium and would thus
not be deductible under federal income or California state personal income tax
law. The percentage of total dividends paid for any taxable year which qualifies
as California exemptinterest dividends will be the same for all shareholders
receiving dividends from the Fund for such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Exempt Securities held by the
California Tax-Exempt Money Market Fund, such shareholders should consult their
tax advisers to determine whether California exempt-interest dividends paid by
the Fund with respect to such obligations retain California state personal
income tax exclusion. In this connection rules similar to those regarding the
possible unavailability of federal exempt-interest dividend treatment to
"substantial users" are applicable for California state tax purposes. See
"Additional Information Concerning Taxes - Federal - Tax-Exempt Money Fund and
California Tax-Exempt Money Market Fund" above. Interest on indebtedness
incurred by a shareholder to purchase or carry California Tax-Exempt Money
Market Fund shares is not deductible for California state personal income tax
purposes if the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.
The foregoing is only a summary of some of the important
California state personal income tax considerations generally affecting the
California Tax-Exempt Money Market Fund and its shareholders. No attempt is made
to present a detailed
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explanation of the California state personal income tax treatment of the Fund or
its shareholders, and this discussion is not intended as a substitute for
careful planning. Further, it should be noted that the portion of any Fund
dividends constituting California exempt-interest dividends is excludable from
income for California state personal income tax purposes only. Any dividends
paid to shareholders subject to California state franchise tax or California
state corporate income tax may therefore be taxed as ordinary or capital gains
dividends to such purchasers notwithstanding that all or a portion of such
dividends is exempt from California state personal income tax. Accordingly,
potential investors in the Fund, including, in particular, corporate investors
which may be subject to either California franchise tax or California corporate
income tax, should consult their tax advisers with respect to the application of
such taxes to the receipt of Fund dividends and as to their own California state
tax situation, in general.
OTHER INFORMATION
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, a Fund may be subject to the tax laws of such states or
localities.
Exempt-interest dividends generally will be exempt from state
and local taxes as well. However, except as noted above with respect to
California state personal income tax, in some situations income distributions
may be taxable to shareholders under state or local law as dividend income even
though all or a portion of such distributions may be derived from interest on
tax-exempt obligations or U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action.
YIELD INFORMATION
The "yields" and "effective yields" of each Fund are
calculated according to formulas prescribed by the Securities and Exchange
Commission. The standardized seven-day yield for each Fund's series of shares is
computed separately for each series by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the
particular
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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
TaxExempt Money Market Fund a combined federal and California state, income tax
rate; (b) with respect to the California Tax-Exempt Money Market Fund dividing
the portion of that Fund's yield (as calculated above) that is exempt from
federal income tax only by one minus a federal income tax rate, and (c) adding
the figure resulting from (a) above (with respect to the Tax-Exempt Money Fund)
or from (a) and (b) above (with respect to the California Tax-Exempt Money
Market Fund) to that portion, if any, of the Fund's yield for such series of
shares that is not exempt from federal income tax. The fees which may be imposed
by institutions directly on their customers for cash management services are not
reflected in the Funds' calculations of yields.
Based on the foregoing calculations, for the seven-day period
ended August 31, 1995, the yield (and effective yield) for Horizon Shares and
the Horizon Service Shares of the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund, and TaxExempt Money Fund after fee waivers and expense
reimbursements by Bank of America and the Administrator, were as follows: Prime
Fund - Horizon Shares -- 5.64% (5.80%); Prime Fund - Horizon Service Shares --
5.39% (5.53%); Treasury Fund - Horizon Shares -- 5.52% (5.67%); Treasury Fund -
Horizon Service Shares -- 5.27% (5.41%); Government Fund - Horizon Shares --
5.40% (5.55%); Government Fund - Horizon Service Shares -- 5.15% (5.28%);
Treasury Only Fund - Horizon Service Shares -- 5.03%
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(5.16%); Tax-Exempt Money Fund - Horizon Shares -- 3.48% (3.54%); and Tax-Exempt
Money Fund - Horizon Service Shares -- 3.23% (3.28%). For the same period, the
tax-equivalent yield for the Tax-Exempt Money Fund was 5.04% and 4.68% for
Horizon Shares and for Horizon Service 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 of the
California TaxExempt Money Market Fund was 3.14%, 3.19% and 4.81%, respectively
for the seven-day period ended August 31, 1995. The combined federal and
California income tax rate used in calculating the foregoing tax-equivalent
yields was 34.70%. As of August 31, 1995, the Horizon Shares of the California
Tax-Exempt Money Market Fund had not been offered.
