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PROSPECTUS
FEBRUARY 20, 1996
PACIFIC HORIZON INTERNATIONAL EQUITY FUND
A series of shares of Pacific Horizon Funds, Inc.
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The PACIFIC HORIZON INTERNATIONAL EQUITY FUND (the "Fund") is a diversified
mutual fund whose investment objective is to seek long-term capital growth
primarily through investments in foreign equity securities. The Fund is offered
by Pacific Horizon Funds, Inc. (the "Company"), an open-end, series management
investment company.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "MASTER PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE
FUND. THE FUND WILL INVEST IN THE MASTER PORTFOLIO WITHOUT INCURRING ANY SALES
CHARGES. THE NET ASSET VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES
IN THE VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON PAGE 10 FOR ADDITIONAL INFORMATION
REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Master Portfolio's investment adviser. Based
in San Francisco, California, Bank of America and its affiliates have over $50
billion under management, including over $10 billion in mutual funds.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated February 20, 1996 and is
incorporated by reference into this Prospectus.
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Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U. S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. Investment in the Fund involves investment risk,
including the possible loss of principal.
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LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
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CONTENTS
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EXPENSE SUMMARY 2
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
6 FUNDAMENTAL LIMITATIONS
6 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 12 HOW TO BUY SHARES
12 What Is My Minimum Investment In The Fund?
12 How Are Shares Priced?
16 How Can I Buy Shares?
17 What Price Will I Receive When I Buy Shares?
18 What Else Should I Know To Make A Purchase?
18 HOW TO SELL SHARES
18 How Do I Redeem My Shares?
20 What NAV Will I Receive For Shares I Want To Sell?
20 What Kind of Paperwork Is Involved In
Selling Shares?
21 How Quickly Can I Receive My Redemption Proceeds?
21 Do I Have Any Reinstatement Privileges After
I Have Redeemed Shares?
21 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 22 CAN I USE THE FUND IN MY RETIREMENT PLAN?
22 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
22 WHAT IS TELETRADE?
23 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
23 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
24 CAN I ARRANGE PERIODIC WITHDRAWALS?
24 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
24 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 24 FUND MANAGEMENT
25 Expenses
25 Service Providers
27 TAX INFORMATION
28 MEASURING PERFORMANCE
29 DESCRIPTION OF SHARES
30 PLAN PAYMENTS
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DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. Shares of the Fund are offered at net asset value plus an
initial sales charge (see page 19 of the Prospectus for an explanation of net
asset value per share) and are subject to a shareholder servicing fee.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund and payments by the
Master Portfolio which are allocable to the Fund. Operating expenses include
fees for portfolio management, maintenance of shareholder accounts, general
administration, shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
and its estimated operating expenses (including the operating expenses of the
Master Portfolio which are allocable to the Fund) for the first twelve months of
operations. A hypothetical example based on the summary is also shown.
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SHAREHOLDER TRANSACTION EXPENSE
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50%
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None(1)
Redemption Fees None
Exchange Fee None
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets after
expense reimbursements)
Management Fees (after fee waivers) 0
Shareholder Service Fees 0
Other Expenses
(After Expense
Reimbursements) 1.50%+
Total Operating Expenses
(After Fee Waivers and Expense
Reimbursements) 1.50%+
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(1) There is no front-end sales load imposed on combined purchases of $1,000,000
or more (the "Large Purchase Exemption"). Shares purchased under the Large
Purchase Exemption are subject to a contingent deferred sales charge of
1.00% and 0.50%, respectively, on redemptions within one and two years after
purchase.
+ Management intends to waive fees and reimburse certain "Other Expenses" on
behalf of the Fund so that "Total Operating Expenses" for the Fund (other
than interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses) will not exceed
1.50% of the Fund's average net assets on an annual basis for the first
twelve months of the Fund's operations. Absent expense reimbursement,
estimated Management Fees would be .95% of the average net assets, estimated
"Other Expenses" would be 2.69% of average net assets (annualized), and
estimated "Total Operating Expenses" would be 3.89% of average net assets
(annualized).
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EXAMPLE: Assume the annual return is 5% and operating expenses are the same After 1 Yr : $60
as those stated above. For every $1,000 you invest, here's how much you After 3 Yrs: $90
would have paid in total expenses if you closed your account after the
number of years indicated:
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Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. The Fund and
the Master Portfolio are new and the above figures are estimates for the first
twelve months of operations only. Actual investment returns and operating
expenses may be more or less than those shown.
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This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.75% of the Master
Portfolio's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets and 0.05% of the Master Portfolio's average daily net
assets.
Currently, the most restrictive expense limitation limits the Fund's aggregate
annual expenses (including management fees and the Fund's pro rata share of such
expenses of the Master Portfolio) to 2.5% of the first $30 million of the Fund's
average daily net assets, 2% of the next $70 million and 1.5% of the Fund's
remaining average net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Master Portfolio in which the Fund's assets are
invested will be less than or approximately equal to the expenses which the Fund
would incur if the Company retained the services of an investment adviser for
the Fund and the assets of the Fund were invested directly in the type of
securities held by the Master Portfolio. Further, the Directors believe that the
shareholders of the Fund will participate in the ownership of a larger portfolio
of securities than could be achieved directly by the Fund. There can be no
assurance, however, that such will be the case or that any economies of scale
that might occur if other investors acquire shares of the Master Portfolio will
be realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
A shareholder service payment is made in the amount of 0.25% of the average
daily net assets of the Fund. For a further description of shareholder
transaction expenses and the Fund's operating expenses, see the sections
entitled "Shareholder Guide," "The Business of the Fund" and "Plan Payments"
below.
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FUND INVESTMENTS
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INVESTMENT OBJECTIVE
THE PACIFIC HORIZON INTERNATIONAL EQUITY FUND SEEKS LONG-TERM CAPITAL GROWTH BY
INVESTING PRIMARILY IN FOREIGN EQUITY SECURITIES. THE FUND MAY BE APPROPRIATE
FOR INVESTORS WHO WANT TO DIVERSIFY THEIR INVESTMENTS INTO FOREIGN EQUITY
MARKETS AND WHO ARE PREPARED TO ACCEPT THE RISKS ENTAILED IN SUCH INVESTMENTS.
THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS
INVESTABLE ASSETS IN THE MASTER PORTFOLIO. THE MASTER PORTFOLIO HAS THE SAME
INVESTMENT OBJECTIVE AS THE FUND.
WHILE THE MASTER PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN
BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO THOSE OF THE
MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF
AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO.
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TYPES OF INVESTMENTS
IN GENERAL. During normal market conditions, the Master Portfolio will invest
at least 80% of its total assets in equity securities of companies that are
domiciled or have their principal activities in countries outside the United
States. Normally, the Master Portfolio will invest in equity securities of
companies in at least three different foreign countries. The domicile or the
location of the principal activities of a company will be the country under
whose laws the company is organized, in which the principal trading market for
the equity securities issued by the company is located, or in which the company
has over half of its assets or derives over half of its revenues or profits.
Equity securities in which the Master Portfolio may invest consist of common
stocks, preferred stocks, securities convertible into common stocks or preferred
stocks, and warrants to purchase such securities.
The Master Portfolio may invest up to 20% of its total assets (at the time of
purchase) in convertible bonds and debt securities. These debt obligations
include U.S. Government and foreign government securities and corporate debt
securities, including Samurai and Yankee bonds and Euro-bonds. The Master
Portfolio will limit its purchases of debt securities to investment grade
obligations. "Investment grade" debt refers to those securities rated within one
of the four highest ratings categories by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Ratings Group, Division of McGraw Hill
("S&P"), Duff & Phelps Credit Co. ("D&P"), or Fitch Investors Service, Inc.
("Fitch"), or, if unrated, deemed by Bank of America to be of equivalent
quality. Securities rated in the lowest category of investment grade, Baa by
Moody's or BBB by S&P, D&P or Fitch may have speculative characteristics.
In the event that the rating of any security held by the Master Portfolio falls
below the required rating, the Master Portfolio will not be obligated to dispose
of such security and may continue to hold the security if, in the opinion of
Bank of America, such investment is considered appropriate under the
circumstances.
The Master Portfolio may also invest, without limitation, in securities of
foreign issuers in the form of American Depositary Receipts ("ADRs") or other
similar securities evidencing ownership of underlying securities issued by
foreign issuers. ADRs purchased for the Master Portfolio will be included as
part of the 80% of assets in foreign equity securities. These securities may not
necessarily be denominated in the same currency as the securities underlying the
ADRs. ADRs are receipts typically issued by a United States bank or trust
company evidencing ownership of the underlying foreign securities. Generally,
ADRs, in
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registered form, are designed for use in U.S. securities markets.
During temporary defensive periods when Bank of America believes such a position
is warranted by uncertain or unusual market conditions, the Master Portfolio may
invest without limit in securities issued or guaranteed by the U.S. Government
(and its agencies and instrumentalities), foreign or domestic money market
instruments and investment grade debt securities, or may hold its assets in cash
(U.S. dollars, foreign currencies or multinational currency units).
RISK FACTORS. Although investing in any mutual fund has certain inherent risks,
an investment in the Fund may have even greater risks than investments in most
other types of mutual funds. The Fund is not a complete investment program, and
it may not be appropriate for an investor if he or she cannot bear financially
the loss of at least a significant portion of his or her investment. The Fund's
net asset value per share is subject to rapid and substantial changes because
greater risk is assumed in seeking the Fund's objective.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers carry certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Master Portfolio will invest heavily in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will, to the extent the Master Portfolio does not adequately
hedge against such fluctuations, affect the value of securities in the Master
Portfolio so far as U.S. investors are concerned. Foreign currency exchange
rates are determined by forces of supply and demand on the foreign exchange
markets and the regulatory control of the exchanges on which the currencies
trade. These forces are themselves affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. Costs are incurred in connection with conversions
between various currencies.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or as
uniform as, those of U.S.-based companies. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than U.S.
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable U.S.-based companies. There
is generally less government supervision and regulation of foreign exchanges,
brokers and issuers than there is in the United States. The Master Portfolio
might have greater difficulty taking appropriate legal action in a foreign court
than in a United States court.
The expense ratio of the Master Portfolio can be expected to be higher than that
of funds investing in domestic securities. The costs attributable to investing
abroad are usually higher for several reasons, such as the higher cost of
investment research, higher cost of custody of foreign securities, higher
commissions paid on comparable transactions on foreign markets and additional
costs arising from delays in settlements of transactions involving foreign
securities.
Interest and dividends payable on a Master Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the net return to the Master Portfolios'
shareholders. See "Tax Information."
ADDITIONAL INVESTMENTS. When not invested in the securities described above,
the Master Portfo-
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lio may invest in other types of securities subject to the limitations described
previously.
The Master Portfolio may purchase bank obligations including certificates of
deposit and bankers' acceptances issued by domestic or foreign banks or
financial institutions that have total assets of more than $2.5 billion. The
Master Portfolio may also make interest-bearing savings deposits in commercial
banks in amounts not exceeding 5% of its total assets.
Commercial paper rated in the top rating category by S&P, Moody's, D&P or Fitch
and unrated commercial paper determined to be of comparable quality by Bank of
America may also be purchased.
As noted above, the Master Portfolio may purchase obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of some of these agencies and instrumentalities, such as the Small
Business Administration or the Maritime Administration, are backed by the full
faith and credit of the U.S. Government; others, like the Federal National
Mortgage Association, are backed by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, including the
Student Loan Marketing Association, are backed solely by the issuer's credit.
There is no assurance that the U.S. Government would support a U.S.
Government-sponsored entity if it was not required to do so by law.
FUNDAMENTAL LIMITATIONS The investment objective of the Fund and the Master
Portfolio may not be changed without a vote by the holders of a majority of the
outstanding shares of the Fund or of the outstanding interests of the Master
Portfolio, respectively. Policies requiring such a vote to effect a change are
known as "fundamental." Included in the Fund's and the Master Portfolio's
fundamental investment limitations is the restriction that neither the Fund nor
the Master Portfolio may borrow money for the purpose of obtaining investment
leverage or issue senior securities (as defined in the Investment Company Act of
1940), provided that the Fund and the Master Portfolio may borrow from banks for
temporary purposes and in an amount not exceeding 10% of the value of the total
assets of the Fund or the Master Portfolio; or mortgage, pledge or hypothecate
any assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of its
total assets at the time of such borrowing. This restriction shall not apply to
(a) the sale of portfolio securities accompanied by a simultaneous agreement as
to their repurchase, or (b) transactions in currency, options, futures contracts
and options on futures contracts, or forward commitment transactions.
A complete list of the fundamental investment limitations is set out in full in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
OPTIONS. The Master Portfolio may write covered put and call options and
purchase put and call options on U.S. or foreign securities that are traded on
United States and foreign securities exchanges and in over-the-counter markets.
Call options written by the Master Portfolio give the holder the right to buy
the underlying security from the Master Portfolio at a stated exercise price
upon exercising the option at any time prior to its expiration. A call option
written by the Master Portfolio is "covered" if the Master Portfolio owns or has
an absolute right (such as by conversion) to the underlying security covered by
the call. A call option is also covered if the Master Portfolio holds a call on
the same security and in the same principal amount as the call written and the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
if the difference is maintained by the Master Portfolio in cash, government
securities or other high grade debt obligations in a segregated account with its
custodian.
Put options written by the Master Portfolio give the holder the right to sell
the underlying security to the Master Portfolio at a stated exercise price. A
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put option written by the Master Portfolio is "covered" if the Master Portfolio
maintains cash or high grade debt obligations with a value equal to the exercise
price in a segregated account with its custodian, or holds a put on the same
security and in the same principal amount as the put written and the exercise
price of the put held is equal to or greater than the exercise price of the put
written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign securities exchanges are similar
to the risks of investing in foreign securities. In addition, a foreign exchange
may impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
The Master Portfolio may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Master Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option plus transaction
costs. The Master Portfolio may purchase call options to hedge against an
increase in the price of securities that the Master Portfolio anticipates
purchasing in the future. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Master
Portfolio upon exercise of the option. Unless the price of the underlying
security rises sufficiently, the call option may expire worthless to the Master
Portfolio.
The Master Portfolio's options transactions will be limited as follows: a) not
more than 5% of the total assets of the Master Portfolio may be invested in
options; b) the obligations of the Master Portfolio under put options written by
the Master Portfolio may not exceed 50% of the net assets of the Master
Portfolio; and c) the aggregate premiums on all options purchased by the Master
Portfolio may not exceed 25% of the net assets of the Master Portfolio.
The Master Portfolio may buy put and call options on various stock indices. In
contrast to an option on a particular security, an option on a stock index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option.
OPTIONS ON FOREIGN CURRENCIES. The Master Portfolio may purchase and write put
and call options on foreign currencies to increase the Fund's gross income and
for the purpose of protecting against declines in the United States dollar value
of foreign currency-denominated portfolio securities and against increases in
the United States dollar cost of such securities to be acquired. As with other
kinds of options, however, writing an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and the Master
Portfolio could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. Purchasing an option
on a foreign currency may constitute an effective hedge against fluctuations in
exchange rates although, in the event of rate movements adverse to the Master
Portfolio's position, the Master Portfolio may forfeit the entire amount of the
premium paid plus related transaction costs. Options on foreign currencies
written or purchased by the Master Portfolio may be traded on United States and
foreign exchanges or over-the-counter. There is no specific percentage
limitation on the Master Portfolio's investments in options on foreign
currencies.
STOCK INDEX, INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS.
The Master Portfolio may purchase and sell stock index, interest rate and
foreign currency futures contracts (as well as purchase related options) in an
effort to hedge against changes in the value of securities that the Master
Portfolio holds in its portfolio or which it intends to purchase, or as a
substitute for purchasing or selling the underlying security. Such changes could
occur as a result of market conditions or fluctuating currency exchange rates.
These transactions will only be entered into when
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deemed appropriate by Bank of America to reduce the risks inherent in the
management of the Master Portfolio.
The Master Portfolio may not purchase or sell a futures contract or purchase a
related option unless immediately after any such transaction the sum of the
aggregate amount of initial margin deposits on its existing futures positions
and the amount of premiums paid for related options does not exceed 5% of the
Master Portfolio's total assets (after taking into account certain technical
adjustments).
The options and futures transactions described above are frequently referred to
as derivative transactions. In general, derivatives are instruments whose value
is based upon, or derived from, some underlying index, reference rate (e.g.
interest rates or currency exchange rates), security, commodity or other asset.
More information regarding futures contracts and related options can be found in
Appendix B to the Statement of Additional Information.
