<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1996
Registration Nos. 2-81110/811-4293
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / x /
Post-Effective Amendment No. 47 / x /
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / x /
Amendment No. 49 / x /
________________________________
PACIFIC HORIZON FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road
Columbus, OH 43219
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (800) 332-3863
W. Bruce McConnel, III
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<PAGE> 2
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. The Registrant has filed its Rule 24f-2 Notice relating
to such shares for Registrant's most recent fiscal year on April 29, 1996.
This Registration Statement has also been executed by Master
Investment Trust, Series I.
================================================================================
<PAGE> 3
THIS POST-EFFECTIVE AMENDMENT IS BEING FILED SOLELY WITH RESPECT TO
THE AGGRESSIVE GROWTH, ASSET ALLOCATION, BLUE CHIP, CAPITAL INCOME, CALIFORNIA
TAX-EXEMPT BOND, CORPORATE BOND, INTERMEDIATE BOND (FORMERLY, FLEXIBLE BOND),
INTERNATIONAL EQUITY, NATIONAL MUNICIPAL BOND, U.S. GOVERNMENT SECURITIES,
PRIME, TREASURY AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS. ACCORDINGLY, THE
PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION FOR THE OTHER PACIFIC
HORIZON FUNDS ARE NOT INCLUDED IN THIS FILING.
<PAGE> 4
PACIFIC HORIZON FUNDS, INC.
Corporate Bond Fund
Intermediate Bond (formerly, Flexible Bond) Fund
U.S. Government Securities Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . Financial Highlights;
Measuring Performance
4. General Description of Registrant . . Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund . . . . . . . . The Business of the Funds
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase . . . . . . . How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 5
PROSPECTUS
, 1996
Pacific Horizon Corporate Bond Fund
Pacific Horizon Intermediate Bond Fund
Pacific Horizon U.S. Government Securities Fund
Investment Portfolios Offered by Pacific Horizon Funds, Inc.
The PACIFIC HORIZON CORPORATE BOND FUND (the "Corporate Bond Fund") is a
diversified mutual fund whose investment objective is to provide
investors with high current income consistent with reasonable investment
risk. The Corporate Bond Fund seeks its objective through investment
primarily in a diversified portfolio of investment grade corporate debt
securities although it may invest a portion of its assets in other types
of securities and money market instruments. The Corporate Bond Fund may
be suited for investors looking for high current income who are willing
to accept some price and yield fluctuations.
The PACIFIC HORIZON INTERMEDIATE BOND FUND (the "Intermediate Bond
Fund") is a diversified mutual fund whose investment objective is to
obtain interest income and capital appreciation. The Intermediate Bond
Fund seeks its objective by investing in investment grade intermediate
and longer term bonds, including corporate and governmental fixed income
obligations and mortgage-backed securities.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN
PORTFOLIO SECURITIES, THE CORPORATE AND INTERMEDIATE BOND FUNDS SEEK TO
ACHIEVE THEIR RESPECTIVE INVESTMENT OBJECTIVES BY INVESTING ALL THEIR
INVESTABLE ASSETS IN FUNDS OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "CORPORATE BOND MASTER PORTFOLIO" WITH RESPECT TO THE CORPORATE
BOND FUND, AND THE "INTERMEDIATE BOND MASTER PORTFOLIO" WITH RESPECT TO
THE INTERMEDIATE BOND FUND, TOGETHER THE "MASTER PORTFOLIOS" AND,
COLLECTIVELY WITH THE U.S. GOVERNMENT SECURITIES FUND, THE "PORTFOLIOS")
HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE RESPECTIVE CORPORATE
AND INTERMEDIATE BOND FUNDS. THE CORPORATE AND INTERMEDIATE BOND FUNDS
WILL PURCHASE SHARES OF THE RESPECTIVE MASTER PORTFOLIOS AT NET ASSET
VALUE. THE NET ASSET VALUES OF THE CORPORATE AND INTERMEDIATE BOND
FUNDS WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE
RESPECTIVE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS - MASTER-FEEDER STRUCTURE" ON PAGE __ FOR ADDITIONAL
INFORMATION REGARDING THIS STRUCTURE.
<PAGE> 6
The PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND (the "U.S.
Government Securities Fund" and, collectively with the Corporate Bond
and Intermediate Bond Funds, the "Funds") is a mutual fund whose
investment objective is to provide investors with a high level of
current income, consistent with preservation of capital. In seeking its
investment objective, the U.S. Government Securities Fund invests
principally in instruments issued by the Government National Mortgage
Association, although it may invest a portion of its assets in other
types of U.S. Government securities. The U.S. Government Securities
Fund may be suited for investors who want to participate in a
diversified portfolio of U.S. Government securities and who are willing
to accept some price and yield variations.