From time to time, the yields of the Funds may be quoted in
and compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. The
Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income of a Fund would increase the value of the Fund investment more quickly
than if dividends or other distributions had been paid in cash. The Funds may
also include discussions or illustrations of the potential investment goals of a
prospective investor (including but not limited to tax and/or retirement
planning), investment management techniques, policies or investment suitability
of a Fund, economic conditions, legislative developments (including pending
legislation), the effects of inflation and historical performance of various
asset classes. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the views
of the investment adviser as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund. The Funds
may also include in advertisements charts, graphs or drawings which illustrate
the potential risks and rewards of investment in various investment vehicles. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund and
may include testimonials as to the investment adviser's capabilities by clients.
Such
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advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Funds is generally available by
calling (800) 346-2087.
In addition to the publications listed in the Funds'
Prospectuses, yield data as reported in the following publications may be used
in comparing the yields of the Funds to those of other mutual funds with similar
investment objectives: Business Week, Investor's Business Daily, Kiplinger, U.S.
News, Financial World, USA Today, Morningstar, Mutual Fund Monitor, and American
Banker.
GENERAL INFORMATION
Description of Shares
The Company is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. The Fund's Charter
authorizes the Board of Directors to issue up to two hundred billion full and
fractional shares of capital stock. The Board of Directors has authorized the
issuance of twenty-two classes of stock - Classes A through W, Common Stock
representing interests in twenty-two separate investment portfolios. Each share
of capital stock has a par value of $.001. This Statement of Additional
Information describes the Horizon and Horizon Service Shares of the Prime,
Treasury, Government, Treasury Only, Tax-Exempt Money and California TaxExempt
Money Market Funds.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in its prospectuses, the Company's shares will be fully
paid and non-assessable. For information concerning possible restrictions upon
the transferability of the Company's shares and redemption provisions with
respect to such shares, see "Purchase and Redemption Information" in this
Statement of Additional Information.
The Funds' Horizon Shares and Horizon Service Shares differ
from Pacific Horizon Shares in the following respects. Only Pacific Horizon
Shares are subject to the Administrative Services fee described in the
prospectuses for such shares, which is payable at the rate of .32% (on an
annualized basis) of the average daily net asset value of the Pacific Horizon
Shares that are outstanding from time to time. Only Horizon Service Shares
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bear the fees payable under the Shareholder Services Plan described below, which
are payable at the rate of up to .25% (on an annualized basis) of the average
daily net asset value of the Horizon Service Shares that are outstanding from
time to time. As a result, at any given time, the net yield on a Fund's Horizon
Shares will be approximately .25% higher than the yield on that Fund's Horizon
Service Shares and .32% higher than the yield on the same Fund's Pacific Horizon
Shares. Standardized yield quotations will be computed separately for each
series of shares.
Holders of all outstanding shares of a particular Fund will
vote together in the aggregate and not by class on all matters, except that only
Horizon Service Shares of a Fund will be entitled to vote on matters submitted
to a vote of shareholders pertaining to the Fund's payments to Service
Organizations and only Pacific Horizon Shares of a Fund will be entitled to vote
on matters submitted to a vote of shareholders pertaining to the expenses that
are borne exclusively by such shares. Further, shareholders of all of the Funds,
as well as those of any other investment portfolio now or hereafter offered by
the Company, will vote together in the aggregate and not separately on a
Fund-by-Fund basis, except as otherwise required by law or when permitted by the
Board of Directors. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding shares of such Fund. However, the Rule
also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts and the election of directors may
be effectively acted upon by shareholders of the Company voting in the aggregate
without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of a Fund voting
separately as a class) in connection with any corporate action, unless otherwise
provided by law (for example, by Rule 18f-2 discussed above) or by the Company's
Charter, the Company may take or authorize such action upon the favorable vote
of the holders of more than 50% of the outstanding common stock of the Company
voting without regard to class.