POTENTIAL RISKS OF OPTIONS AND FUTURES. The successful use of the foregoing
investment techniques depends on the ability of Bank of America to forecast
interest rate and currency exchange rate movements correctly. Should interest or
exchange rates move in an unexpected manner, the Master Portfolio may not
achieve the anticipated benefits of futures contracts or options or may realize
losses and thus be in a worse position than if such strategies had not been
used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to options
on currencies, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the prices of such instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses. The Master Portfolio's ability to dispose of its
positions in futures contracts, options and forward contracts will depend on the
availability of liquid markets in such instruments. Therefore, no assurance can
be given that the Master Portfolio will be able to utilize these instruments
effectively for the purposes set forth above. In order to prevent leverage in
connection with the purchase of futures contracts or call options thereon by the
Master Portfolio, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the custodian. Furthermore, the Master Portfolio's ability to
engage in options and futures transactions may be limited by tax considerations.
REPURCHASE AGREEMENTS. The Master Portfolio may buy securities subject to the
seller's agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Master Portfolio will enter
into repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Master Portfolio's Board of Trustees. It is intended that such
agreements will not have maturities longer than 60 days. During the term of any
repurchase agreement, the seller must maintain the value of the securities
subject to the agreement in an amount that is greater than the repurchase price.
Bank of America then continually monitors that value. Nonetheless, should the
seller default on its obligations under the agreement, the Master Portfolio
would be exposed to possible loss due to adverse market action or delays
connected with the disposition of the underlying obligations. Repurchase
agreements are considered to be loans under the Investment Company Act of 1940
(the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Master Portfolio may borrow money for
temporary purposes by entering into reverse repurchase agreements. Under these
agreements the Master Portfolio sells portfolio securities to financial
institutions (such as banks and broker-dealers) and agrees to buy them back at
an agreed upon time
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and price. When the Master Portfolio enters into a reverse repurchase
agreement, it places in a separate custodial account either liquid assets or
other high grade debt securities that have a value equal to or greater than the
repurchase price. The account is then continuously monitored by Bank of America
to make sure that an appropriate value is maintained. Reverse repurchase
agreements involve the risk that the value of portfolio securities the Master
Portfolio relinquishes may decline below the price the Master Portfolio must
pay when the transaction closes. Reverse repurchase agreements are considered
to be borrowings by the Master Portfolio under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of the Master Portfolio's outstanding
shares. The Master Portfolio will only enter into reverse repurchase agreements
to avoid the need to sell portfolio securities to meet redemption requests
during unfavorable market conditions.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Master
Portfolio may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Master Portfolio
may purchase or sell securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by the Master
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Master Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. Delayed settlement
refers to a transaction in the secondary market that will settle some time in
the future. These transactions involve the risk that the price or yield obtained
may be less favorable than the price or yield available when the delivery takes
place. The Master Portfolio will set aside in a segregated account cash or
liquid securities equal to the amount of any when-issued, forward commitment or
delayed settlement transactions. When-issued purchases, forward commitments and
delayed settlements are not expected to exceed 25% of the Master Portfolio's
total assets under normal circumstances. These transactions will not be entered
into for speculative purposes, but primarily to hedge against anticipated
changes in interest rates.
SECURITIES LENDING. In order to earn additional income, the Master Portfolio
may lend its portfolio securities to financial institutions (such as banks and
brokers) that Bank of America considers to be of good standing. Borrowers of
portfolio securities may not be affiliated directly or indirectly with the
Company or the Master Portfolio. If the financial institution should become
bankrupt, however, the Master Portfolio could experience delays in recovering
its securities. A securities loan will only be made when, in the judgment of
Bank of America, the possible reward from the loan justifies the possible risks.
In addition, such loans will not be made if, as a result, the value of
securities loaned by the Master Portfolio exceeds 30% of its total assets.
Securities loans will be fully collateralized.
INVESTMENT COMPANY SECURITIES. The Master Portfolio may acquire shares of open-
and closed-end investment companies, including companies that invest in foreign
issuers, subject to the requirements of applicable securities laws. No more than
10% of the value of the Master Portfolio's total assets will be invested in
securities of other investment companies, with no more than 5% invested in the
securities of any one investment company. In addition, the Master Portfolio may
hold no more than 3% of the outstanding voting stock of any other investment
company. Although these investment companies may have policies that differ from
the Master Portfolio's policies, their management and other types of expenses
will be similar to those borne by the Master Portfolio. When the Master
Portfolio invests in another investment company, it pays a pro rata portion of
that company's expenses. Such expenses are in addition to the expenses the
Master Portfolio pays in connection with its own operations.
9
<PAGE> 11
ILLIQUID SECURITIES. The Master Portfolio will not invest more than 15% of the
value of its total assets (determined at the time of acquisition) in securities
that are illiquid, including unrated commercial paper and repurchase agreements
with maturities exceeding seven days. If, after the time of acquisition, events
cause this limit to be exceeded, the Master Portfolio will take steps to reduce
the aggregate amount of illiquid securities as soon as is reasonably
practicable. The Master Portfolio intends that investments in securities that
are not registered under the Securities Act of 1933 but may be purchased by
institutional buyers under Rule 144A and for which a liquid trading market
exists as determined by the Board of Trustees or Bank of America (pursuant to
guidelines adopted by the Board), will not be subject to the Master Portfolio's
15% limitation on illiquid securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Master Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Master Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Master Portfolio and another investment company or account,
available investments or opportunities for sales will be equitably allocated
pursuant to procedures of Bank of America. In some instances, this investment
procedure may adversely affect the price paid or received by the Master
Portfolio or the size of the position obtained or sold by the Master Portfolio.
From time to time, the Master Portfolio may pay brokerage commissions to an
affiliate of the Fund's distributor on securities acquired by the Master
Portfolio. In allocating purchase and sale orders for investment securities,
Bank of America may consider the sale of Fund shares by broker-dealers and other
financial institutions (including affiliates of Bank of America or the Fund's
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to the Master Portfolio are not less favorable
than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Master Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Turnover
may require payment of brokerage commissions, impose other transaction costs and
could increase substantially the amount of income received by the Master
Portfolio that constitutes taxable capital gains. To the extent capital gains
are realized, distributions from those gains may be ordinary income for federal
tax purposes (see "Tax Information"). The Master Portfolio's portfolio turnover
rate is not expected to exceed 75%, although portfolio turnover will not be a
limiting factor in making investment decisions for the Fund.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Master Portfolio which has the same investment objective. The Fund
may withdraw its investment in the Master Portfolio at any time if the Board of
Directors of the Company determines that it is in the best interest of the Fund
to do so. Upon any such withdrawal, the Board of Directors would consider what
action might be taken, including the investment of all of the assets of the Fund
in another pooled investment entity having the same investment objective as the
Fund or the hiring of an investment adviser to manage the Fund's assets in
accordance with the investment policies described above with respect to the
Master Portfolio. See "Expense Summary," "Fund Investments" and "Fund
Management" for a description of this investment objective and the investment
policies, restrictions, management and expenses of the Fund and the Master
Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Fund and other entities that may invest in the Master Portfolio
from time to time (e.g., other investment companies and commingled trust funds)
will each be liable for all obligations of the Master Portfolio. However, the
10
<PAGE> 12
risk of the Fund's incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance exists and the
Master Portfolio itself is unable to meet its obligations. Accordingly, the
Company's Board of Directors believes that neither the Fund nor its shareholders
will be adversely affected by reason of the Fund's investing in the Master
Portfolio. As stated above, the investment objective of the Fund and the Master
Portfolio is a fundamental policy and may not be changed, in the case of the
Fund, without the vote of its shareholders or, in the case of the Master
Portfolio, without the vote of its interestholders. Whenever the Fund is
requested to vote on matters pertaining to the investment objective or a
fundamental policy of the Master Portfolio, the Fund will hold a meeting of its
shareholders and will cast its vote in the same proportion as the votes cast by
the Fund's shareholders. The Fund will vote any shares for which it receives no
voting instructions in the same proportion as the shares for which it does
receive voting instructions. As with any mutual fund, other investors in the
Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the Fund's shareholders). This could result
in the Fund's withdrawal of its investment in the Master Portfolio, and in
increased costs and expenses for the Fund. Further, the withdrawal of other
entities that may from time to time invest in the Master Portfolio could have an
adverse effect on the performance of the Master Portfolio and the Fund, such as
decreased economies of scale and increased per share operating expenses. In
addition, the total withdrawal by another investment company as an investor in
the Master Portfolio will cause the Master Portfolio to terminate automatically
in 120 days unless the Fund and any other investors in the Master Portfolio
unanimously agree to continue the business of the Master Portfolio. If unanimous
agreement is not reached to continue the Master Portfolio, the Board of
Directors of the Company would need to consider alternative arrangements for the
Fund, such as those described above. The policy of the Fund, and other similar
investment companies, to invest their investable assets in trusts such as the
Master Portfolio is a relatively recent development in the mutual fund industry
and, consequently, there is a lack of substantial experience with the operation
of this policy.
There may also be other investment companies through which you can invest in the
Master Portfolio which may have higher or lower fees and expenses than those of
the Fund and which may therefore have different performance results than the
Fund. Information concerning whether an investment in the Master Portfolio may
be available through another entity investing in the Master Portfolio may be
obtained by calling 800-332-3863.
11
<PAGE> 13
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs (one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs (more than one
participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeri
Choice Program.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
-----------------------------------------------------------
NAV =
Number of Outstanding Shares of the Fund
Net asset value is determined as of 12:00 p.m. Eastern time on days the New York
Stock Exchange (the "Exchange") is open.
The Master Portfolio's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Master Portfolio pursuant to procedures adopted by the Master Portfolio's
Board of Trustees. Short-term debt securities are valued at amortized cost,
which approximates market value. Trading in foreign securities is generally
completed prior to the end of regular trading on the Exchange. Trading may occur
in foreign securities, however, on Saturdays and U.S. holidays and at other
times when the Exchange is closed. As a result, there may be delays in
reflecting changes in the market values of foreign securities in the calculation
of the net asset value per share of the Master Portfolio on days when net asset
value is not calculated and on which shareholders of the Fund cannot redeem due
to changes in values of securities traded in foreign markets. For further
information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
SALES LOAD. The front-end sales load ("front-end sales load," "sales load" or
"sales charge") for the Fund begins at 4.50% and may decrease as the amount you
invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FRONT-END FRONT-END DEALER'S
SALES LOAD SALES LOAD REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
--------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
12
<PAGE> 14
There is no front-end sales load on combined purchases of $1,000,000 or more
(the "Large Purchase Exemption"). Shares purchased under the Large Purchase
Exemption are subject to a contingent deferred sales charge of 1.00% and 0.50%,
respectively, on redemptions within one and two years after purchase. The
contingent deferred sales charge is paid to the Fund's distributor. Shares
cannot be purchased under the Large Purchase Exemption if there is another
no-load exemption available. Despite the fact that no front-end sales load will
be paid on shares purchased under the Large Purchase Exemption, the Distributor
will compensate brokers whose customers purchase such shares at the following
rates: 1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter.
Neither a contingent deferred sales charge nor a front-end sales charge will be
imposed if a shareholder who has entered the Fund under the Large Purchase
Exemption exchanges shares between funds of the Company or Time Horizon Funds (a
"Time Horizon Fund"), an open-end investment company managed by Bank of America.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales charge. In determining the holding period for calculating the
contingent deferred sales charge payable upon redemption of such shares, the
holding period of the shares originally held will be added to the holding period
of the shares acquired through the exchange. However, if shares are exchanged
for shares of Pacific Horizon Money Market Mutual Funds (the "Money Market
Funds") the holding period of the Money Market Funds will not count towards the
total holding period of the shares. The contingent deferred sales charge is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time.
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
- - corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund other than 403(b) plans;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account) other than purchases for
403(b) plans;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of America Illinois or
by Private Banking clients of Seattle-First National Bank or by or on behalf
of agency accounts administered by any bank or trust company affiliate of Bank
of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you
13
<PAGE> 15
were the beneficial owner of shares of the Fund (or any other fund in the
Pacific Horizon Family of Funds) prior to July 1, 1992, so long as your
account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below;
- - any purchase of shares pursuant to the Directed Distribution Plan described
below; and
- - any purchase of shares of the Fund, provided that (i) you are investing
proceeds from a redemption of shares from another open-end investment company
on which you paid a front-end sales load, (ii) such redemption occurred within
30 days prior to the purchase order, and (iii) such other open-end investment
company is not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations;
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books;
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeri-
Choice Program (initial award only; a sales load will apply to subsequent
purchases).
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund on which you paid a sales load (including shares that carry no
sales load but were obtained through an exchange and can be traced back to
shares that were acquired with a sales load and shares that were purchased under
the Large Purchase Exemption).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Pacific Horizon
California Tax-Exempt Bond Fund, the Pacific Horizon U.S. Government Securities
Fund, the Pacific Horizon Cap-
14
<PAGE> 16
ital Income Fund and shares of the Company's money market funds that can be
traced back to the purchase of shares carrying a sales load (or any combination
thereof) with an aggregate current value of $90,000. If you subsequently
purchase shares of the Fund with a current value of $10,000, the sales load
applicable to the subsequent purchase would be reduced to 3.75% of the offering
price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in the aggregate $100,000 or more in shares of any Pacific Horizon Fund within a
period of 13 months, beginning up to 90 days prior to the date of the Letter's
execution. Shares purchased during that period count as a credit toward
completion of the Letter of Intent. Any investments you make during the period
receive the discounted sales load based on the full amount of your investment
commitment. When your commitment is fulfilled, an adjustment will be made to
reflect any reduced sales load applicable to shares purchased during the 90-day
period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
15
<PAGE> 17
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to Pacific Horizon
International Equity Fund) to Pacific Horizon Funds, Inc.
the address on the Account File No. 54634
Application. Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc., Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of Fund shares in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
- --------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's next determined public offering
price after your purchase order is received in proper form by the Fund's
transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 12:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 12:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day. Except as
provided in the following two sentences, if the order is not received in proper
form by a Service Organization by 12:00 p.m. Eastern time or not received by the
Transfer Agent by the close of its business day, the order will be based upon
the next determined purchase price. The Company may from time to time in its
sole discretion appoint one or more entities as the Fund's agent to receive
irrevocable purchase and redemption orders and to transmit them on a net basis
to the Transfer Agent. In these instances orders received by the entity by 12:00
p.m. Eastern time on a business day will be effected as of 12:00 p.m. Eastern
time that day if the order is actually received by the Transfer Agent not later
than the next business morning accompanied by payment in federal funds.
17
<PAGE> 19
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The Fund
imposes no charge when you redeem shares (other than the contingent deferred
sales charge if you redeem shares purchased under the Large Purchase Exemption
within two years of purchase). The value of the shares you redeem may be more or
less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
18
<PAGE> 20
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- --------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<TABLE>
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
International Equity Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds, Inc.,
P.O. Box 80221
Los Angeles, California 90080-
9909
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) to the address on the left.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE> 21
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved in Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
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WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Fund itself imposes no charge when shares are redeemed
(except shares purchased under the Large Purchase Exemption and redeemed within
two years of purchase), if you purchase shares through Bank of America or a
Service Organization, they may charge a fee for providing certain services in
connection with investments in Fund shares.
Shares purchased pursuant to the Large Purchase Exemption which are redeemed
within 2 years of purchase may be subject to a contingent deferred sales charge
as described above.
The Company reserves the right to redeem accounts (other than IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for (i) an
amount in excess of $50,000 per day, (ii) any amount if the redemption proceeds
are to be sent somewhere other than the address of record on the Company's
books, or (iii) an amount of $50,000 or less if the address of record has not
been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
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<PAGE> 22
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act or, during periods of abnormal
market conditions, for up to five business days.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, in like shares of another Fund in the Pacific Horizon Family of Funds or
in like shares of any investment portfolio of Time Horizon Funds within 90 days
of your redemption trade date without paying a sales load. Upon such a
reinvestment, the Fund's distributor will credit to your account any contingent
deferred sales charge imposed on any redeemed Large Purchase Exemption shares.
Shares so reinvested will be purchased at a price equal to the net asset value
next determined after the Transfer Agent receives a reinstatement request and
payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends and distributions arising
from the net investment income and net realized gains, if any, earned on
investments in the Master Portfolio which are allocable to the Fund. The Fund's
net income and net realized capital gains (if any) are distributed at least
annually. Distributions are generally paid within five business days after the
end of the year.