This Prospectus describes three classes of shares from which investors
may choose. A shares are sold with a front-end sales charge. B shares
are sold with a contingent deferred sales charge. K shares are not
subject to either a front-end or a contingent deferred sales charge.
The Funds are offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America
National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Portfolios' investment adviser.
Based in San Francisco, California, Bank of America and its affiliates
have over $__ billion under management, including over $__ billion in
mutual funds.
This Prospectus describes concisely the information about the Funds and
the Company that you should know before investing. Please read it
carefully and retain it for future reference.
More information about the Funds is contained in a Statement of
Additional Information that has been filed with the Securities and
Exchange Commission. To obtain a free copy, call 800-332- 3863. The
Statement of Additional Information, as it may be revised from time to
time, is dated ______________, 1996 and is incorporated by reference
into this Prospectus.
Shares of the Funds are not bank deposits or obligations of, or
guaranteed or endorsed by, Bank of America or any of its affiliates and
are not federally insured by, guaranteed by, obligations of or otherwise
supported by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental agency.
Investment in the Funds involve investment risk, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-2-
<PAGE> 7
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 Funds' shares, other
than as contained in this Prospectus and the Funds' official sales
literature. Therefore, other information and representations must not
be relied upon as having been authorized by the Funds. 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.
-3-
<PAGE> 8
CONTENTS
EXPENSE SUMMARY
FINANCIAL HIGHLIGHTS
FUND INVESTMENTS
Investment Objectives
Types Of Investments
Fundamental Limitations
Other Investment Practices And Considerations
SHAREHOLDER GUIDE
How To Buy Shares
What Is My Minimum Investment In The Funds?
What Alternative Sales Arrangements Are Available?
How Are Shares Priced?
How Do I Decide Whether To Buy A, B or K Shares?
How Can I Buy Shares?
What Price Will I Receive When I Buy Shares?
What Else Should I Know To Make A Purchase?
How To Sell Shares
How Do I Redeem My Shares?
What NAV Will I Receive For Shares I Want To Sell?
What Kind of Paperwork Is Involved In Selling
Shares?
How Quickly Can I Receive My Redemption Proceeds?
Do I Have Any Reinstatement Privileges After I
Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES
Can I Use The Funds In My Retirement Plan?
Can I Exchange My Investment From One Fund To Another?
What is TeleTrade?
Can I Arrange To Have Automatic Investments Made On A
Regular Basis?
What Is Dollar Cost Averaging And How Can I Implement
It?
Can I Arrange Periodic Withdrawals?
Can My Dividends From A Fund Be Invested In Other
Funds?
Is There A Salary Deduction Plan Available?
THE BUSINESS OF THE FUND
Fund Management
Service Providers
TAX INFORMATION
MEASURING PERFORMANCE
DESCRIPTION OF SHARES
PLAN PAYMENTS
-4-
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Bank of America National Trust
Inc. and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
</TABLE>
-5-
<PAGE> 10
EXPENSE SUMMARY
Shareholder Transaction Expenses are charges you pay when buying or
selling shares of the Funds. The Funds offer three classes of shares.
A shares are offered at net asset value plus a front-end sales charge
(see page ___ of the Prospectus for an explanation of net asset value
per share) and are subject to a shareholder servicing fee. B shares are
offered at net asset value without a front-end sales charge but are
subject to a contingent deferred sales charge plus distribution and
shareholder servicing fees. K shares are offered at net asset value
with neither a front-end sales charge nor a contingent deferred sales
charge, but are subject to distribution, administrative servicing and
shareholder servicing fees. B shares of a Fund held for 8 years will
convert to A shares of a Fund.
Annual Fund Operating Expenses include payments by the Funds and
payments by the Master Portfolios which are allocable to the Corporate
Fund and Intermediate Bond Fund. Operating expenses include fees for
portfolio management, maintenance of shareholder accounts, general
administration, distribution (in the case of B and K shares only),
shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by
the Funds for A, B and K Shares and their operating expenses (including
the operating expenses of the Master Portfolio which are allocable to
the Corporate Fund and Intermediate Bond Fund) expected to be incurred
during the current fiscal year. This information has been restated to
assume that current fees had been in effect during the previous fiscal
period. Actual expenses may vary. A hypothetical example based on the
summary is also shown. Expenses of the Corporate Bond Fund are based
upon expected costs for the Corporate Bond Fund and the Corporate Bond
Master Portfolio which will differ from the historical costs of the
Corporate Bond Fund's Predecessor Fund as a result of the change in
organization of the Corporate Bond Fund from a closed-end fund to an
open-end fund.