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HORIZON SERVICE SHARES
As stated in the Prospectuses for such Shares, Horizon Service
Shares are sold to institutions ("Service Organizations") which enter into
service agreements requiring them to provide support services to their customers
who beneficially own Horizon Service Shares in consideration of the Funds'
payment of up to .25% (on an annualized basis) of the average daily net asset
value of the Horizon Service Shares beneficially owned by the customers. For the
fiscal years ended February 28, 1993, February 28, 1994, and February 28, 1995,
payments to Shareholder Organizations totalled $1,935,140, $2,029,346 and
$2,115,780, respectively, with respect to the Horizon Service Shares of the
Prime Fund, $758,331, $1,231,895 and $989,269, respectively, with respect to
Horizon Service Shares of the Treasury Fund, and $118,727, $118,946 and
$103,606, respectively, with respect to the Horizon Service Shares of the
Tax-Exempt Money Fund. Of these amounts, for the fiscal years indicated,
$1,578,092, $940,512 and $391,875, respectively, $716,174, $1,160,141 and
$224,434, respectively, and $95,544, $56,412 and $28,442, respectively, were
paid to Bank of America (Security Pacific prior to April 22, 1992) and/or its
(their) affiliates with respect to the Prime Fund, Treasury Fund and Tax-Exempt
Money Fund, respectively, and $0 was paid to the Administrator and/or its
affiliates with respect to the Prime Fund, Treasury Fund and Tax-Exempt Money
Fund, respectively.
For the fiscal year ended February 28, 1994, payments to
Shareholder Organizations totaled $884,419 and $323,937, respectively with
respect to the Government Fund and Treasury Only Fund. Of these amounts,
$445,463 and $213,799, respectively was paid by the Government Fund and Treasury
Only Fund to Bank of America and/or its affiliates, and $0 and $0, respectively
was paid by the Government Fund and Treasury Only Fund to the Administrator
and/or its affiliates. In addition, during the same period, Bank of America, the
Administrator and Service Organizations waived fees totaling $160,284 for the
Government Fund and $171,993 for the Treasury Only Fund. For the fiscal year
ended February 28, 1995, payments to Shareholder Organizations totaled $590,188
and $604,380, respectively, with respect to the Government Fund and Treasury
Only Fund. Of these amounts, $132,934 and $569,889, respectively, were paid by
the Government Fund and Treasury Only Fund to Bank of America and/or its
affiliates, and $0 was paid by the Government Fund and the Treasury Only Fund to
the Administrator and/or its affiliates.
Horizon Service Shares of the California Tax-Exempt Money
Market Fund were first offered on March 1, 1993. For the fiscal year ended
February 28, 1994, payments to Service Organizations totalled $294,140. Of this
amount $226,495 was paid to Bank of America and/or its affiliates; and $0 was
paid to
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the Administrator and/or its affiliates. In addition, Bank of America, the
Administrator and/or its affiliates waived fees totaling $59,369. For the fiscal
year ended February 28, 1995, payments to Service Organizations totalled
$255,299 with respect to the California Tax-Exempt Money Market Fund. Of this
amount, $251,505 was paid to Bank of America and/or its affiliates, and $0 was
paid to the Administrator and/or its affiliates.
Services provided by Shareholder Organizations under service
agreements may include: (i) aggregating and processing purchase and redemption
requests for Horizon Service Shares from customers and placing net purchase and
redemption orders with the Distributor; (ii) providing customers with a service
that invests the assets of their accounts in Horizon Service Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend payments on
behalf of customers; (iv) providing information periodically to customers
showing their positions in Horizon Service Shares; (v) arranging for bank wires;
(vi) responding to customer inquiries relating to the services performed by the
Shareholder Organizations; (vii) providing subaccounting with respect to Horizon
Service Shares beneficially owned by customers or providing the information to
the Company necessary for subaccounting; (viii) if required by law, forwarding
shareholder communications from the Company (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (ix) forwarding to customers proxy statements and
proxies containing any proposals regarding the Company's arrangements with
Shareholder Organizations; and (x) providing such other similar services as
requested by the Funds.
The Company's agreements with Shareholder Organizations are
governed by a Plan (called a "Shareholder Services Plan"). The Plan has been
approved by the Board of Directors of the Company, including a majority of the
Directors who are not "interested persons" of the Company as defined in the
Investment Company Act of 1940 and have no direct or indirect financial interest
in the Plan or any related service agreement (the "Disinterested Directors"). In
approving the Plan, the Directors determined that there was a reasonable
likelihood that it would be beneficial to each Fund and to the holders of its
Horizon Service Shares. The Plan will continue with respect to each Fund until
October 31, 1996, unless earlier terminated in accordance with its terms, and
thereafter it will continue in effect indefinitely provided that the Directors
approve the Plan at least annually in the manner described above.