You will automatically receive dividends and capital gain distributions in
additional shares of the Fund without a sales load unless you: (i) elect in
writing to receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, at P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
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<PAGE> 23
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to shares purchased pursuant
to the Large Purchase Exemption will not be charged on redemptions in connection
with minimum required distributions from an IRA due to the shareholders' having
reached age 70 1/2. For details, contact the Fund's distributor at 800-332-3863.
Investors should also read the IRA Disclosure Statement and the Bank Custodial
Agreement for further details on eligibility, service fees and tax implications,
and should consult their tax advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: shares
of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING SHARES PURCHASED WITH
A FRONT-END SALES LOAD FOR SHARES OF ANOTHER FRONT-END SALES LOAD FUND OF THE
COMPANY OR TIME HORIZON FUNDS.
An investment in the Fund automatically entitles you to use this Exchange
Privilege, unless you indicate on the Account Application or in a subsequent
letter to the Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below regarding TeleTrade for a description of
the Company's policy regarding responsibility for telephone instructions.) You
may also send exchange instructions in writing by following directions set forth
previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TeleTrade is a service which allows you to authorize electronic transfers of
money to purchase shares in or redeem shares from an established Fund account.
The service may be used like an "electronic check" to move money between an
22
<PAGE> 24
account at a financial institution and a Fund account with a single telephone
call.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. In the event
that the Company fails to utilize such reasonable procedures, it may be liable
for the execution of unauthorized telephone transactions. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon
notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
Dollar Cost Averaging involves investing a fixed dollar amount at regular
predetermined intervals. Because more shares are bought during periods with
lower share prices and fewer shares are bought when the price is higher, your
average cost per share may be reduced. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
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<PAGE> 25
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load. Use of this Plan may also be disadvantageous for purchases
made under the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
CAN MY DIVIDENDS FROM THE FUND BE
INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after serving 30 days' notice.
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
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<PAGE> 26
EXPENSES
Operating expenses borne by the Fund and the Master Portfolio include taxes,
fees and expenses of the directors, trustees and officers, administration,
custodial and transfer agency fees, certain insurance premiums, outside auditing
and legal expenses, cost of shareholder/interestholder reports and meetings and
any extraordinary expenses. Fund expenses also include Securities and Exchange
Commission fees, state securities qualification fees, cost of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, and certain shareholder
servicing fees. Portfolio expenses include investment advisory fees. Except as
noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services and the Fund and Master
Portfolio bear the expenses incurred in their operations.
SERVICE PROVIDERS
-----------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Master Portfolio. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking, business
credit and thrift offices in major U.S. cities and branches, corporate offices
and representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Master
Portfolio's investments and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Master Portfolio's
securities. The advisory agreement also provides that Bank of America may, in
its discretion, provide advisory services through its own employees or employees
of one or more of its affiliates that are under the common control of Bank of
America's parent, BankAmerica Corporation, provided such employees are under the
management of Bank of America. Bank of America may also employ a sub-adviser
provided that Bank of America remains fully responsible to the Master Portfolio
for the acts and omissions of the sub-adviser.
E. Keith Wirtz is the lead manager of the Master Portfolio, and Jeanne Howard
and Bernard H. Taylor co-manage and are primarily responsible for the day-to-day
investment activities of the Master Portfolio. Mr. Wirtz is a senior vice
president and chief investment officer of Bank of America, his employer since
1992. Previously, he was trust investment manager with Security Pacific Bank for
a ten year period. Mr. Wirtz is a Chartered Financial Analyst. Ms. Howard joined
Bank of America in 1992 and has been a co-manager and portfolio manager of Bank
of America's International Equity Common Trust Fund since its inception in 1993.
Mr. Taylor joined Bank of America in 1994 as Regional Investment Manager for the
European Investment Group in London. Prior to joining Bank of America, he
managed client assets for BSI-Thornhill for four years, was European Fund
Manager for Hill Samuel Investment Management Group for two years and had
investment research and analysis responsibilities for Mercantile and General
Reinsurance Company for three years.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.75% of the
Master Portfolio's average daily net assets. This fee may be higher than that
paid by other investment companies but is comparable to fees paid by other
investment companies with similar investment objectives and policies.
This amount may be reduced pursuant to undertakings by Bank of America. (See the
information below under "Fee Waivers"). In addition, Bank of America, and its
affiliates may be entitled to fees under the Shareholder Service Plan as
described under "Plan Payments" below, and may receive
25
<PAGE> 27
fees charged directly to their accounts in connection with investments in Fund
shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Master Portfolio. Concord is an indirect, wholly-owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master Portfolio; provide a facility to receive purchase and redemption
orders; provide statistical and research data, data processing services, and
clerical services; coordinate the preparation of reports to shareholders of the
Fund, interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
the Fund's shares for sale under state securities laws; maintain books and
records of the Fund and the Master Portfolio; calculate the net asset value of
the Fund and the Master Portfolio and dividends and capital gains distributions
to shareholders; serve as dividend disbursing agent for the Master Portfolio;
and generally assist in all aspects of the operations of the Fund and the Master
Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Master Portfolio at
the annual rate of 0.05% of the Master Portfolio's average daily net assets.
These amounts may be reduced pursuant to undertakings by Concord. (See the
information below under "Fee Waivers").
Pursuant to the authority granted in its administration agreements, Concord has
entered into an agreement with PFPC, Inc. ("PFPC") under which PFPC, and an
off-shore affiliate of PFPC, perform certain of the services listed above, e.g.,
calculating the net asset value of the Fund and the Master Portfolio,
calculating dividends and capital gains distributions to shareholders, and
maintaining the books and records of the Fund and the Master Portfolio. The Fund
and the Master Portfolio bear all fees and expenses charged by PFPC for these
services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect wholly-owned subsidiary
of The BISYS Group, Inc. and is located at 3435 Stelzer Road, Columbus, Ohio
43219.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Fund and the Master Portfolio. BISYS Fund
Services, Inc. is the transfer and dividend disbursing agent of the Fund and is
located at 3435 Stelzer Road, Columbus, Ohio 43219.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund and Master
Portfolio bear the expenses incurred in their operations. Expenses can be
reduced by voluntary fee waivers and expense reimbursements by Bank of America
and other service providers as well as by certain expense limitations imposed by
state securities regulators. Periodically, during the course of the Fund's
fiscal year, Bank of America, Concord and/or the Distributor may prospectively
choose not to receive fee payments and/or may assume certain Fund or Master
Portfolio expenses as a result of competitive pressures and in order to preserve
and protect the business and reputation of Concord and Bank of America. However,
the service providers retain the ability to discontinue such fee waivers and/or
waivers and expense reimbursements at any time.
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<PAGE> 28
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code (the "Code") for the current taxable year. As a result of
this qualification, the Fund generally is not required to pay federal income
taxes to the extent its earnings are distributed in accordance with the Code.
The Fund intends to qualify for this special tax treatment as long as it is in
the best interest of its shareholders. It is expected that the Master Portfolio
will not be subject to federal income taxes. The Master Portfolio intends to
qualify as a partnership (or other pass-through entity) for federal income tax
purposes. As such, the Master Portfolio is not subject to tax and the Fund will
be treated for federal tax purposes as recognizing its pro rata share of the
Master Portfolio's income and deductions and owning its pro rata share of the
Master Portfolio's assets. The Fund's status as a regulated investment company
is dependent on, among other things, the Master Portfolio's continued
qualification as a partnership (or other pass-through entity) for federal income
tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. It is not
anticipated that any such distribution from the Fund will qualify for the
dividends received deduction allowed to corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of the Fund on or just before the record
date of a dividend, you should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gains dividend on those shares, any
loss on the sale or exchange of those shares will be treated as a long-term
capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company
27
<PAGE> 29
within 90 days of the purchase and are able to reduce the sales load on the new
shares through the Exchange Privilege, the reduction may not be included in the
tax basis of your exchanged shares for the purpose of calculating your gain or
loss from the exchange. It may be included in the tax basis of the new shares,
subject to the same limitations.
Certain interest income and dividends earned by the Master Portfolio from
foreign securities is expected to be subject to foreign withholding taxes or
other taxes. So long as more than 50% of the value of the Fund's total assets at
the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. The Fund may make this
election. As a consequence, the amount of these foreign taxes paid by the Master
Portfolio will be included in the income of the Fund's shareholders pro rata (in
addition to taxable distributions actually received by them), and each
shareholder will be entitled either (a) to credit his proportionate amount of
such taxes against his U.S. federal income tax liabilities, or (b) if he
itemizes his deductions, to deduct such proportionate amounts from his U.S.
income.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Master Portfolio, to the extent attributable to fluctuations in currency
or exchange rates, as well as other gains or losses attributable to exchange
rate fluctuations, are typically treated as ordinary income or loss. Such income
or loss may increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by the Fund may be
treated for federal income tax purposes as a return of capital, or, in some
circumstances, as capital gains. Generally, your tax basis in your Fund shares
will be reduced to the extent that an amount distributed to you is treated as a
return of capital.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends paid to any investor (i) who has provided either
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure properly to include on this return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN AND
AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be quoted
in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by the Fund during the period are
28
<PAGE> 30
reinvested in Fund shares, and include the maximum front-end sales charge for
shares. The Fund may also advertise total return data without reflecting the
sales load imposed on the purchase of Fund shares in accordance with the rules
of the Securities and Exchange Commission. Quotations that do not reflect the
sales load will, of course, be higher than quotations that do reflect sales
loads.
The Fund may compare its total return to that of other mutual funds with similar
investment objectives and to stock and other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor mutual fund performance. For example, the Fund's total return may
be compared to the Consumer Price Index or to data prepared by: Lipper
Analytical Services, Inc.; the Europe, Asia and Far East Index ("EAFE"); Mutual
Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies
Services; or CDA Investment Technologies, Inc. Total return data as reported in
national financial publications such as Money, Forbes, Barron's, The Wall Street
Journaland The New York Times, or in local or regional publications, may also be
used in comparing Fund performance. The Fund's total return also may be compared
to indices such as: the Dow Jones Industrial Average; the Financial Times World
Stock Index; the Lipper International Fund Index; the Standard & Poor's 500
Stock Index; the Wilshire 5000 Equity Indexes; or the Consumer Price Index. (A
complete listing of the indices, rankings and publications discussed above is
contained in the Statement of Additional Information.)
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in the Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 40 million shares of Class
T Common Stock representing interests in the Fund; an additional class of shares
representing interests in the Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. The Board
of Directors may similarly classify or reclassify any class of shares (including
unissued Class T Common Stock) into one or more series. For more information
about the Company's other portfolios, contact the Company at the telephone
number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable. Certificates for shares will not
be issued.
29
<PAGE> 31
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). The Fund does not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office has been elected by the shareholders. At that time, the directors
then in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
The Company has adopted a Shareholder Service Plan under which the Fund
reimburses the Distributor for shareholder servicing fees the Distributor pays
to Service Organizations.
SHAREHOLDER SERVICE PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
30
<PAGE> 32
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPINEQ296P
<PAGE> 33
INTERNATIONAL EQUITY FUND
PROSPECTUS
February 20, 1996
NOT FDIC INSURED
<PAGE> 34
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
<PAGE> 35
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
INTERNATIONAL EQUITY FUND
FEBRUARY 20, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . 2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . 18
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . 25
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 51
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
This Statement of Additional Information applies to the Pacific
Horizon International Equity Fund (the "Fund") of the Company. This Statement
of Additional Information is meant to be read in conjunction with the
Prospectus dated February 20, 1996, as it may from time to time be revised (the
"Prospectus"), which describes the Fund. This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectus.
Because this Statement of Additional Information is not itself a prospectus, no
investment in shares of the Fund should be made solely upon the information
contained herein. Copies of the Prospectus may be obtained by calling Concord
Financial Group, Inc. at 800-332-3863. Capitalized terms used but not defined
herein have the same meaning as in the Prospectus.
<PAGE> 36
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund seeks to achieve its investment objective by investing
substantially all of its assets in a diversified investment portfolio of an
open-end, management investment company (the "Master Portfolio") having the
same investment objective as that of the Fund.
The Company also offers other investment portfolios which are
described in separate Prospectuses and Statements of Additional Information.
For information concerning these other portfolios contact the Distributor at
the telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus for the Fund describes the investment objective of the
Fund and the Master Portfolio. Since the investment characteristics of the
Fund will correspond to those of the Master Portfolio, the following is a
discussion of the various investments of and techniques employed by the Master
Portfolio. The following information supplements and should be read in
conjunction with the description of the investment objective and policies for
the Master Portfolio in the Prospectus for the Fund.
PORTFOLIO TRANSACTIONS
- ----------------------
The portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the
monthly average value of the portfolio securities. The calculation excludes
all securities whose maturities at the time of acquisition were one year or
less. Portfolio turnover may vary greatly from year to year as well as within
a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions.
Subject to the general control of the Master Portfolio's Board
of Trustees, Bank of America National Trust and Savings Association ("Bank of
America" or the "investment adviser") is responsible for, makes decisions with
respect to and places orders for all purchases and sales of portfolio
securities for the Master Portfolio. Transactions on stock exchanges involve
the payment of negotiated brokerage commissions. There is generally no stated
commission in the case of securities traded in the over-the-counter market, but
the price includes an undisclosed commission or mark-up. The cost of
securities
<PAGE> 37
purchased by the Master Portfolio from underwriters generally includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or
dealers, it is the Master Portfolio's policy to seek the best overall terms
available. The Investment Advisory Agreement between the Master Portfolio and
Bank of America provides that, in assessing the best overall terms available
for any transaction, Bank of America shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, the Investment Advisory Agreement
authorizes Bank of America, subject to the approval of the Board of Trustees of
the Master Portfolio, to cause the Master Portfolio to pay a broker-dealer
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker-dealer for effecting the same
transaction, provided that such commission is deemed reasonable in terms of
either that particular transaction or the overall responsibilities of Bank of
America to the Fund, Company or Master Portfolio. Brokerage and research
services may include: (1) advice as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities or purchasers or sellers of securities; and (2)
analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
It is possible that certain of the brokerage and research
services received will primarily benefit one or more other investment companies
or other accounts for which investment discretion is exercised. Conversely,
the Master Portfolio may be the primary beneficiary of the brokerage or
research services received as a result of portfolio transactions effected for
such other accounts or investment companies.
Brokerage and research services so received are in addition to
and not in lieu of services required to be performed by Bank of America and do
not reduce the advisory fee payable to Bank of America. Such services may be
useful to Bank of America in serving both the Company, the Master Portfolio and
other clients and, conversely, services obtained by the placement of business
of other clients may be useful to Bank of America in carrying out its
obligations to the Company and the Master Portfolio. In connection with its
investment management services with respect to the Master Portfolio, Bank of
America will not acquire certificates of deposit or other securities issued by
it or its affiliates, and will give no preference to certificates of
-3-
<PAGE> 38
deposit or other securities issued by Service Organizations. In addition,
portfolio securities in general will be purchased from and sold to affiliates
of the Company, the Master Portfolio, Bank of America, the Distributor and
their affiliates acting as principal, underwriter, syndicate member,
market-maker, dealer, broker or in any similar capacity, provided such
purchase, sale or dealing is permitted under the Investment Company Act of 1940
(the "1940 Act") and the rules thereunder.
The Master Portfolio may participate, if and when practicable,
in bidding for the purchase of securities of the U.S. Government and its
agencies and instrumentalities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Master Portfolio will engage in this practice only when Bank of America, in
its sole discretion, subject to guidelines adopted by the Board of Trustees of
the Master Portfolio, believes such practice to be in the interest of the
Master Portfolio.
To the extent permitted by law, Bank of America may aggregate
the securities to be sold or purchased on behalf of the Master Portfolio with
those to be sold or purchased for other investment companies or common trust
funds in order to obtain best execution.