-6-
<PAGE> 11
Corporate Bond Fund
- -------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES A Shares B Shares K Shares
------------ --------- --------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase or
redemption proceeds, whichever is lower) None(1) 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+ % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses (After Expense Reimbursements) % % %
Total Operating Expenses
(After Fee Waivers and Expense Reimbursements) % % %
---- ---- ----
</TABLE>
_________________
1. There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption"). Unless
you are a participant in Bank of America's 401(k) Daily Advantage(R)
Retirement Plan Program, A shares purchased under the Large Purchase
Exemption are subject to a contingent deferred sales charge of 1.00% and
0.50%, respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to Concord
Financial Group, Inc. (the "Distributor"). A shares cannot be purchased
under the Large Purchase Exemption if there is another no-load exemption
available. Accordingly, A shares purchased under another no-load
exemption are not subject to a contingent deferred sales charge.
Although no front-end sales load will be paid on shares purchased under
the Large Purchase Exemption, the Distributor will compensate brokers
whose customers purchase such shares at the following rates: 1.00% of
the amount under $3 million, 0.50% of the next $47 million and 0.25%
thereafter.
2. Bank of America will compensate Seafirst Investment Services, Inc.
("SISI") and BA Investment Services, Inc. ("BAIS") (BAIS and SISI are
collectively referred to herein as "Affiliated Brokers") for its
customers who have invested in the Fund and are participants in the
401(k) Daily Advantage(R) Retirement Plan Program. The affiliated
brokers will be compensated by Bank of America at the rate of 1.00% of
the first $1 million of combined Pacific Horizon Funds' and Time Horizon
Funds' K shares in each 401(k) Daily Advantage(R) Retirement Plan
Program.
+ Absent fee waivers and/or expense reimbursement, management fees would
be ___% of the average net assets, actual "Other Expenses" for the Asset
Allocation Fund's A, B and K shares would be ___%, ___% and ___%,
respectively, of average net assets (annualized) and "Total Operating
Expenses" for
-7-
<PAGE> 12
the Asset Allocation Fund's A, B and K shares would be ___%, ___% and ___%
of average (annualized), respectively.
* The total of all 12b-1 fees, administrative service fees and shareholder
service fees may not exceed, in the aggregate, the annual rate of 1.00% of
the average net assets of the Fund's K shares. Because of the Rule 12b-1,
administrative and/or shareholder service fees paid by the Corporate Bond
Fund as shown in the above tables, long-term B and K shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. For a
further description of shareholder transaction expenses and the Corporate
Bond Fund's operating expenses, see the sections entitled "Shareholder
Guide," "The Business of the Funds" and "Plan Payments" below.
EXAMPLE: Assume the annual return is 5% and its operating expenses are the
same as those stated above. For every $1,000 you invest, here's how much
you would have paid in total expenses if you closed your account after the
number of years indicated:
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $ $ (3)
Assuming no redemption $ $ $ $ $ (3)
K shares $ $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable
front-end sales charge.
2. Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
-8-
<PAGE> 13
Intermediate Bond Fund
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES A Shares B Shares K Shares
------------ --------- --------
<S> <C> <C> <C>
4.50% None None(2)
Maximum Sales Load Imposed on Purchases None None None
(as a percentage of offering price)
Sales Load Imposed on Reinvested Dividends
Maximum Contingent Deferred Sales Load None(1) 5.00% None
(as a percentage of original purchase or None None None
redemption proceeds, whichever is lower) None None None
Redemption Fees
Exchange Fee
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+ % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses (After Expense Reimbursements+) % % %
Total Operating Expenses
(After Fee Waivers and Expense Reimbursements+) % % %
---- ---- ----
</TABLE>
_____________________
1. There is no front-end sales load on combined purchases of A
shares of the Company of $1,000,000 or more ("Large Purchase
Exemption"). Unless you are a participant in Bank of America's
401(k) Daily Advantage(R) Retirement Plan Program, A shares
purchased under the Large Purchase Exemption are subject to a
contingent deferred sales charge of 1.00% and 0.50%,
respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A shares
cannot be purchased under the Large Purchase Exemption if there
is another no-load exemption available. Accordingly, A shares
purchased under another no-load exemption are not subject to a
contingent deferred sales charge. Although no front-end sales
load will be paid on shares purchased under the Large Purchase
Exemption, the Distributor will compensate brokers whose
customers purchase such shares at the following rates: 1.00% of
the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter.