Under the Plan, the Board of Directors must be provided
with and must review, at least quarterly, a written report of all
amounts expended pursuant to the Plan. The Plan and any service
agreements implementing the Plan must be in writing. The Plan
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may be terminated at any time with respect to any Fund by a vote of the majority
of the Disinterested Directors. Each service agreement under the Plan is also
terminable at any time without payment of any penalty by a vote of a majority of
the Disinterested Directors. Any material amendment of the Plan must be approved
by a majority vote of the Board of Directors and of the Disinterested Directors
cast in person at a meeting called for the purpose of voting on the amendment.
With respect to the purchase or sale of portfolio securities
and the execution of portfolio transactions, no Fund will give preference to
Shareholder Organizations with which the Fund enters into service agreements.
First Cash Funds of America, pursuant to an Administrative
Services Plan, had previously entered into a shareholder servicing agreement
with Bank of America (and prior to that shareholder servicing agreement had
entered into a shareholder servicing agreement with Seattle-First National Bank,
an affiliate of Bank of America). Under the shareholder servicing agreement,
Bank of America, as shareholder servicing agent, or an affiliate of Bank of
America pursuant to a subshareholder servicing agreement, provided certain
services to shareholders in exchange for a fee from each Predecessor Fund of
First Cash Funds of America not in excess of .20% of the average daily net
assets of such Predecessor Fund. Such fees were actually incurred by the
Predecessor Government Fund of First Cash Funds of America at the effective
annual rate of .12% of its average daily net assets and by the Predecessor
Treasury Only Fund of First Cash Funds of America at the effective annual rate
of .06% of its average daily net assets for the period ended February 28, 1993.
For the period June 4, 1990 (commencement of operations) through March 31, 1991
(fiscal year end), the fiscal year ended March 31, 1992 and the period April 1,
1992 through February 28, 1993, the Predecessor Government Fund and Predecessor
Treasury Only Fund of First Cash Funds of America, respectively, accrued
shareholder servicing fees of $269,126 (of which $46,068 was waived), $501,845
(of which $170,760 was waived) and $378,058 (of which $138,771 was waived),
respectively, and $76,982 (of which $69,283 was waived), $253,503 (of which
$164,166 was waived) and $234,373 (of which $160,559 was waived), respectively.
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COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of the Company, is a partner), 1345 Chestnut Street, Philadelphia
National Bank Building, Philadelphia, Pennsylvania 19107, serves as counsel to
the Company and will pass upon the legality of the shares offered hereby.
O'Melveny & Myers, 400 South Hope Street, Los Angeles, California 90071, acts as
special California counsel for the Company and has reviewed the portions of the
Prospectus and Statement of Additional Information for the California Tax-Exempt
Money Market Fund concerning California taxes and the description of the special
considerations relating to California Municipal Securities.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, with offices at 1177 Avenue of the
Americas, New York, New York 10036, has been selected as independent accountants
of each Fund for the fiscal year ending February 28, 1996. Deloitte & Touche LLP
served as independent accountants for the Predecessor Government Funds and
Predecessor Treasury Only Funds for the 11-month period ended February 28, 1993,
the fiscal year ended March 31, 1992 and the period from June 4, 1990
(commencement of operations) through March 31, 1991.
REPORTS
Each Fund will send its shareholders unaudited semi-annual
reports including a description of the Fund's investments, and annual financial
statements together with a report of independent accountants.
SHAREHOLDER VOTE
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund or a
particular series means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or of the series, or (b) 67% of the shares of the Fund or of
the series present at a meeting at which more than 50% of the outstanding shares
of the Fund or series are represented in person or by proxy.