The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the Investment
Company Act of 1940) or their parents held by the Company as of the close of
its most recent fiscal year. As of February 28, 1995: (a) the Treasury Fund
held the following securities, Repurchase Agreement with Goldman, Sachs & Co.
in the principal amount of $95,000,000; Repurchase Agreement with Merrill Lynch
Government Securities, Inc. in the principal amount of $95,000,000; (b) the
Prime Fund held the following securities, Merrill Lynch & Co., Inc., commercial
paper in the principal amount of $100,000,000; Goldman, Sachs Group L.P., Daily
Variable Rate Master Note in the principal amount of $120,000,000; Morgan
Stanley Group, Inc., Daily Variable Rate Master Note in the principal amount of
$120,000,000; Bear Stearns Co., Inc., Series B, Monthly Variable Rate Note in
the principal amount of $100,000,000; Repurchase Agreement with Goldman, Sachs
& Co. in the principal amount of $120,000,000; (c) the Government Fund held the
following securities, Repurchase Agreement with Goldman, Sachs & Co. in the
principal amount of $40,000,000; Repurchase Agreement with Merrill Lynch
Government Securities, Inc. in the principal amount of $40,000,000; and (d)
the Prime Value Fund held the following securities, Merrill Lynch & Co., Inc.,
commercial paper in the principal amount of $7,000,000; Goldman, Sachs Group
L.P., Daily Variable Rate Master Note in the principal amount of $7,000,000;
Repurchase Agreement with Dean Witter Reynolds, Inc. in the principal amount of
$8,000,000;
-4-
<PAGE> 39
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$8,000,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns
Co., Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc.,
Dean Witter Reynolds, Inc. and Paine Webber are considered to be regular
brokers and dealers of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the description of such
investments in the Prospectus.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND
INTEREST-BEARING SAVINGS DEPOSITS. Certificates of deposit, bankers'
acceptances and interest-bearing savings deposits are eligible investments for
the Master Portfolio, as described in the Fund's Prospectus. Certificates of
deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' Acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Certificates of Deposit
and Banker's Acceptances may only be purchased from domestic or foreign banks
and financial institutions having total assets at the time of purchase in
excess of $2.5 billion. Interest-bearing savings deposits are non-negotiable
deposits maintained at a banking institution for a specified period of time at
a specified interest rate.
Instruments issued by foreign banks or financial institutions
may be subject to investment risks that are different in some respects than the
risks associated with instruments issued by those U.S. domestic issuers. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer
is located on interest income payable on the securities, the possible seizure
or nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which
may be made and interest rates which may be charged. In addition, the
profitability of the banking industry
-5-
<PAGE> 40
is dependent largely upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operations of
the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels
of reserves, limited in the amount which they can loan to a single borrower,
and subject to other regulations designed to promote financial soundness.
However, such laws and regulations do not necessarily apply to foreign bank
obligations.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The investment
policies of the Master Portfolio permit investment in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes
issued by corporations. Except as noted below with respect to variable and
floating rate instruments, issues of commercial paper and short-term notes will
normally have maturities of less than 9 months and fixed rates of return,
although such instruments may have maturities of up to one year.
CONVERTIBLE SECURITIES. Convertible securities entitle the
holder to receive interest paid or accrued on debt until the convertible
securities mature or are redeemed, converted or exchanged. Prior to
conversion, convertible securities have characteristics similar to ordinary
debt securities in that they normally provide a stable stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells above its value as a fixed income security.
In selecting convertible securities for the Master Portfolio,
the investment adviser will consider, among other factors, its evaluation of
the creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the underlying stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Master Portfolio as to issuers; and whether
the securities are rated by Moody's Investors Service, Inc. ("Moody's"), or
Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Co. ("D&P") or Fitch
-6-
<PAGE> 41
Investors Service, Inc. ("Fitch") and, if so, the ratings assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion
value of convertible securities is determined by the market price of the
underlying stock. If the conversion value is low relative to the investment
value, the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying stock while holding fixed income securities.
REPURCHASE AGREEMENTS. The Master Portfolio is permitted to
enter into repurchase agreements with respect to its portfolio securities.
Pursuant to such agreements, the Master Portfolio acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy subject to the seller's agreement to repurchase and the agreement
of the Master Portfolio to resell such securities at a mutually agreed upon
date and price. Although securities subject to a repurchase agreement may bear
maturities exceeding ten years, the Master Portfolio intends to only enter into
repurchase agreements having maturities not exceeding 60 days. The Master
Portfolio is not permitted to enter into repurchase agreements with Bank of
America or its affiliates, and will give no preference to repurchase agreements
with Service Organizations. The repurchase price generally equals the price
paid by the Master Portfolio plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the underlying
portfolio security). Securities subject to repurchase agreements will be held
by the custodian or sub-custodian of the Master Portfolio or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement
will be required to deliver instruments the value of which is 102% of the
repurchase price (excluding accrued interest), provided that notwithstanding
such requirement, the adviser shall require that the value of the collateral,
after transaction costs (including loss of interest) reasonably expected to be
incurred on a default, shall be equal to or greater than the resale price
(including interest) provided
-7-
<PAGE> 42
in the agreement. If the seller defaulted on its repurchase obligation, the
Master Portfolio would suffer a loss because of adverse market action or to the
extent that the proceeds from a sale of the underlying securities were less
than the repurchase price under the agreement. Bankruptcy or insolvency of
such a defaulting seller may cause the Master Portfolio's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans by the Master Portfolio under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS. The Master Portfolio is
permitted to make investments in U.S. Government obligations. Such obligations
include Treasury bills, certificates of indebtedness, notes and bonds, and
issues of such entities as the Government National Mortgage Association,
Export-Import Bank of the United States, Tennessee Valley Authority, Resolution
Funding Corporation, Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land
Banks, Federal Housing Administration, Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, and the Student Loan Marketing
Association. Treasury bills have maturities of one year or less, Treasury
notes have maturities of one to ten years and Treasury bonds generally have
maturities of more than ten years. Some of these obligations, such as those of
the Government National Mortgage Association, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import
Bank of the United States, are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government sponsored instrumentalities if it
is not obligated to do so by law.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Master Portfolio
may acquire variable and floating rate instruments. Such instruments are
frequently not rated by credit rating agencies. However, in determining the
creditworthiness of unrated variable and floating rate instruments and their
eligibility for purchase by the Master Portfolio, Bank of America will consider
the earning power, cash flow and other liquidity ratios of the issuers of such
instruments (which include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. An active
secondary market may not exist with respect to particular variable or floating
rate instruments purchased by the Master Portfolio. The absence of such an
active secondary market could make it difficult to dispose of a variable or
floating rate
-8-
<PAGE> 43
instrument in the event the issuer of the instrument defaulted on its payment
obligation or during periods that the Master Portfolio is not entitled to
exercise its demand rights, and the Master Portfolio could, for these or other
reasons, suffer a loss to the extent of the default. Investments in illiquid
variable and floating rate instruments (instruments which are not payable upon
seven days' notice and do not have active trading markets) are subject to the
Master Portfolio's 15% limitation on illiquid securities. Variable and
floating rate instruments may be secured by bank letters of credit.
OTHER INVESTMENT COMPANIES. The Master Portfolio may acquire
shares of open- and closed-end investment companies. The 1940 Act prohibits
the Master Portfolio from investing more than 5% of the value of its total
assets in any one investment company, or more than 10% of the value of its
total assets in investment companies as a group, and also restricts its
investment in any investment company to 3% of the outstanding voting stock of
such investment company. In addition, no more than 10% of the outstanding
voting stock of any one investment company may be owned in the aggregate by the
Master Portfolio and any other investment company advised by Bank of America.
Investment in other investment companies will involve payment of the Master
Portfolio's (and in turn the Fund's) pro rata share of advisory and
administration fees charged by such fund, in addition to those paid by the
Master Portfolio (and in turn the Fund).
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectus, the Master Portfolio is permitted to borrow funds for temporary
purposes by entering into reverse repurchase agreements with such financial
institutions as banks and broker-dealers in accordance with the investment
limitations described therein. Whenever the Master Portfolio enters into a
reverse repurchase agreement, it will place in a segregated account maintained
with its custodian liquid assets such as cash, U.S. Government securities or
other liquid high grade debt securities having a value equal to the repurchase
price (including accrued interest) and Bank of America will subsequently
continuously monitor the account for maintenance of such equivalent value. The
Master Portfolio intends to enter into reverse repurchase agreements to avoid
otherwise having to sell securities during unfavorable market conditions in
order to meet redemptions. Reverse repurchase agreements are considered to be
borrowings by the Master Portfolio under the 1940 Act.
OPTIONS TRADING. The Master Portfolio may under certain
circumstances engage in options trading. Such options may relate to U.S. and
foreign securities or to various stock indices. In addition, the Master
Portfolio may acquire options relating to foreign currencies in order to hedge
against changes in exchange rates. Such options may be traded on U.S.
exchanges,
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<PAGE> 44
over-the-counter, and on foreign exchanges to the extent permitted by law.
Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Regardless of how much the market
price of the underlying security, index or currency increases or decreases, the
option buyer's risk is limited to the amount of the original premium paid for
the purchase of the option. However, options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. A listed call option for a particular
security or amount of currency gives the purchaser of the option the right to
buy from a clearing corporation, and a writer has the obligation to sell to the
clearing corporation the underlying security or currency amount at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security or currency. The premium paid to the writer
is in consideration for undertaking the obligations under the option contract.
A listed put option gives the purchaser the right to sell to a clearing
corporation, the underlying security or amount of currency at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security or currency. In contrast to an
option on a particular security, an option on a stock index provides the holder
with the right to make or receive a cash settlement upon exercise of the
option. The amount of this settlement will be equal to the difference between
the closing price of the index at the time of exercise and the exercise price
of the option expressed in dollars, times a specified multiple. Furthermore,
it is the position of the staff of the Securities and Exchange Commission (the
"SEC") that over-the-counter options are illiquid. To the extent that the
Master Portfolio invests in options that are illiquid (including
over-the-counter options), such investment will be subject to the Master
Portfolio's limitations on illiquid securities.
The Master Portfolio will continue to receive interest or
dividend income on the securities underlying such puts until they are exercised
by the Master Portfolio. Any losses realized by the Master Portfolio in
connection with its purchase of put options will be limited to the premiums
paid by the Master Portfolio for the options plus any transaction costs. A
gain or loss may be wholly or partially offset by a change in the value of the
underlying security which the Master Portfolio owns.
The Master Portfolio is permitted to write call options if
they are "covered." In the case of a call option on a security, the option is
"covered" if the Master Portfolio owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional
cash
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<PAGE> 45
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if the Master Portfolio
maintains with its custodian cash or cash equivalents equal to the contract
value. A call option is also covered if the Master Portfolio holds a call on
the same security or index as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Master Portfolio in cash or cash equivalents in
a segregated account with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for
the premium, the covered option writer gives up the opportunity for profit from
a price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to
an option, the covered option writer has no control over when it may be
required to sell its securities, since it may be assigned an exercise notice at
any time prior to the expiration of its obligation as a writer.
If the Master Portfolio desires to sell a particular security
from its portfolio on which it has written an option, the Master Portfolio will
seek to effect a closing purchase transaction prior to, or concurrently with,
the sale of the security. In order to close out a covered call option
position, the Master Portfolio will enter into a "closing purchase transaction"
- - the purchase of a call option on a security or stock index with the same
exercise price and expiration date as the call option which it previously wrote
on the same security or index.
When the Master Portfolio purchases a put or call option, the
premium paid by it is recorded as an asset of the Master Portfolio. When the
Master Portfolio writes an option, an amount equal to the net premium (the
premium less the commission) received by the Master Portfolio is included in
the liability section of the statement of assets and liabilities as a deferred
credit. The amount of this asset or deferred credit will be subsequently
marked-to-market to reflect the current value of the option purchased or
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option purchased by the Master Portfolio expires unexercised, the Master
Portfolio realizes a loss equal to the premium paid. If the
-11-
<PAGE> 46
Master Portfolio enters into a closing sale transaction on an option purchased
by it, the Master Portfolio will realize a gain if the premium received by it
on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. Moreover, because increases in the market
price of an option will generally reflect (although not necessarily in direct
proportion) increases in the market price of the underlying security any loss
resulting from a closing purchase transaction is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Master
Portfolio. If an option written by the Master Portfolio expires on the
stipulated expiration date or if the Master Portfolio enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an
option written by the Master Portfolio is exercised, the proceeds of the sale
will be increased by the net premium originally received and the Master
Portfolio will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities, currencies and indices. For example,
there are significant differences between the securities, currencies and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In
addition, a liquid secondary market for particular options, whether traded
over-the-counter or on a national securities exchange ("Exchange") may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be
adequate to handle current trading volume; or one or more Exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that Exchange would continue to be exercisable in accordance with their
terms.
A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.
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<PAGE> 47
FOREIGN INVESTMENTS. In considering whether to invest in the
securities of a foreign company, Bank of America considers such factors as the
characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within
other countries, and also factors relating to the general economic,
governmental and social conditions of the country or countries where the
company is located.
The Master Portfolio may purchase debt obligations issued or
guaranteed by governments (including states, provinces or municipalities) of
countries other than the United States, or by their agencies, authorities or
instrumentalities, or by supranational entities organized or supported by
several national governments, such as the International Bank for Reconstruction
and Development (the "World Bank"), the Inter-American Development Bank, the
Asian Development Bank and the European Investment Bank. The Master Portfolio
also may purchase debt obligations of foreign corporations or financial
institutions, such as Yankee bonds (dollar-denominated bonds sold in the United
States by non- U.S. issuers), Samurai bonds (yen-denominated bonds sold in
Japan by non-Japanese issuers and Euro bonds (bonds not issued in the country
(and possibly currency of the country) of the issuer). The Master Portfolio's
investments will be allocated among securities denominated in the currencies of
a number of foreign countries and, within each such country, among different
types of debt securities. The percentage of assets invested in securities of a
particular country or denominated in a particular currency will vary in
accordance with Bank of America's assessment of the Country's gross domestic
product, purchasing power parity and market capitalization and the relationship
of a country's currency to the United States dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by Bank of America in determining whether to increase or decrease
the emphasis placed upon a particular type of security within the Master
Portfolio.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Master Portfolio endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the United States. Mail service between the United States and foreign
countries may be slower or less reliable than within the United States, thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been
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<PAGE> 48
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Such delays in settlement could result in temporary periods when a portion of
the assets of the Master Portfolio is uninvested and no return is earned
thereon. The inability of the Master Portfolio to make intended security
purchases due to settlement problems could cause the Master Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Master Portfolio due to subsequent declines in value of the portfolio
securities, or, if the Master Portfolio has entered into a contract to sell the
securities, could result in possible liability to the purchaser. Individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The Master Portfolio may purchase securities on a "when-issued,"
"forward commitment" or "delayed settlement" basis. When the Master Portfolio
agrees to purchase securities on a when-issued, forward commitment or delayed
settlement basis, its custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment. In such a case, the Master Portfolio may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of the
commitment. It may be expected that the net assets of the Master Portfolio
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. The Master
Portfolio does not intend to engage in these transactions for speculative
purposes but primarily in order to hedge against anticipated changes in
interest rates. Because the Master Portfolio will set aside cash or liquid
portfolio securities to satisfy its purchase commitments in the manner
described, its liquidity and the ability of the investment adviser to manage it
may be affected in the event the forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceeded 25% of the value
of the Master Portfolio's assets.
The Master Portfolio will purchase securities on a
when-issued, forward commitment or delayed settlement basis only with the
intention of completing the transaction. If deemed advisable as a matter of
investment strategy, however, the Master Portfolio may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Master
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<PAGE> 49
Portfolio on the settlement date. In these cases the Master Portfolio may
realize a taxable capital gain or loss.
When the Master Portfolio engages in when-issued, 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 Master
Portfolio's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
The market value of the securities underlying a when-issued
purchase, forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account
when determining the market value of the Master Portfolio starting on the day
the Master Portfolio agrees to purchase the securities. The Master Portfolio
does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
SECURITIES LENDING. The Master Portfolio may lend securities
as described in the Fund's Prospectus. Such loans will be secured by cash or
securities of the U.S. Government and its agencies and instrumentalities. The
collateral must be at all times equal to at least the market value of the
securities loaned by marking-to-market daily. The Master Portfolio will
continue to receive interest or dividends on the securities it loans, and will
also earn interest on the investment of any cash collateral. Cash collateral
may be invested in short-term U.S. Government securities, U.S. Treasury notes,
certificates of deposit, other high-grade, short-term obligations or interest-
bearing cash equivalents. Although voting rights, or rights to consent,
attendant to securities loaned pass to the borrower, such loans may be called
at any time and will be called so that the securities may be voted by a Master
Portfolio if a material event affecting the investment is to occur.
ILLIQUID SECURITIES. It is possible that unregistered
securities purchased by the Master Portfolio in reliance upon Rule 144A under
the Securities Act of 1933 could have the effect of increasing the level of the
Master Portfolio's, and correspondingly the Fund's illiquidity to the extent
that qualified institutional buyers become, for a period, uninterested in
purchasing these securities.
OTHER INVESTMENT LIMITATIONS
The Prospectus for the Fund sets forth certain fundamental
policies that may not be changed with respect to the Fund or the Master
Portfolio without the affirmative vote of the holders of the majority of the
Fund's outstanding shares or the Master Portfolio's outstanding interests (as
defined below under
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<PAGE> 50
"General Information - Miscellaneous"). The following is a list of additional
fundamental policies and may not be changed with respect to the Fund or the
Master Portfolio without such a vote.