2. Bank of America will compensate Affiliated Brokers for its
customers who have invested in the Fund and are participants in
the 401(k) Daily Advantage(R) Retirement Plan Program. The
affiliated brokers will be compensated by Bank of America at the
rate of 1.00% of the First $1 million of combined Pacific
Horizon Funds' and Time Horizon Funds' K shares in each 401(k)
Daily Advantage(R) Retirement Plan Program.
+ Management intends to waive fees and reimburse certain "Other
Expenses" on behalf of the Intermediate Bond Fund so that "Total
Operating Expenses" for the Asset Allocation Fund (other than
interest, taxes, brokerage commissions and other portfolio
transaction expenses, capital expenditures and extraordinary
expenses) will not exceed ___%, ___% and ___% of the average net
assets of the Intermediate Bond Fund's A, B and K shares,
respectively. Absent fee waivers and/or, management fees would
be ___% of the average net assets, actual "Other Expenses" for
the Asset Allocation Fund's A, B and K shares would be ___%,
___% and ___%, respectively, of average net assets (annualized)
-9-
<PAGE> 14
and actual "Total Operating Expenses" for the Intermediate Bond Fund's A,
B and K shares would be ___%, ___% and ___% of average net assets
(annualized), respectively.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the
annual rate of 1.00% of the average net assets of the Fund's K
shares. Because of the Rule 12b-1, administrative and/or
shareholder service fees paid by the Intermediate Bond Fund as
shown in the above tables, long-term B and K shareholders may
pay more than the economic equivalent of the maximum front-end
sales charge permitted by the National Association of Securities
Dealers, Inc. For a further description of shareholder
transaction expenses and the Intermediate Bond Fund's operating
expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
EXAMPLE: Assume the annual return is 5% and its operating
expenses are the same as those stated above. For every $1,000 you
invest, here's how much you would have paid in total expenses if
you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $ (3)
Assuming no redemption $ $ $ $ (3)
K shares $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable
front-end sales charge.
2. Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
-10-
<PAGE> 15
U.S. Government Securities Fund
- -------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES A Shares B Shares K Shares
------------- --------- --------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase or
redemption proceeds, whichever is lower)(1) None 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses % % %
Total Operating Expenses % % %
---- ---- ----
</TABLE>
_________________
1. There is no front-end sales load on combined purchases of A
shares of the Company of $1,000,000 or more ("Large Purchase
Exemption"). Unless you are a participant in Bank of America's
401(k) Daily Advantage(R) Retirement Plan Program, A shares
purchased under the Large Purchase Exemption are subject to a
contingent deferred sales charge of 1.00% and 0.50%,
respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A shares
cannot be purchased under the Large Purchase Exemption if there
is another no-load exemption available. Accordingly, A shares
purchased under another no-load exemption are not subject to a
contingent deferred sales charge. Although no front-end sales
load will be paid on shares purchased under the Large Purchase
Exemption, the Distributor will compensate brokers whose
customers purchase such shares at the following rates: 1.00% of
the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter.
2. Bank of America will compensate Affiliated Brokers for its
customers who have invested in the Fund and are participants in
the 401(k) Daily Advantage(R) Retirement Plan Program. The
Affiliated Brokers will be compensated by Bank of America at the
rate of 1.00% of the first $1 million of combined Pacific
Horizon Funds' and Time Horizon Funds' K shares in each 401(k)
Daily Advantage(R) Retirement Plan Program.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the
annual rate of 1.00% of the average net assets of the Fund's K
shares. Because of the Rule 12b-1, administrative and/or
shareholder service fees paid by the U.S. Government Securities
Fund as shown in the above table, long-term B and K shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. For a
further description of shareholder transaction expenses and the U.S.
Government Securities Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments"
below.
-11-
<PAGE> 16
EXAMPLE: Assume the annual return is 5% and its operating expenses are the
same as those stated above. For every $1,000 you invest, here's how much
you would have paid in total expenses if you closed your account
after the number of years indicated:
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $ (3)
Assuming no redemption $ $ $ (3)
K shares $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable
front-end sales charge.
2. Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
Note: The preceding operating expenses and example should not be
considered a representation of future investment returns and operating
expenses. Actual investment returns and operating expenses may be more
or less than those shown.
___________________________________________
This expense information is provided to help you understand the expenses
you would bear either directly (as with transaction expenses) or
indirectly (as with annual operating expenses) as a shareholder of the
Funds.
Management fees consist of:
# an investment advisory fee payable at the annual rate of
0.45%, 0.45% and 0.35% of the Corporate Bond Master
Portfolio's, Intermediate Bond Master Portfolio's and
U.S. Government Securities Fund's respective average
daily net assets; and
# an administration fee payable at the annual rate of
0.15%, 0.15% and 0.20% of the Corporate, Intermediate and
U.S. Government Securities Funds' respective average
daily net assets and 0.05% of each Master Portfolio's
average daily net assets.