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Pacific Horizon Shares
of the Treasury Fund were as follows: Hare & Company, Bank of New York, Short
Term Investment Funds, Attn: Bimal Saha, One Wall Street, New York, NY 10286,
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129,738,570.66 shares (9.91%); BA Investment Services, Inc., For the Benefit of
Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San Francisco, CA
94120, 187,236,422.96 shares (14.31%); and Bank of America State Trust Company,
299 N. Euclid Avenue, Pasadena, CA 91101, 879,468,871.56 shares (67.23%).
At November 30, 1995, the name, address and share ownership of the
entities which held more than 5% of the outstanding Horizon Shares of the
Treasury Fund were as follows: Bank of America TTEE/Custodian For Investing in
Horizon Treasury Fund, Attn: Common Trust Funds Units, 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 340,367,029.56 shares (11.76%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Treasury Fund were as follows: Omnibus Account Horizon 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, 182,496,513.51 shares (17.82%); 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,
321,226,413.93 shares (31.36%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the California Tax-Exempt Money Market 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, 55,027,046.86 shares (33.60%); and BA Investment Services,
Inc., Attn: Bob Santilli, 185 Berry Street, 3rd Floor, Unit 7852, San Francisco,
California 94107, 43,548,248.13 shares (7.21%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Pacific Horizon Shares
of the California Tax-Exempt Money Market Fund were as follows: Bank of America
National Trust and Savings Association, The Private Bank, Attn: Common Trust
Funds Unit #8329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051,
30,906,970.67 shares (6.99%); and BA Investment Services, Inc., For the Benefit
of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San Francisco, CA
94120, 370,355,176.96 shares (83.76%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Prime Fund were as follows: Omnibus Account For the Shareholder Accounts
Maintained
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By Concord Financial Services, Inc., Attn: Linda Zerbe, First and Market
Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222, 219,051,606.48
shares (15.53%); 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, 583,075,731.46 shares
(41.34%); and Security Pacific Cash Management, c/o Bank of America - GPO m/c
5533, 1850 Gateway Boulevard m/c 5533, Concord, CA 94520, 479,982,900 shares
(9.59%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Shares of the
Prime Fund were as follows: Bank of America TTEE/Custodian For Investing in
Horizon Prime Funds, Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal
Annex, Los Angeles, CA 90051, 602,705,536.17 shares (20.83%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Pacific Horizon Shares
of the Prime Fund were as follows: Hare & Co. Bank of New York, Short Term
Investment Funds, Attn: Bimal Saha, One Wall Street, New York, NY 10286,
116,544,091.86 shares (6.05%); BA Investment Services, Inc., For the Benefit of
Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San Francisco, CA
94120, 1,314,518,652.69 shares (68.31%); and Bank of America State Trust
Company, 299 N. Euclid Avenue, Pasadena, CA 91101, 179,521,133.11 shares
(9.33%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Tax-Exempt Money Market Fund were as follows: Fatigue Technologies, Inc.,
Attn: Kevin Dooley, 100 Andover Park West, Seattle, WA 98138, 2,582,833.38
shares (5.36%); Bank of America Illinois Sweep, Attn: Jewel James, 231 South
LaSalle Street, Chicago, IL 60697, 5,000,000 shares (10.39%); 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, 21,318,681.46 shares (44.30%); 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, 3,038,268.73 shares (6.31%); and Bank of America Custodian for Investing
in Horizon Tax-Exempt Fund, Attn. Common Trust Funds. Unit 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 115,395,847.74 shares (26.39%); and
Continental Bank Natl. Assn. Cust., FBO Cust & Co., Attn: Mary Chester, 231
South LaSalle Street 6Q, Chicago, IL 606970001, 174,128,061.4 shares (39.82%).
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At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Pacific Horizon Shares
of the Tax-Exempt Money Market Fund were as follows: BA Investment Services,
Inc., For the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob
Santilli, San Francisco, California 94120, 49,103,295.68 shares (87.39%); and
Bank of America State Trust Company, 299 N. Euclid Avenue, Pasadena, California
91101, 5,534,888.99 shares (9.85%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Government Fund were as follows: COHU, Inc., 5755 Kearny Villa Road, San
Diego, CA 92123, 12,187,859.46 shares (5.60%); Perkins, Coie, Stone, Olsen &
Willi, Attn: Brennan J. Devine, 1201 Third Avenue, 40th FL, Seattle, WA 98101,
14,506,737.78 (6.67%); Toasty, Ltd., Leslie L. Alexander, One Greenway Plaza,
Suite 645, Houston, TX 77046, 12,847,594.83 shares (5.91%); Rocket Ball, Ltd.,
One Greenway Plaza, Suite 645, Houston, TX 77046, 15,022,454.78 shares (6.91%);
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, 38,579,041.68 shares (17.74%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Pacific Horizon Shares
of the Government Fund were as follows: Bank of America National Trust and
Savings Association, The Private Bank, Attn: ACI Unit #8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 65,616,870.55 shares (21.09%); and BA
Investment Services, Inc., For the Benefit of Clients, P.O. Box 7042, Attn: Unit
#7852 - Bob Santilli, San Francisco, California 94120, 198,966,023.95 shares
(63.95%).