NEITHER THE FUND NOR THE MASTER PORTFOLIO MAY:
1. Purchase securities (except securities issued by the
U.S. Government, its agencies or instrumentalities) if, as a result more than
5% of its total assets will be invested in the securities of any one issuer,
except that up to 25% of its total assets may be invested without regard to
this 5% limitation; provided that all of the assets of the Fund may be invested
in the Master Portfolio or another investment company.
2. Underwrite the securities of other issuers, provided
that all of the assets of the Fund may be invested in the Master Portfolio or
another investment company.
3. Purchase or sell real estate, except that the Master
Portfolio may, to the extent appropriate to its investment objective, invest in
securities and instruments guaranteed by agencies or instrumentalities of the
U.S. Government and securities issued by companies which invest in real estate
or interests therein.
4. Purchase securities on margin (except for such
short-term credits as may be necessary for the clearance of transactions), make
short sales of securities or maintain a short position. For this purpose, the
deposit or payment by the Master Portfolio for initial or maintenance margin in
connection with futures contracts is not considered to be the purchase or sale
of a security on margin.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof, except that it may engage in options transactions.
6. Purchase or sell commodities or commodity contracts,
or invest in oil, gas or mineral exploration or development programs, except
that: (a) it may, to the extent appropriate to its investment objective,
invest in securities issued by companies which purchase or sell commodities or
commodity contracts or which invest in such programs; and (b) it may purchase
and sell futures contracts and options on futures contracts.
7. Purchase securities of other investment companies to
the extent prohibited by the 1940 Act.
8. Purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers
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<PAGE> 51
conducting their principal business activities in the same industry; provided,
however, that (a) there is no limitation with respect to investments in
obligations issued or guaranteed by the federal government and its agencies and
instrumentalities; (b) each utility (such as gas, gas transmission, electric
and telephone service) will be considered a single industry for purposes of
this policy; and (c) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of their parents.
9. Purchase securities of any issuer if as a result it
would own more than 10% of the voting securities of such issuer; provided that
all of the assets of the Fund may be invested in the Master Portfolio or
another investment company.
10. Borrow money for the purpose of obtaining investment
leverage or issue senior securities (as defined in the 1940 Act), provided that
the Fund and the Master Portfolio may borrow from banks for temporary purposes
and in an amount not exceeding 10% of the value of the total assets of the Fund
or the Master Portfolio; or mortgage, pledge or hypothecate any assets, except
in connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the value of its total assets
at the time of such borrowing. This restriction shall not apply to (a) the
sale of portfolio securities accompanied by a simultaneous agreement as to
their repurchase, or (b) transactions in currency, options, futures contracts
and options on futures contracts, or forward commitment transactions.
11. Make loans, except investments in debt securities,
repurchase agreements and securities loans.
* * *
In order to permit the sale of the Fund's shares in certain
states, the Company may make commitments more restrictive than the investment
policies and limitations described above. The Company has agreed to the
following additional non-fundamental investment restrictions with respect to
the Fund: 1) the Master Portfolio will not purchase or sell real estate,
including real estate limited partnership interests, but excluding readily
marketable interests in Real Estate Investment Trusts ("REITS") or readily
marketable securities of companies that invest in real estate investments in
real estate limited partnerships; 2) the Master Portfolio will not invest more
than 5% of the value of its net assets in warrants, of which no more than 2%
may be warrants which are not listed on the New York or American Stock
Exchanges; 3) the Master Portfolio will not purchase or retain the securities
of any issuer if the Officers or Trustees of the Master Portfolio or its
investment adviser,
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<PAGE> 52
each of whom owning beneficially more than one half of one percent of the
securities of an issuer together own beneficially more than 5% of the
securities of that issuer; 4) the Master Portfolio will not write or sell puts,
calls, straddles, spreads or combinations thereof, except that it may write
covered put and call options contracts; 5) the Master Portfolio will not
purchase or sell commodities or commodity contracts, or invest in oil, gas or
mineral exploration leases or development programs, except that: (a) it may, to
the extent appropriate to its investment objective, invest in securities issued
by companies which purchase or sell commodities or commodity contracts or which
invest in such programs, and (b) it may purchase and sell futures contracts and
options on futures contracts; and 6) the Master Portfolio will not purchase
securities of any other open-end or closed-end investment companies except (a)
by purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
(b) in connection with a merger, consolidation, acquisition or reorganization,
and (c) that assets may be invested in securities of one or more open-end
management investment companies to the extent permitted by the 1940 Act.
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For the purposes of Investment Limitation 8 above and in
accordance with the current views of the staff of the SEC and as a matter of
non-fundamental policy that may be changed without a vote of shareholders, the
Master Portfolio and Fund treat all supranational organizations as a single
industry and each foreign government (and all of its agencies) as a separate
industry.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how
such shares are priced, is included in the Prospectus. The net asset value per
share of the Master Portfolio is determined at the same time and on the same
days as the net asset value per share of the Fund is determined. The net asset
value of the Fund is equal to the Fund's pro rata share of the total
investments and other assets of the Master Portfolio, less any liabilities with
respect to the Fund, including the Fund's pro rata share of the Master
Portfolio's liabilities.
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers.
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<PAGE> 53
Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the Board of Trustees of the Master Portfolio. Debt securities
with remaining maturities of 60 days or less are valued on an amortized cost
basis unless the Board determines that such basis does not represent fair value
at the time. Under this method such securities are valued initially at cost on
the date of purchase or, in the case of securities purchased with more than 60
days to maturity, are valued at their market or fair value each day until the
61st day prior to maturity. Thereafter, absent unusual circumstances, a
constant proportionate amortization of any discount or premium is assumed until
maturity of the security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it
deems relevant in determining valuations for normal institutional-sized trading
units of debt securities and would not rely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the Board. Valuation of options is described above
under "Investment Objectives and Policies - Options Trading."
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or
Letter of Intent privileges available to certain shareholders as described in
the Prospectus, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) although more than
one beneficiary is involved; or "a qualified group" which has been in existence
for more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount,
provided that the purchases are made through a central administrator or a
single dealer, or by other means which result in economy of sales effort or
expense. A "qualified group" must have more than 10 members, must be available
to arrange for group meetings between representatives of the Fund and the
members, and must be able to arrange for mailings to members at reduced or no
cost to the Distributor. The value of shares eligible for the Right of
Accumulation privilege may also be used as a credit toward completion of the
Letter of Intent privilege. Such shares
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<PAGE> 54
will be valued at their offering price prevailing on the date of submission of
the Letter of Intent. Distributions on shares held in escrow pursuant to the
Letter of Intent privilege will be credited to the shareholder, but such shares
are not eligible for the Fund's Exchange Privilege.
The computation of the hypothetical offering price per share
for the Fund based on the value of the Fund's net assets at inception and the
Fund's shares outstanding on such date is as follows:
<TABLE>
<CAPTION>
International Equity Fund
-------------------------
<S> <C>
Net Assets . . . . . . . . . . . . . . . . . . . . . . $10.00
Outstanding Shares . . . . . . . . . . . . . . . . . . . 1
Net Asset Value Per Share . . . . . . . . . . . . . . . $10.00
Sales Charge 4.50 percent
of offering price (4.71
percent of net asset value
per share) . . . . . . . . . . . . . . . . . . . . . . $ 0.47
Offering Price to Public . . . . . . . . . . . . . . . $10.47
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION
Shares in the Fund for which orders for wire redemption are
received on a business day before 12:00 p.m. Eastern time will be redeemed as
of 12:00 p.m. and the proceeds of redemption (less any applicable contingent
deferred sales charge imposed on shareholders who purchased shares of the Fund
of $1 million or more without a front-end sales load and redeem such shares
within 2 years after purchase) will normally be wired in federal funds on the
next business day to the commercial bank specified by the investor on the
Account Application (or other bank of record on the investor's file with the
Transfer Agent). To qualify to use the wire redemption privilege, the payment
for Fund shares must be drawn on, and redemption proceeds paid to, the same
bank and account as designated on the Account Application (or other bank of
record as described above). If the proceeds of a particular redemption are to
be wired to another bank, the request must be in writing and signature
guaranteed. Shares for which orders for wire redemption are received after or
on a non-business day will be redeemed as of 12:00 p.m. on the next day on
which shares of the Fund are priced and the proceeds (less any applicable
contingent deferred sales charge imposed on shareholders who purchased shares
of the Fund of $1 million or more without a
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<PAGE> 55
front-end sales load and redeem such shares within 2 years after purchase) will
normally be wired in federal funds on the next business day thereafter.
Redemption proceeds (less any applicable contingent deferred sales charge
imposed on shareholders who purchased shares of the Fund of $1 million or more
without a front-end sales load and redeem such shares within 2 years after
purchase) will be wired to a correspondent member bank if the investor's
designated bank is not a member of the Federal Reserve System. Immediate
notification by the correspondent bank to the investor's bank is necessary to
avoid a delay in crediting the funds to the investor's bank account. Proceeds
of less than $1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Fund's Prospectus. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular
verification.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION
- -------------------------------------------------
IN GENERAL. As described in the Prospectus, Fund shares may
be purchased directly by the public, by clients of Bank of America through
their qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the
Fund and described in the Prospectus. Purchase orders will be effected only on
business days.
Shares in the Fund are sold with a sales load. However, there
is no front-end sales load on combined purchases of shares of $1 million or
more. Concord Financial Group, Inc. will pay commissions of up to 1.00% to
brokers whose customers purchase such shares. Additionally, a 1.00% and 0.50%
contingent deferred sales charge is applicable to shareholders who purchase
shares of the Fund of $1 million or more without a front-end sales load and
redeem such shares within one year and two years,
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<PAGE> 56
respectively, after purchase. Service Organizations may be paid by the
Distributor at the Company's expense for shareholder services. Depending on
the terms of the particular account, Bank of America, its affiliates, and
Service Organizations also may charge their customers fees for automatic
investment, redemption and other services provided. Such fees may include, for
example, account maintenance fees, compensating balance requirements or fees
based upon account transactions, assets or income. Bank of America or the
particular Service Organization is responsible for providing information
concerning these services and any charges to any customer who must authorize
the purchase of Fund shares prior to such purchase.
Persons wishing to purchase Company shares through their
accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions.
Initial purchases of shares into a new account may not be made
by wire. However, persons wishing to make a subsequent purchase of Company
shares into an already existing account by wire should telephone the Transfer
Agent at (800) 346-2087. The investor's bank must be instructed to wire
federal funds to the Transfer Agent, referring in the wire to the particular
Fund in which such investment is to be made; the investor's portfolio account
number; and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for
IRAs, payment of which could require the liquidation of shares. All fees
charged are described in the appropriate form. Shares may be purchased in
connection with these plans only by direct remittance to the Transfer Agent.
Purchases for IRA accounts will be effective only when payments received by the
Transfer Agent are converted into federal funds. Purchases for these plans may
not be made in advance of receipt of funds.
For processing redemptions, the Transfer Agent may request
further documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the
TeleTrade Privilege, any request for a wire redemption will be effected as a
TeleTrade transaction through the Automated Clearing House (ACH) system unless
more prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
EXCHANGE PRIVILEGE. Shareholders in the Pacific Horizon
Family of Funds have an exchange privilege whereby they
-22-
<PAGE> 57
may exchange all or part of their shares for like shares of another investment
portfolio in the Pacific Horizon Family of Funds or for like shares of an
investment portfolio of Time Horizon Funds. By use of the exchange privilege,
the investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange instructions from any person representing himself or herself
to be the investor and believed by the Transfer Agent to be genuine. The
Transfer Agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon notice to
shareholders. For federal income tax purposes, exchange transactions are
treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
Exchange transactions described in Paragraphs A, B, C and D
below will be made on the basis of the relative net asset values per share of
the investment portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales
load, as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may
be exchanged without a sales load for shares of any other
investment portfolio in the Pacific Horizon Family of Funds or
for like shares of Time Horizon Funds.
B. Shares of any investment portfolio in the Pacific Horizon
Family of Funds or Time Horizon Funds on which a sales load
has directly or indirectly been paid (e.g. shares purchased
with a sales load or issued in connection with an exchange
transaction involving shares that had been purchased with a
sales load), as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may
be redeemed and the proceeds used to purchase without a sales
load shares of any other investment portfolio within 90 days
of your redemption trade date. To accomplish an exchange
transaction under the provisions of this Paragraph, investors
must notify the Transfer Agent of their prior ownership of
shares and their account number.
C. Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
shares of any other investment portfolio in the Family that is
offered without a sales load.
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<PAGE> 58
D. Shares of any investment portfolio in the Pacific Horizon
Family of Funds purchased without a sales load may be
exchanged without a sales load for shares in any other
portfolio where the investor involved maintained an account in
the Pacific Horizon Family of Funds before April 20, 1987 or
was the beneficial owner of shares of Bunker Hill Income
Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund.
Neither a contingent deferred sales charge nor a front-end
sales load will be imposed at the time of exchange if a shareholder purchases
shares of the Fund of $1 million or more without a front-end sales load and
exchanges such shares for shares of another investment portfolio of the Company
or Time Horizon Funds. However, shares acquired in the exchange are subject to
a contingent deferred sales charge of 1.00% and 0.50%, respectively, on
redemptions within one year and two years after purchase.
Except as stated above, a sales load will be imposed when
shares of any investment portfolio in the Pacific Horizon Family of Funds that
were purchased or otherwise acquired without a sales load are exchanged for
shares of another investment portfolio in the Pacific Horizon Family or for
like shares of Time Horizon Funds which are sold with a sales load.
Exchange requests received on a business day prior to the time
shares of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new investment portfolio into which the
shareholder is investing will also normally be purchased at the net asset value
per share next determined coincident to or after the time of redemption.
Exchange requests received on a business day after the time shares of the
investment portfolios involved in the request are priced will be processed on
the next business day in the manner described above.
MISCELLANEOUS. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of
America or a Service Organization, certain purchasers may arrange with the
Company's custodian for sub-accounting services paid by the Company without
direct charge to the purchaser.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent at its Columbus office is a day
on which the New York Stock Exchange is
-24-
<PAGE> 59
open for trading. In 1996, the holidays on which the New York Stock Exchange
is closed are: New Year's Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or
(d) an emergency exists as determined by the SEC. (The Company may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does
not increase such balance to $500 or more upon 60 days' notice. The Company
will not require a shareholder to redeem shares of the Fund if the balance held
of record by the shareholder is less than $500 solely because of a decline in
the net asset value of the Fund's shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in securities or
other property. In such an event, a shareholder would incur transaction costs
in selling the securities or other property. The Company has committed that it
will pay all redemption requests by a shareholder of record in cash, limited in
amount with respect to each shareholder during any ninety-day period to the
lesser of $250,000 or 1% of the net asset value at the beginning of such
period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
- -------
The Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, the
Fund expects to eliminate or reduce to a nominal amount the federal income
taxes to which it may be subject. If for any taxable year the Fund does not
qualify for the special federal tax treatment afforded regulated investment
companies, all of the Fund's taxable income would be subject to tax at regular
corporate rates (without any deduction for
-25-
<PAGE> 60
distributions to shareholders). In such event, the Fund's dividend
distributions to shareholders would be taxable as ordinary income to the extent
of the current and accumulated earnings and profits of the Fund and would be
eligible for the dividends received deduction in the case of corporate
shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income and 90% of its tax-exempt income net of certain deductions for each
taxable year. In general, the Fund's investment company taxable income will be
its taxable income, including dividends, interest, and short-term capital gains
(the excess of net short-term capital gain over net long-term capital loss),
subject to certain adjustments and excluding the excess of net long-term
capital gain for the taxable year over the net short-term capital loss for such
year (if any). The Fund will be taxed on its undistributed investment company
taxable income, if any. As stated, the Fund intends to distribute at least 90%
of its investment company taxable income for each taxable year. To the extent
such income is distributed by the Fund (whether in cash or additional shares)
it will be taxable to shareholders as ordinary income.
The Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts, other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to the Fund's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities) (the
"Short-Short test"). Interest (including original issue discount and accrued
market discount) received by the Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and the
cost of the securities subject to the call is capital gain or loss. Premiums
from expired call options written by a Fund and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-
-26-
<PAGE> 61
term capital losses. See Appendix B -- "Accounting and Tax Treatment" -- for a
general discussion of the federal tax treatment of futures contracts, related
options thereon and other financial instruments, including their treatment under
the Short-Short test.
Any distribution of the excess of net long-term capital gains
over net short-term capital losses is taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held Fund shares and
whether such gains are received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year. It
should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for more than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (or at a maximum effective marginal rate of 39% in
the case of corporations having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or gross sale
proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company either that they are subject to backup withholding
when required to do so or that they are "exempt recipients."
-27-
<PAGE> 62
Appendix B - "Accounting and Tax Treatment" - contains a
discussion of the tax treatment of certain foreign currency contracts and of
certain transactions denominated in, or determined by reference to, currencies
other than the U.S. dollar.
TAXATION OF THE MASTER PORTFOLIO
- --------------------------------
Management of the Master Portfolio intends for the Master
Portfolio to be treated as a partnership (or, in the event that the Fund is the
sole investor in the Master Portfolio, as an agent or nominee) rather than as a
regulated investment company or a corporation under the Code. Under the rules
applicable to a partnership (or an agent of nominee) under the Code, any
interest, dividends, gains and losses of the Master Portfolio will be deemed to
have been "passed through" to its investors regardless of whether any amounts
are actually distributed by the Master Portfolio.
Each investor in the Master Portfolio will be taxed on its
share (as determined in accordance with the governing instruments of the Master
Portfolio) of the Master Portfolio's ordinary income and capital gains in
determining its income tax liability. The determination of such share will be
made in accordance with the Code and regulations promulgated thereunder. It is
intended that the Master Portfolio's assets, income and distributions will be
managed in such a way that an investor in the Master Portfolio will be able to
satisfy the requirements of Sub-chapter M of the Code, assuming that the
investor invested all of its assets in the Master Portfolio.
OTHER INFORMATION
- -----------------
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities.
Income distributions may be taxable to shareholders under
state or local law as dividend income even though all or a portion of such
distributions may be derived from interest on tax-exempt obligations or U.S.
government obligations which, if realized directly, would be exempt from such
income taxes. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally
-28-
<PAGE> 63
affecting purchasers of Fund shares. No attempt is made to present a detailed
explanation of the federal income tax treatment of the Fund or its
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of Fund shares should consult
their tax advisers with specific reference to their own tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
- -------------------------------------
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Thomas M. Collins . . . . . . . . . . . . 61 Director Of Counsel, law firm of
McDermott & Trayner McDermott & Trayner; Partner
225 S. Lake Avenue of the law firm of Musick,
Suite 410 Peeler & Garrett (until
Pasadena, CA 91101-3005 April, 1993); Trustee, Master
Investment Trust, Series I
and Master Investment Trust,
Series II (since 1993);
former Director, Bunker Hill
Income Securities, Inc.
(registered investment
company), through 1991.
Douglas B. Fletcher . . . . . . . . . . . 70 Vice Chairman of the Chairman of the Board and
Fletcher Capital Advisors Incorporated Board Chief Executive Officer,
4 Upper Newport Plaza Fletcher Capital Advisors,
Suite 100 Incorporated (registered
Newport Beach, CA 92660-2629 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
</TABLE>
-29-
<PAGE> 64
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
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 Asset
Page Mill Asset Management Management (a private
433 California Street investment company) since
Suite 900 1991; Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett Packard
Company from 1979 to 1991;
Trustee, Master Investment
Trust, Series I and Master
Investment Trust, Series II
(since 1993); Director,
Morgan Grenfell Small Cap
Fund (since 1986), former
Director, Bunker Hill Income
Securities, Inc. (since 1989)
(registered investment
companies); former Trustee,
SunAmerica Fund Group)
(previously Equitec Siebel
Fund Group) from 1984 to
1992.
Kermit O. Hanson . . . . . . . . . . . . 79 Director Vice Chairman of the Advisory
17760 14th Ave., N.W. Board, 1988 to date,
Seattle, WA 98177 Executive Director, 1977 to
1988, Pacific Rim Bankers
Program (a non-profit
educational institution);
Dean Emeritus, 1981 to date,
Dean, 1964-81,
</TABLE>
-30-
<PAGE> 65
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Graduate School and School of Business
Administration, University of Washington;
Director, Washington Federal Savings &
Loan Association; Trustee, Seafirst
Retirement Funds (registered investment
company).
Cornelius J. Pings* . . . . . . . . . . . 66 Chairman of President, Association of
Association of American the Board American Universities,
Universities and President February 1993 to date;
One Dupont Circle Provost, 1982 to January,
Suite 730 1993, Senior Vice President
Washington, DC 20036 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; Former
11131 Briarcliff Drive Distinguished Emeritus
San Diego, CA 92131-1329 Professor of Finance and
Chairman of the Department of
Finance and Business
Economics of the Graduate
School of Business of the
University of Southern
California; former Director,
Metro Goldwyn Mayer, Inc.;
Director, Fremont General
Corporation (insurance and
financial services holding
company); Director, Source
Capital, Inc. (closed-end
investment company); Director
of three open-end investment
companies
</TABLE>
-31-
<PAGE> 66
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
managed by First
Pacific Advisors, Inc.;
Former Chairman of the Board
of Directors (or Trustees) of
nineteen investment companies
managed by American Capital
Asset Management, Inc.
Richard E. Stierwalt . . . . . . . . . . 40 Executive Vice Chairman of the Board and
125 W. 55th Street President Chief Executive Officer, July
New York, NY 10019 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 to
125 W. 55th Street President date; prior thereto Director
New York, NY 10019 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>
-32-
<PAGE> 67
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Irimga McKay . . . . . . . . . . . . . . 35 Vice President Senior Vice President, July
1230 Columbia Street 1993 to date; prior thereto
5th Floor First Vice President of the
San Diego, CA 92101 Administrator and
Distributor, November 1988 to
July 1993; Vice President,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
Stephanie L. Blaha . . . . . . . . . . . 36 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
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.
Mark E. Nagle . . . . . . . . . . . . . . 36 Treasurer Senior Vice President,
BISYS Fund Services Fund Accounting Services,
3435 Stelzer Road The BISYS Group, Inc.,
Columbus, OH 43219 September 1995 to Present:
Treasurer, Seafirst Retirement
Funds and Master Investment
</TABLE>
33
<PAGE> 68
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Trust, Series II,
January 1996 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 Accounting of
BISYS Fund Services Treasurer BISYS Fund Services, May 1994
3435 Stelzer Road to Present; Assistant
Columbus, OH 43219 Treasurer, Master Investment
Trust, Series II and Seafirst
Retirement Funds (since
1996); Senior Manager at KPMG
Peat Marwick previously 1990-
1994.
W. Bruce McConnel, III Partner of the law firm of
1345 Chestnut Street Drinker Biddle & Reath.
Philadelphia National Bank . . . . . . . . . . 52 Secretary Secretary, Master Investment
Building, Suite 1100 Trust, Series I, Master
Philadelphia, PA 19107 Investment Trust, Series II
and Seafirst Retirement Funds
(since 1993).
George O. Martinez . . . . . . . . . . . 35 Assistant Secretary Senior Vice President
3435 Stelzer Road and Director of Legal and
Columbus, OH 43219 Compliance Services of the
Administrator, since
</TABLE>
-34-
<PAGE> 69
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C>
April 1995; Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds; prior
thereto, Vice President and
Associate General Counsel,
Alliance Capital Management,
L.P.
</TABLE>
- ---------------------
Mr. Pings is an "interested director" of the Company as
defined in the 1940 Act.
The Audit Committee of the Board is comprised of all directors
and is chaired by Dr. Trefftzs. The Board does not have an Executive
Committee.
Each director is entitled to receive an annual fee of $25,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $20,000 per annum for his
services as President; Mr. Collins, in consideration of his years of service as
President and Chairman of the Board, receives an additional $40,000 per annum
in severance until February 28, 1997; each member of a Committee of the Board
is entitled to receive $1,000 for each Committee meeting he participates 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; none of this amount was allocated to the Fund.
Each director is also reimbursed for out-of-pocket expenses incurred as a
director. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Company. As of the date of this Statement of
Additional Information, the directors and officers of the Company, as a group,
own less than 1% of the outstanding shares of each of the Company's investment
portfolios.
Under a retirement plan approved by the Board, including a
majority of its directors who are not "interested
-35-
<PAGE> 70
persons" of the Company, effective March 1, 1995, a director who dies or
resigns after five years of service is entitled to receive ten annual payments
each equal to the greater of: (i) 50% of the annual director's retainer that
was payable by the Company during the year of his/her death or resignation, or
(ii) 50% of the annual director's retainer then in effect for directors of the
Company during the year of such payment. A director who dies or resigns after
nine years of service is entitled to receive ten annual payments each equal to
the greater of: (i) 100% of the annual director's retainer that was payable by
the Company during the year of his/her death or resignation, or (ii) 100% of
the annual director's retainer then in effect for directors of the Company
during the year of such payment. Further, the amount payable each year to a
director who dies or resigns is increased by $1,000 for each year of service
that the director served as Chairman of the Board.
Years of service for purposes of calculating the benefit
described above are based upon service as a director or Chairman after February
28, 1994. Retirement benefits in which a director has become vested may not be
reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer
payable to directors thereafter), and (ii) using the interest rate in effect as
of the date of the director's death or resignation by the Pension Benefit
Guaranty Corporation (or any successor thereto) for valuing immediate annuities
under terminating defined benefit pension plans. A director's election to
receive a single sum must be made in writing within the 30 calendar days after
the date the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before
March 1, 1994 as a director and possibly as Chairman, authorize the Company to
pay a retirement benefit following the director's death or resignation (unless
the director has vested benefits as a result of completing nine years of
service). Any such action shall be approved by the Board and by a majority of
the directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
-36-
<PAGE> 71
The obligation of the Company to pay benefits to a former
director is neither secured nor funded by the Company but is binding upon its
successors in interest. The payment of such benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Investment Trust, Series
I, (the "Master Trust") a Delaware business trust of which the Master Portfolio
is a series, their addresses, ages and principal occupation during the past
five years are:
<TABLE>
<S> <C> <C> <C>
61 Chairman of the Board See "Directors and Officers
Thomas M. Collins of the Company."
McDermott & Trayner
255 South Lake Avenue,
Suite 410
Pasadena, CA 91101
Michael Austin 59 Trustee Chartered Accountant;
Victoria House Trustee, Master Investment
Nelson Quay Trust, Series II (since
Governor's Harbour 1993); Retired Partner, KPMG
British West Indies Peat Marwick LLP.
Robert E. Greeley 62 Trustee See "Directors and Officers
Page Mill Asset Management of the Company."
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee Retired President, Laird
1200 Shenandoah Drive East Norton Trust Company,
Seattle, WA 98112 Chairman of the Board of
Advisors, Phoenix Venture
Funds; Trustee, Seafirst
Retirement Funds (since July
1993); Trustee, Master
Investment Trust, Series II
(since 1993); former Trustee,
First Funds of America
(registered investment
</TABLE>
-37-
<PAGE> 72
<TABLE>
<CAPTION>
Position with
Name and Address Age the Master Trust Principal Occupations
- ---------------- --- ---------------- ---------------------
<S> <C> <C> <C>
companies); former
Supervisor, Collective
Investment Trust for Seafirst
Retirement Accounts
(collective investment
funds).
Cornelius J. Pings 66 Trustee See "Directors and
Association of Officers of the
American Universities Company."
One Dupont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President See "Directors and Officers
125 West 55th Street of the Company."
11th Floor
New York, NY 10019
Adrian J. Waters 32 Executive Vice Managing Director of Concord
ITT House President, Treasurer Management (Ireland) Limited
23 Earlsfort Terrace and Assistant since May 1993; Manager in
Dublin 2, Ireland Secretary Investment Company Industry
Services Group, Price
Waterhouse, 1989-1993; Member
of Oliver Freaney &
Co./Spicer & Oppenheim
Chartered Accountants, 1986-
1989.
W. Bruce McConnel, III 52 Secretary See "Directors and Officers
Philadelphia National Bank of the Company."
Building, Suite 1100
1345 Chestnut Street
Philadelphia, PA 19107
</TABLE>
[FN]
_____________________________
* Mr. Nathane is an "interested trustee" of the Master Trust as defined
in the 1940 Act.
Each trustee receives an aggregate annual fee of $1,500 plus
$500 per meeting attended and $250 per day for each full day devoted to travel
in connection with each meeting attended, for his services as trustee of the
Master Trust. Each trustee is also reimbursed for out-of-pocket expenses
incurred as a trustee. The trustee's fees and reimbursements are allocated
among all of the Master Trust's
-38-
<PAGE> 73
portfolios based on their relative net asset values. For its fiscal year ended
February 28, 1995, the Master Trust paid or accrued for the account of its
trustees as a group for services in all capacities a total of $30,221; none of
this amount was allocated to the Master Portfolio.
The following chart provides certain information as of
February 28, 1995 about the fees received by directors of the Company as
directors and/or officers of the Company and as directors and/or trustees of
the Fund Complex:
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL REGISTRANT AND
COMPENSATION FROM AS PART OF FUND BENEFITS UPON FUND COMPLEX*
NAME OF PERSON/ POSITION THE COMPANY EXPENSES RETIREMENT PAID TO DIRECTORS
<S> <C> <C> <C> <C>
Thomas M. Collins $100,000 $0 $0 $110,000
President and Chairman of
the Board+
Douglas B. Fletcher $57,500 $0 $0 $57,500
Vice Chairman of the Board
Robert E. Greeley** $57,500 $0 $0 $65,781
Director
Kermit O. Hanson $57,500 $0 $0 $63,500
Director
Cornelius J. Pings $57,500 $0 $0 $57,500
Director
Kenneth L. Trefftzs $57,500 $0 $0 $57,500
Director
- ------------------------------
</TABLE>
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I and Master Investment Trust, Series
II.
** 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.
-39-
<PAGE> 74
INVESTMENT ADVISER
- ------------------
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to the other investment portfolios of the Company since the
commencement of its operations. As described in the Prospectus, the Fund has
not retained the services of an investment adviser since it seeks to achieve
its investment objective by investing all of its assets in the Master
Portfolio. In the Investment Advisory Agreement with the Master Trust, Bank of
America has agreed to provide investment advisory services as described in the
Prospectus. Bank of America has also agreed to pay all expenses incurred by it
in connection with its activities under its agreement other than the cost of
securities, including brokerage commissions, if any, purchased for the Master
Portfolio. In rendering its advisory services, Bank of America may utilize
Bank officers from one or more of the departments of the Bank which are
authorized to exercise the fiduciary powers of Bank of America with respect to
the investment of trust assets. In some cases, these officers may also serve
as officers, and utilize the facilities, of wholly owned subsidiaries and other
affiliates of Bank of America or its parent corporation. In addition, the
agreement also provides that Bank of America may, in its discretion, provide
advisory services through its own employees or employees of one or more of its
affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation; provided such employees are under the management of
Bank of America.
For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement for the Master Portfolio, the Master Trust has
agreed to pay Bank of America fees, accrued daily and payable monthly, at the
annual rate of 0.75% of the average daily net assets of the Master Portfolio.
The fees payable to Bank of America are not subject to reduction as the value
of the Master Portfolio's net assets increases. From time to time, Bank of
America may waive fees or reimburse the Company or the Master Portfolio for
expenses voluntarily or as required by certain state securities laws. If
total expenses borne by the Fund in any fiscal year exceed the expense
limitations imposed by applicable state securities regulations, Bank of America
will reimburse the Company and the Master Trust the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. As of the date of this Statement of Additional
Information, the most restrictive expense limitation that may be applicable to
the Company limits aggregate annual expenses with respect to the Fund
(including management and advisory fees and the Fund's pro-rata share of such
expenses of the Master Portfolio but excluding interest, taxes, brokerage
commissions, and certain other expenses) to 2-1/2% of the first $30 million of
its average daily net assets, 2% of the next $70 million, and 1-1/2% of its
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<PAGE> 75
remaining average daily net assets. During the course of the Company's fiscal
year, Bank of America or the Administrator may assume certain expenses and/or
not receive payment of fees of the Fund or Master Portfolio, while retaining
the ability to be reimbursed by the Fund or Master Portfolio for such amounts
prior to the end of the fiscal year. This will have the effect of increasing
yield to investors at the time such fees are not received or amounts are
assumed and decreasing yield when such fees or amounts are reimbursed.
The Investment Advisory Agreement for the Master Portfolio
provides that Bank of America shall not be liable for any error of judgment or
mistake of law or for any loss suffered in connection with the performance of
the Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
- -----------------------------------------------
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in INVESTMENT COMPANY INSTITUTE V. CAMP that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies.