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Treasury Only Fund were as follows: National Home Mortgage Corp., Attn:
Mortgage Banking, Treasury Operations, 5565 Morehouse Drive 3rd FL, San Diego,
CA 92121, 12,801,637.68 shares (9.38%); Comcare, Inc., 4001 N. 3rd Street, Suite
120, Phoenix, AZ 85012, 18,619,366.33 shares (13.65%); Comcare, Inc., 4001 N.
3rd Street, Suite 120, Phoenix, AZ 85012, 7,425,544.39 shares (5.44%); 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, 31,525,895.7 shares (23.12%); and BA Investment Services,
Inc., Attn: Bob Santilli, 185 Berry Street 3rd Floor Unit 7852, San Francisco,
CA 94107, 21,434,633.16 shares (5.38%).
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At November 30, 1995, the name, address and share ownership of the
entities which held more than 5% of the outstanding Pacific Horizon Shares of
the Treasury Only Fund were as follows: Bank of America National Trust and
Savings Association, The Private Bank, Attn: ACI Unit #8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 28,253,603.65 shares (10.85%); Bank of
America State Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 24,389,477.13
shares (9.37%); Hare & Co., Bank of New York, Short Term Investment Funds, Attn:
Bimal Saha, One Wall Street, New York, NY 10286, 24,091,542.54 shares (9.25%);
and BA Investment Services, Inc., For the Benefit of Clients, P.O. Box 7042,
Attn: Unit #7852 - Bob Santilli, San Francisco, CA 94120, 154,869,688.24 shares
(59.52%).
At November 30, 1995, the name, address and share ownership of the
entities which held more than 5% of the outstanding Class A Shares of the
National Municipal Bond Fund were as follows: BA Investment Services, Inc., FBO
405084421, 555 California Street, 4th FL #2640, San Francisco, CA 94104,
56,270.593 shares (5.59%); and BA Investment Services, Inc., FBO 407021281, 185
Berry Street, 3rd FL #2640, San Francisco, CA 94104, 50,388,324 shares (5.00%).
At November 30, 1995, the name, address and share ownership of the
entities which held more than 5% of the outstanding Class A Shares of the
Corporate Bond Fund were as follows: Dean Witter Reynolds, Inc., Attn: Stanley
Worksman, Stock Record Dept. 5th, 5 World Trade Center, New York, NY 10048,
118,064 shares (5.96%); and Smith Barney, Inc. CUST, 388 Greenwich 16th FL, New
York, NY 10013, 128,824.633 shares (6.50%).
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 Horizon Shares and Horizon Service
Shares and this Statement of Additional Information omit certain information
contained in the Company's registration statement filed with the Securities and
Exchange Commission. Copies of the registration statement, including items
omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year or periods ended
February 28, 1995 and the Semi-Annual Reports for the period ended August 31,
1995 (the "Annual Reports" and "Semi-Annual Reports" respectively) accompany
this Statement of Additional Information. The financial statements and notes
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thereto in each Annual Report and Semi-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 reference. Such financial statements have been incorporated herein in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial highlights and financial statements for the 11-month
period ended February 28, 1993, the fiscal year ended March 31, 1992 and the
period June 4, 1990 through March 31, 1991 of the Predecessor Government Fund
and Predecessor Treasury Only Fund of First Cash Funds of America, as well as of
the Government Money Trust and Treasury Money Trust in which said Funds invested
included in the Prospectus for the Government Fund and Treasury Only Fund (with
regard to the financial highlights) and incorporated by reference in this
Statement of Additional Information (with regard to the financial statements),
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports, which are incorporated herein by reference. The financial
statements and financial highlights audited by Deloitte & Touche LLP have been
incorporated herein by reference (with regard to the financial statements) and
included herewith (with regard to the financial highlights) in reliance on the
report given on their authority as experts in accounting and auditing.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
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"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
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<PAGE> 108
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
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year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
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"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and
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principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are
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generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
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higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
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as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
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are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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