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may perform the services
for the Master Portfolio contemplated by the Investment Advisory Agreement, the
Prospectus, and this Statement
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<PAGE> 76
of Additional Information without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. It should be noted, however, that
there have been no cases deciding whether a national bank may perform services
comparable to those performed by Bank of America and that future changes in
either federal or state statutes and regulations relating to permissible
activities of banks or trust companies and their subsidiaries or affiliates, as
well as further judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent Bank of America from
continuing to perform such services for the Master Portfolio or from continuing
to purchase Fund shares for the accounts of its customers.
For a discussion of the Glass Steagall Act in connection with
the Company's Shareholder Service Plan and Distribution and Shareholder Service
Plan, see "Plan Payments" in the Fund's Prospectus.
On the other hand, as described herein, the Fund is currently
distributed by Concord Financial Group, Inc. Concord Holding Corporation, its
parent, either directly or through its off-shore subsidiary, provides the
Master Portfolio and the Fund with administrative services. If current
restrictions under the Glass-Steagall Act preventing a bank from sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, the Company and the Master Trust expect that Bank of America would
consider the possibility of offering to perform some or all of the services now
provided by Concord Holding Corporation or Concord Financial Group, Inc. From
time to time, legislation modifying such restriction has been introduced in
Congress which, if enacted, would permit a bank holding company to establish a
non-bank subsidiary having the authority to organize, sponsor and distribute
shares of an investment company. If this or similar legislation were enacted,
the Company and the Master Trust expect that Bank of America's parent bank
holding company would consider the possibility of one of its non-bank
subsidiaries offering to perform some or all of the services now provided by
Concord Holding Corporation or Concord Financial Group, Inc. It is not
possible, of course, to predict whether or in what form such legislation might
be enacted or the terms upon which Bank of America or such a non-bank affiliate
might offer to provide services for consideration by the Company's Board of
Directors or the Master Trust's Board of Trustees.
ADMINISTRATOR
- -------------
Concord Holding Corporation (the "Administrator"), with
offices at 125 W. 55th Street, New York, New York 10019 and 3435 Stelzer Road,
Columbus, Ohio 43219 is an indirect, wholly owned subsidiary of The BISYS
Group, Inc. The Administrator also serves as administrator to several other
investment companies.
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<PAGE> 77
The Administrator (and/or its off-shore affiliate), provides
administrative services to the Company and the Master Portfolio as described in
the Fund's Prospectus pursuant to separate administration agreements for the
Company and the Master Trust. The Master Portfolio's administration agreement
will continue in effect until October 31, 1996, and thereafter for successive
periods of one year, provided that such continuance is specifically approved at
least annually (a) by a vote of a majority of those members of the Board of
Trustees of the Master Trust who are not parties to the administration
agreement or "interested persons" of any such party, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by the Board
of Trustees of the Master Trust or by vote of a "majority of the outstanding
voting securities" of the Master Portfolio. The Master Portfolio's
administration agreement is terminable at any time without penalty by the
Master Portfolio's Board of Trustees or by a vote of a majority of the Master
Portfolio's outstanding interests upon 60 days' notice to the Administrator, or
by the Administrator upon 90 days' notice to the Master Portfolio. The Fund's
administration agreement will continue in effect until October 31, 1996 and
thereafter will be extended for successive periods of one year, provided that
each such extension is specifically approved (a) by vote of a majority of those
members of the Company's Board of Directors who are not interested persons of
any party to the agreement, cast in person at a meeting called for the purpose
of voting on such approval, and (b) the Company's Board of Directors or by vote
of a majority of the outstanding voting securities of the Fund. The agreement
is terminable at any time without penalty by the Company's Board of Directors
or by a vote of a majority of the Fund's outstanding securities upon 60 days'
notice to the Administrator, or by the Administrator upon 90 days' notice to
the Company.
The Company has agreed to pay the Administrator a fee for its
services as Administrator, accrued daily and payable monthly, at the annual
rate of .15% of the average daily net assets of the Fund. Similarly, the
Master Portfolio has agreed to pay the Administrator a fee for its services,
accrued daily and payable monthly, at the annual rate of .05% of the average
daily net assets of the Master Portfolio. The fees payable to the
Administrator are not subject to reduction as the value of the Fund's and the
Master Portfolio's net assets increases. From time to time, the Administrator
may waive fees or reimburse the Master Portfolio or the Fund for expenses,
either voluntarily or as required by certain state securities laws.
The Administrator will bear all expenses in connection with
the performance of its services under the administration agreements with the
exception of the fees charged by PFPC, Inc. ("PFPC") for certain fund
accounting services which are borne by the Fund and the Master Portfolio.
Expenses borne by the Fund and/or Master Portfolio include taxes, interest,
brokerage fees
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<PAGE> 78
and commissions, if any, fees of Board members who are not officers, directors,
partners, employees or holders of 5% or more of the outstanding voting
securities of Bank of America or the Administrator or any of their affiliates,
SEC fees and state securities qualification fees, advisory fees, administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, outside auditing and legal expenses, costs of
maintaining corporate existence, costs attributable to investor services,
including without limitation telephone and personnel expenses, costs of
preparing and printing prospectuses and Statements of Additional Information
for regulatory purposes, cost of shareholders' reports and corporate meetings
and any extraordinary expenses. Certain distribution and shareholder servicing
fees in connection with the Company's shares are also paid by the Company. See
"Distributor and Plan Payments."
The administration agreements provide that the Administrator
shall not be liable for any error of judgment or mistake of law or any loss
suffered by the Company or the Master Portfolio in connection with the
performance of the administration agreements, except a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties
or from the reckless disregard by it of its obligations and duties thereunder.
Bank of America has received an option entitling it to
purchase approximately 4% of the Administrator's authorized common stock on or
before December 31, 1998.
DISTRIBUTOR AND PLAN PAYMENTS
- -----------------------------
Concord Financial Group, Inc. (the "Distributor"), a
wholly-owned subsidiary of the Administrator, acts as distributor of the shares
of the Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale
of the Company's shares although it is not obliged to sell any particular
amount of shares. The distribution agreement shall continue in effect until
October 31, 1996. Thereafter, if not terminated, the distribution agreement
shall continue automatically for successive terms of one year, provided that
such continuance is specifically approved at least annually (a) by a vote of a
majority of those members of the Board of Directors of the Company who are not
parties to the distribution agreement or "interested persons" of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Fund as to which the
distribution agreement is effective; PROVIDED, HOWEVER, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a
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<PAGE> 79
majority of the entire Board of Directors of the Company or by a vote of a
"majority of the outstanding voting securities" of the Fund on 60 days' written
notice to the Distributor, or by the Distributor at any time, without the
payment of any penalty, on 90 days' written notice to the Company. The
agreement will automatically and immediately terminate in the event of its
"assignment."
THE SHAREHOLDER SERVICE PLAN
- ----------------------------
The Distributor is entitled to payment by the Company for
certain shareholder servicing expenses, in addition to the sales loads
described above and in the Prospectus, under the Shareholder Service Plan (the
"Plan") adopted by the Company. Under the Plan, the Company pays the
Distributor, with respect to the Fund, for (a) non-distribution shareholder
services provided by the Distributor to Service Organizations and/or the
beneficial owners of Fund shares, including, but not limited to shareholder
servicing provided by the Distributor at facilities dedicated for Company use,
provided such shareholder servicing is not duplicative of the servicing
otherwise provided on behalf of the Fund, and (b) fees paid to Service
Organizations (which may include the Distributor itself) for the provision of
support service to the shareholders for whom the Service Organization is the
dealer of record or holder of record or with whom the Service Organization has
a servicing relationship ("Clients").
Support services provided by Service Organizations may
include, among other things: (i) establishing and maintaining accounts and
records relating to Clients that invest in Fund shares; (ii) processing
dividend and distribution payments from the Fund on behalf of Clients; (iii)
providing information periodically to Clients regarding their positions in
shares; (iv) arranging for bank wires; (v) responding to Client inquiries
concerning their investments in Fund shares; (vi) providing the information to
the Fund necessary for accounting or subaccounting; (vii) if required by law,
forwarding shareholder communications from the Fund (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Clients; (viii) assisting in processing
exchange and redemption requests from Clients; (ix) assisting Clients in
changing dividend options, account designations and addresses; and (x)
providing such other similar services.
The Shareholder Service Plan provides that the Distributor is
entitled to receive payments for expenses on a monthly basis, at an annual rate
not exceeding 0.25% of the average daily net assets of the Fund during such
month for shareholder servicing expenses. The calculation of a Fund's average
daily net assets for these purposes does not include assets held in accounts
opened via a transfer of assets from
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<PAGE> 80
trust and agency accounts of Bank of America. Further, payments made out of or
charged against the assets of the Fund must be in payment for expenses incurred
on behalf of the Fund.
If in any month the Distributor expends or is due more monies
than can be immediately paid due to the percentage limitation described above,
the unpaid amount is carried forward from month to month while the Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under the Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid amounts or credits due under the Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
Payments for shareholder service expenses under the
Shareholder Service Plan are not subject to Rule 12b-l (the "Rule") under the
1940 Act. Pursuant to the Shareholder Service Plan, the Distributor provides
that a report of the amounts expended under the Plan, and the purposes for
which such expenditures were incurred, will be made to the Board of Directors
for its review at least quarterly. In addition, the Plan provides that the
selection and nomination of the directors of the Company who are not
"interested persons" of the Company have been committed to the discretion of
the directors who are neither "interested persons" (as defined in the 1940 Act
of the Company, nor have any direct or indirect financial interest in the
operation of the Shareholder Service Plan (or related servicing agreements)
(the "Non-Interested Plan Directors").
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan is subject to annual reapproval by a majority of the Non-Interested
Plan Directors and is terminable at any time with respect to the Fund by a vote
of a majority of such Directors or by vote of the holders of a majority of the
shares of the Fund. Any agreement entered into pursuant to the Plan with a
Service Organization is terminable with respect to the Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Directors, by vote
of the holders of a majority of the shares of the Fund, by the Distributor or
by the Service Organization. Each agreement will also terminate automatically
in the event of its assignment.
The Company understands that Bank of America and/or some
Service Organizations may charge their clients a direct fee for administrative
and shareholder services in connection with the holding of Fund shares. These
fees would be in addition to any amounts which might be received under the
Plans. Small,
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<PAGE> 81
inactive long-term accounts involving such additional charges may not be in the
best interest of shareholders.
YIELD AND TOTAL RETURN
- ----------------------
From time to time, the yield and the total return of the Fund
may be quoted in and compared to other mutual funds with similar investment
objectives in advertisements, shareholder reports or other communications to
shareholders. The Fund may also include calculations in such communications
that describe hypothetical investment results. (Such performance examples will
be based on an express set of assumptions and are not indicative of the
performance of the Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of the Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund), as well as the views of the Master Portfolio's investment adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in
advertisements charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stocks, bonds, Treasury bills and shares of the Fund. In addition,
advertisements or shareholder communications may include a discussion of
certain attributes or benefits to be derived by an investment in the Fund.
Such advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, the Fund may reprint articles (or
excerpts) written regarding the Fund and provide them to prospective
shareholders. Performance information with respect to the Fund is generally
available by calling (800) 346-2087.
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<PAGE> 82
YIELD CALCULATIONS. The yield of the Fund is calculated by
dividing the net investment income per share (as described below) earned by the
Fund during a 30-day (or one month) period by the maximum offering price per
share (including the maximum front-end sales charge) on the last day of the
period and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. The Fund's net investment income per share
earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)(6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities is recognized by accruing 1/360 of the stated dividend rate of the
security each day. Except as noted below, interest earned on debt obligations
is calculated by computing the yield to maturity of each obligation based on
the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held. For purposes of this calculation, it is
assumed that each month contains 30 days. The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations
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<PAGE> 83
purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations that are issued
without original issue discount and have a current market discount is
calculated by using the coupon rate of interest instead of the yield to
maturity. In the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that
exceed the then-remaining portion of the original issue discount (market
discount), the yield to maturity is the imputed rate based on the original
issue discount calculation. On the other hand, in the case of tax-exempt
obligations that are issued with original issue discount but which have the
discounts based on current market value that are less than the then-remaining
portion of the original issue discount (market premium), the yield to maturity
is based on the market value.
With respect to mortgage or other receivables-backed
obligations which are expected to be subject to monthly payments of principal
and interest ("pay downs"), (a) gain or loss attributable to actual monthly pay
downs are accounted for as an increase or decrease to interest income during
the period; and (b) the Master Portfolio may elect either (i) to amortize the
discount and premium on the remaining security, based on the cost of the
security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if any, if the weighted
average maturity date is not available, or (ii) not to amortize discount or
premium on the remaining security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared and paid as a dividend shortly thereafter. The Fund's maximum
offering price per share for purposes of the formula includes the maximum sales
load imposed by the Fund -- currently 4.50% of the per share offering price.
TOTAL RETURN CALCULATIONS. The Fund may compute its average
annual total return by determining the average annual compounded rates of
return during specified periods that equate the initial amount invested to the
ending redeemable value of such investment. This is done by dividing the
ending redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the
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<PAGE> 84
computation and subtracting one from the result. This calculation can be
expressed as follows:
ERV (Exp. 1/n)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
The Fund computes its aggregate total return by determining
the aggregate rate of return during specified periods that likewise equates the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value (variable "ERV" in each formula) is determined by assuming
complete redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations. In
addition, the Fund's average annual total return and aggregate total return
quotations reflect the deduction of the maximum sales load charged in
connection with the purchase of Fund shares.
The Fund may advertise total return data without reflecting
the sales load imposed on the purchase of shares of the Fund in accordance with
the rules of the SEC. Quotations which do not reflect the sales load will, of
course, be higher than quotations which do.
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<PAGE> 85
GENERAL INFORMATION
DESCRIPTION OF SHARES
- ---------------------
The Company is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. The Fund's Charter
authorizes the Board of Directors to issue up to two hundred billion full and
fractional common shares. Pursuant to the authority granted in the Charter,
the Board of Directors has authorized the issuance of twenty-two classes of
stock - Classes A through W Common Stock, $.001 par value per share,
representing interests in twenty-two separate investment portfolios. Class T
represents interests in the International Equity Fund. The Company's charter
also authorizes the Board of Directors to classify or reclassify any particular
class of the Company's shares into one or more series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectus, the Company's shares will be fully paid
and non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share
held, and fractional votes for fractional shares held, and will vote in the
aggregate and not by class or series except as otherwise required by the 1940
Act or other applicable law or when permitted by the Board of Directors.
Shares have cumulative voting rights to the extent they may be required by
applicable law.
Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each fund affected by the matter. The Fund is affected by a matter unless
it is clear that the interests of each of the Company's funds in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under Rule 18f-2 any change in a fundamental investment policy would be
effectively acted upon with respect to the Fund only if approved by a majority
of the outstanding shares of the Fund. However, the rule also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts and the election of directors may be effectively acted
upon by shareholders of the Company voting without regard to particular funds.
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<PAGE> 86
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of the Fund voting
separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2 discussed above) or by
the Company's Charter, the Company may take or authorize such action upon the
favorable vote of the holders of more than 50% of the outstanding common stock
of the Company voting without regard to class.
THE MASTER PORTFOLIO
- --------------------
The Master Portfolio is a separate series of Master Investment
Trust, Series I, which was organized on October 26, 1992 as a Delaware business
trust. The Master Trust's Declaration of Trust authorizes its Board of
Trustees to issue an unlimited number of interests of beneficial interest and
to establish and designate any unissued interests of one or more additional
series of interests. Investors in the Master Portfolio are entitled to
distributions arising from the net investment income and net realized gains, if
any, earned on investments held by the Master Portfolio. Investors are also
entitled to participate in the net distributable assets of the Master Portfolio
on liquidation. Beneficial interests have no preemptive, conversion or
exchange rights.
REPORTS
- -------
Shareholders will receive unaudited semi-annual reports
describing the Master Portfolio's and the Fund's investment operations and
annual financial statements of the Master Portfolio and the Fund, audited by
the independent accountants.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
- ----------------------------------------------
PNC Bank, National Association ("PNC") has been appointed
custodian for the Fund and the Master Portfolio. As custodian of the assets of
the Fund and the Master Portfolio, PNC (i) maintains a separate account or
accounts in the name of the Fund and Master Portfolio (as applicable), (ii)
holds and disburses portfolio securities; (iii) makes receipts and
disbursements of money, (iv) collects and receives income and other payments
and distributions on account of portfolio securities, (v) responds to
correspondence from security brokers and others relating to its respective
duties and (vi) makes periodic reports concerning its respective duties. PFPC,
Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, DE 19809
provides the Fund and Master Portfolio with certain accounting services
pursuant to separate fund accounting services agreements with the
Administrator. Under the fund accounting services agreements, PFPC has agreed
to provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect to the Company and the Master
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<PAGE> 87
Portfolio, respectively. The monthly fees charged by PFPC under the fund
accounting services agreements are borne by the Fund and the Master Portfolio,
respectively.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Fund.
COUNSEL
- -------
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of the Company, is a partner), 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, serves as counsel to the Company and will
pass upon the legality of the shares offered hereby.
INDEPENDENT ACCOUNTANTS
- -----------------------
Price Waterhouse LLP, independent accountants, with offices at
1177 Avenue of the Americas, New York, New York 10036, has been selected as
independent accountants of the Fund and for the Master Portfolio.
MISCELLANEOUS
- -------------
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority" of the outstanding interests of the Master
Portfolio, the outstanding shares of the Fund or a particular series means the
affirmative vote of the lesser of (a) more than 50% of the outstanding
interests of the Master Portfolio, the outstanding shares of the Fund or such
series, or (b) 67% of the interests of the Master Portfolio, the shares of the
Fund or such series present at a meeting at which more than 50% of the
outstanding interests of the Master Portfolio, the outstanding shares of the
Fund or series (as applicable) 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,
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,
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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 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%).
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<PAGE> 89
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%).
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
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<PAGE> 90
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%).
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%).
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<PAGE> 91
At November 30, 1995, the name, address and share ownership of
the entities which held more than 5% of the outstanding Shares of the National
Municipal Bond Fund were as follows: BA Investment Services, Inc., FBO
405084421, 555 California Street, 4th 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 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 other
investment portfolio of the Company.
The Prospectus relating to the Fund and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the Commission
by paying the charges prescribed under its rules and regulations.
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<PAGE> 92
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-
A-1
<PAGE> 93
term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
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<PAGE> 94
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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<PAGE> 95
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to
the capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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<PAGE> 96
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE> 97
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
A-6
<PAGE> 98
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
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<PAGE> 99
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A-8
<PAGE> 100
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business,
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term
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debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades.
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Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
----------
As stated in the Prospectus, the Master Portfolio may enter
into futures contracts and options for hedging purposes. Such transactions are
described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS.
--------------------------------
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Master Portfolio may use interest
rate futures as a defense, or hedge, against anticipated interest rate changes
and not for speculation. As described below, this would include the use of
futures contract sales to protect against expected increases in interest rates
and futures contract purchases to offset the impact of interest rate declines.
The Master Portfolio presently could accomplish a similar
result to that which it hopes to achieve through the use of futures contracts
by selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase, or conversely, selling
short-term bonds and investing in long-term bonds when interest rates are
expected to decline. However, because of the liquidity that is often available
in the futures market the protection is more likely to be achieved, perhaps at
a lower cost and without changing the rate of interest being earned by the
Master Portfolio, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by the Master Portfolio,
as seller, to deliver the specific type of financial instrument called for in
the contract at a specific future time for a specified price. A futures
contract purchase would create an obligation by the Master Portfolio, as
purchaser, to take delivery of the specific type of financial instrument at a
specific future time at a specific price. The specific securities delivered or
taken, respectively, at settlement date, would not be determined until at or
near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
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Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery of securities. Closing out a futures contract sale is effected by the
Master Portfolio's entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Master Portfolio is paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Master Portfolio
pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Master Portfolio's entering into a
futures contract sale. If the offsetting sale price exceeds the purchase
price, the Master Portfolio realizes a gain, and if the purchase price exceeds
the offsetting sale price, the Master Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. The Master Portfolio would deal
only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury bonds
and notes; Government National Mortgage Association (GNMA) modified
pass-through mortgage-backed securities; three-month United States Treasury
bills; and ninety-day commercial paper. The Master Portfolio may trade in any
futures contract for which there exists a public market, including, without
limitation, the foregoing instruments.
EXAMPLES OF FUTURES CONTRACT SALE. The Master Portfolio would
engage in an interest rate futures contract sale to maintain the income
advantage from continued holding of a long-term bond while endeavoring to avoid
part or all of the loss in market value that would otherwise accompany a
decline in long-term securities prices. Assume that the market value of a
certain security in the Master Portfolio tends to move in concert with the
futures market prices of long-term United States Treasury bonds ("Treasury
bonds"). The adviser wishes to fix the current market value of this portfolio
security until some point in the future. Assume the portfolio security has a
market value of 100, and the adviser believes that, because of an anticipated
rise in interest rates, the value will decline to 95. The Master Portfolio
might enter into futures contract sales of Treasury bonds for an equivalent of
98. If the market value of the portfolio security does indeed decline from 100
to 95, the
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equivalent futures market price for the Treasury bonds might also decline from
98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The adviser could be wrong in its forecast of interest rates
and the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Master Portfolio
in the above example might incur a loss of 2 points (which might be reduced by
an off-setting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
EXAMPLES OF FUTURES CONTRACT PURCHASE. The Master Portfolio
would engage in an interest rate futures contract purchase when it is not fully
invested in long-term bonds but wishes to defer for a time the purchase of
long-term bonds in light of the availability of advantageous interim
investments, e.g., shorter-term securities whose yields are greater than those
available on long-term bonds. The Master Portfolio's basic motivation would be
to maintain for a time the income advantage from investing in the short-term
securities; the Master Portfolio would be endeavoring at the same time to
eliminate the effect of all or part of an expected increase in market price of
the long-term bonds that the Master Portfolio may purchase.
For example, assume that the market price of a long-term bond
that the Master Portfolio may purchase, currently yielding 10%, tends to move
in concert with futures market prices of Treasury bonds. The adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the adviser believes
that, because of an anticipated fall in interest rates, the price will have
risen to 105 (and the yield will have dropped to about 9 1/2%) in four months.
The Master Portfolio might enter into futures contracts purchases of Treasury
bonds for an equivalent price of 98. At the same time, the Master Portfolio
would assign a pool of investments in short-term securities that are either
maturing in four months or earmarked for sale in four months, for purchase of
the long-term bond at an assumed market price of 100. Assume these short-term
securities
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are yielding 15%. If the market price of the long-term bond does indeed rise
from 100 to 105, the equivalent futures market price for Treasury bonds might
also rise from 98 to 103. In that case, the 5-point increase in the price that
the Master Portfolio pays for the long-term bond would be offset by the 5-point
gain realized by closing out the futures contract purchase.
The adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Master Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Master Portfolio would discontinue its
purchase program for long-term bonds. The yield on short-term securities in
the portfolio, including those originally in the pool assigned to the
particular long-term bond, would remain higher than yields on long-term bonds.
The benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase. In each transaction,
expenses would also be incurred.
II. STOCK INDEX FUTURES CONTRACTS.
------------------------------
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value (which assigns relative values to the common stocks included in the
index) at the close of the last trading day of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New
York Stock Exchange Composite Index. In contrast, certain exchanges offer
futures contracts on narrower market indices, such as the Standard & Poor's 100
or indices based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through
a clearing corporation, which guarantees the performance of the parties to each
contract.
The Master Portfolio will sell stock index futures contracts
in order to offset a decrease in market value of its
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portfolio securities that might otherwise result from a market decline. The
Master Portfolio may do so either to hedge the value of its portfolios as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, the Master Portfolio
will purchase stock index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Master
Portfolio will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
In addition, the Master Portfolio may utilize stock index
futures contracts in anticipation of changes in the composition of its
respective portfolio holdings. For example, in the event that the Master
Portfolio expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish
a long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. The Master Portfolio
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of its respective portfolio securities will decline
prior to the time of sale.
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
</TABLE>
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that
is, market value decreased and the Master Portfolio had entered into an
anticipatory purchase hedge, or market value increased and the Master Portfolio
had hedged its stock portfolio, the results of the Master Portfolio's
transactions in stock index futures would be as set forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
</TABLE>
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio Value = $40,000 Loss of Futures = $40,000
</TABLE>
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES.
----------------------------------------
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Master Portfolio to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.
IV. MARGIN PAYMENTS.
----------------
Unlike when a Portfolio purchases or sells a security, no
price is paid or received by the Master Portfolio upon the purchase or sale of
a futures contract. Initially, the Master Portfolio will be required to
deposit with the broker or in a
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segregated account with the Master Portfolio's custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Master Portfolio upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying
instruments fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as mark-to-market. For
example, when the Master Portfolio has purchased a futures contract and the
price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Master
Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Master
Portfolio has purchased a futures contract and the price of the future contract
has declined in response to a decrease in the underlying instruments, the
position would be less valuable and the Master Portfolio would be required to
make a variation margin payment to the broker. At any time prior to expiration
of the futures contract, the adviser may elect to close the position by taking
an opposite position, subject to the availability of a secondary market, which
will operate to terminate the Master Portfolio's position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Master Portfolio, and the
Master Portfolio realizes a loss or gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
-------------------------------------------
There are several risks in connection with the use of futures
in the Master Portfolio as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the future and
movements in the price of the securities which are the subject of the hedge.
The price of the future may move more than or less than the price of the
securities being hedged. If the price of the future moves less than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in
an unfavorable direction, the Master Portfolio would be in a better position
than if it had not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, this advantage will be partially offset by
the loss on the future. If the price of the future moves more than the price
of the hedged securities,
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the Master Portfolio involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, the Master Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of such
securities has been greater than the volatility over such time period of the
future, or if otherwise deemed to be appropriate by the investment adviser.
Conversely, a Master Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the adviser.
It is also possible that, where the Master Portfolio has sold futures to hedge
its portfolio against a decline in the market, the market may advance and the
value of securities held in the Master Portfolio may decline. If this
occurred, the Master Portfolio would lose money on the future and also
experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities before the Master Portfolio is able to
invest its cash (or cash equivalents) in securities (or options) in an orderly
fashion, it is possible that the market may decline instead; if the Master
Portfolio then concludes not to invest in securities or options at that time
because of concern as to possible further market decline or for other reasons,
the Master Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by
the Master Portfolio, an amount of cash and cash equivalents, equal to the
market value of the futures contracts, will be deposited in a segregated
account with the Master Portfolio's custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
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participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the price
of futures, a correct forecast of general market trends or interest rate
movements by the adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although
the Master Portfolio intends to purchase or sell futures only on exchanges or
boards of trade where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board of trade will
exist for any particular contract or at any particular time. In such event, it
may not be possible to close a futures investment position, and in the event of
adverse price movements, the Master Portfolio would continue to be required to
make daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by the Master Portfolio is also
subject to the adviser's ability to predict correctly movements in the
direction of the market. For example, if the Master Portfolio has hedged
against the possibility of a decline in the market adversely affecting
securities held by it and securities prices increase instead, the Master
Portfolio will lose part of all of the benefit to the increased value of its
securities which it has hedged because it will have offsetting
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losses in its futures positions. In addition, in such situations, if the
Master Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. The
Master Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
VI. OPTIONS ON FUTURES CONTRACTS.
-----------------------------
The Master Portfolio may purchase options on the futures
contracts described above. A futures option gives the holder, in return for
the premium paid, the right to buy (call) from or sell (put) to the writer of
the option a futures contract at a specified price at any time during the
period of the option. Upon exercise, the writer of the option is obligated to
pay the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing, an option of the
same series, at which time the person entering into the closing transaction
will realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts
may frequently involve less potential risk to the Master Portfolio because the
maximum amount at risk is the premium paid for the options (plus transaction
costs).
VII. OTHER HEDGING TRANSACTIONS
--------------------------
The Master Portfolio presently intends to use interest rate
futures contracts, stock index futures contracts and foreign currency futures
contracts (and related options) in connection with its hedging activities. The
Master Portfolio is authorized to enter into hedging transactions in any other
futures or options contracts which are currently traded or which may
subsequently become available for trading. Such instruments may be employed in
connection with the Master Portfolios' hedging
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strategies if, in the judgment of the adviser, transactions therein are
necessary or advisable.
VIII. ACCOUNTING AND TAX TREATMENT.
-----------------------------
Accounting for futures contracts and related options will be
in accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts
held by the Master Portfolio at the close of the Master Portfolio's taxable
year will be treated for federal income tax purposes as sold for their fair
market value on the last business day of such year, a process known as
"mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60%
of such gain or loss will be treated as long-term capital gain or loss, without
regard to the length of time the Master Portfolio holds the futures contract or
option ("the 40%-60% rule"). The amount of any capital gain or loss actually
realized by the Master Portfolio in a subsequent sale or other disposition of
those futures contracts or options will be adjusted to reflect any capital gain
or loss taken into account by the Master Portfolio in a prior year as a result
of the constructive sale of the contracts or options. With respect to futures
contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by the Master Portfolio, losses as to such contracts to sell will be
subject to certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which also
will be applicable, the holding period of the securities forming part of the
straddle will (if they have not been held for the long-term holding period) be
deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts and related options, deductions for interest and
carrying charges will not be allowed. Notwithstanding the rules described
above, with respect to futures contracts to sell which are properly identified
as such, the Master Portfolio may make an election which will exempt (in whole
or in part) those identified futures contracts from being treated for federal
income tax purposes as sold on the last business day of the Master Portfolio's
taxable year, but gains and losses will be subject to such short sales, wash
sales and loss deferral rules and the requirement to capitalize interest and
carrying charges. Under Temporary Regulations, the Master Portfolio would be
allowed (in lieu of the foregoing) to elect either (1) to offset gains or
losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed
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straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60%
rule will apply to the net gain or loss attributable to the futures contracts,
but in the case of a mixed straddle account election, not more than 50% of any
net gain may be treated as long-term and no more than 40% of any net loss may
be treated as short-term.
Certain foreign currency contracts entered into by the Master
Portfolio may be subject to the "mark-to-market" process, but gain or loss will
be treated as 100% ordinary income or loss. To receive such federal income tax
treatment, a foreign currency contract must meet the following conditions: (1)
the contract must require delivery of a foreign currency of a type in which
regulated futures contracts are traded or upon which the settlement value of
the contract depends; (2) the contract must be entered into at arm's length at
a price determined by reference to the price in the interbank market; and (3)
the contract must be traded in the interbank market. The Treasury Department
has broad authority to issue regulations under the provisions respecting
foreign currency contracts. As of the date of this Statement of Additional
Information, the Treasury has not issued any such regulations. Foreign
currency contracts entered into by the Master Portfolio may result in the
creation of one or more straddles for federal income tax purposes, in which
case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern
the federal income tax treatment of certain transactions denominated in terms
of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (i) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(ii) the accruing of certain trade receivables and payables; and (iii) the
entering into or acquisition of any forward contract, futures contract, option
or similar financial instrument. However, regulated futures contracts and
non-equity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the mark-to-market rules, unless an election is made to have such
currency rules apply. The disposition of a currency other than the U.S. dollar
by a U.S. taxpayer is also treated as a transaction subject to the special
currency rules. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
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loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. In accordance with Treasury regulations, certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the Code and the Treasury regulations)
will be integrated and treated as a single transaction or otherwise treated
consistently for purposes of the Code. "Section 988 hedging transactions" are
not subject to the mark-to-market or loss deferral rules under the Code. It
is anticipated that some of the non-U.S. dollar denominated investments and
foreign currency contracts that the Master Portfolio may make or may enter into
will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by
the Master Portfolio which are not subject to special currency rules (such as
foreign equity investments other than certain preferred stocks) will be treated
as capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
Qualification as a regulated investment company under the Code
requires that the Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of the
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to the Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by the Master Portfolio from a partnership
or trust is treated for this purpose as derived with respect to the Master
Portfolio's business of investing in stock, securities or currencies only to
the extent that such income is attributable to items of income which would have
been qualifying income if realized by the Master Portfolio in the same manner
as by the partnership or trust.
An additional requirement for qualification by the Fund as a
regulated investment company under the Code is the Short-Short test described
in the Prospectus. With respect to futures contracts and other financial
instruments subject to the mark-to-market rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a futures
contract or financial instrument will be treated as being derived from a
security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the mark-to-
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market rules, and will be treated as being derived from a security held for
less than three months only if the contract or instrument is terminated (or
transferred) during the taxable year (other than by reason of mark-to-market)
and less than three months have elapsed between the date the contract or
instrument is acquired and the termination date. In determining whether the
Fund meets the Short-Short test for a taxable year, increases and decreases in
the value of the Master Portfolio's futures contracts and other investments that
qualify as part of a "designated hedge," as defined in the Code, may be netted.
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