Currently, the most restrictive expense limitation limits each Fund's
aggregate annual expenses (including management fees and the Corporate
Bond and Intermediate Bond
-12-
<PAGE> 17
Fund's pro rata share of such expenses of the particular Master
Portfolio) to 2.5% of the first $30 million of each Fund's average daily
net assets, 2% of the next $70 million and 1.5% of each Fund's remaining
average daily net assets.
The Board of Directors of the Company believes that the aggregate per
share expenses of the Corporate and Intermediate Bond Funds and the
respective Master Portfolios in which each Fund's assets are invested
will be less than or approximately equal to the expenses which the
particular Fund would incur if the Company retained the services of an
investment adviser for that Fund and the assets of that Fund were
invested directly in the type of securities held by its Master
Portfolio. Further, the Directors believe that the shareholders of the
Corporate and Intermediate Bond Funds may participate in the ownership
of a larger portion of securities than could be achieved directly by the
Corporate and Intermediate Bond Funds. There can be no assurance,
however, that such will be the case or that any economies of scale that
might occur if other investors acquire shares of the Corporate Bond
Master Portfolio will be realized, inasmuch as the Company is not aware
of any other potential investor in the Corporate Bond Master Portfolio.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the
purchase, the length of time you expect to hold the shares and other
circumstances. You should determine whether under your particular
circumstances it is more advantageous to incur a front-end sales charge,
with respect to A shares, or to have the entire initial purchase price
invested in the Funds with the investment thereafter being subject to an
annual distribution and services plan charge and a contingent deferred
sales charge upon redemption within the first six years of investment,
with respect to B shares. K shares are not subject to either a front-
end sales charge or a contingent deferred sales charge, but do incur
fees under a Distribution Plan and an Administrative and Shareholder
Services Plan. K shares, however, are available for investment by: (a)
businesses or other organizations that participate in the 401(k) Daily
Advantage Retirement Plan Program sponsored by Bank of America and (b)
individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end
sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of
America, respectively, or their affiliates. See the Section entitled
"How to Buy Shares" below.
-13-
<PAGE> 18
FINANCIAL HIGHLIGHTS
The Corporate Bond Fund commenced operations in 1973 as a diversified,
closed-end management investment company (that is, as an investment
company with non-redeemable shares) known as Bunker Hill Income
Securities, Inc. (the "Corporate Predecessor Fund"). Following its
initial public sale of common shares in 1973, the Corporate Predecessor
Fund did not regularly issue additional common shares except in
connection with dividend reinvestments. On April 25, 1994, the
Corporate Predecessor Fund was reorganized as a new open-end portfolio
of the Company and, in connection with the reorganization, all of the
assets and liabilities of the Corporate Predecessor Fund were
transferred to the Portfolio. The Corporate Predecessor Fund received
investment advisory services from Bank of America.
The U.S. Government Securities Fund commenced operations on January 7,
1988 as The Horizon Capital GNMA Extra Fund (the "Government Predecessor
Fund"), a separate portfolio of a Massachusetts business trust called
The Horizon Capital Funds. On January 1, 1989 the Government
Predecessor Fund changed its name to The Pacific Horizon GNMA Extra Fund
and on January 9, 1990 was reorganized as a portfolio of the Company.
On June 28, 1991 the U.S. Government Securities Fund changed its name to
the Pacific Horizon U.S. Government Securities Fund.
The tables below show certain financial highlights of the investment
results of the Corporate Predecessor Fund for the periods ended on or
prior to September 30, 1993; the combined investment results of the
Corporate Bond Fund and the Corporate Predecessor Fund for the period
October 1, 1993 through September 30, 1994, and the Corporate Bond
Fund's investment results for the period October 1, 1994 through
February 28, 1995 and the year ended February 29, 1996; certain
financial highlights for the Intermediate Bond Fund for the years and
period indicated; and certain financial highlights of the investment
results of the Government Predecessor Fund for the periods ended on or
prior to August 31, 1989, the combined results of the U.S. Government
Securities Fund and the Government Predecessor Fund for the period
September 1, 1989 through February 28, 1990 and the U.S. Government
Securities Fund's investment results for the six fiscal years in the six
year period ended February 29, 1996. During the periods shown, the
Funds (and the Corporate Predecessor Fund and Government Predecessor
Fund) did not offer B or K shares. Actual investment results of the B
and K shares may be different. The information for the years and
periods indicated was audited by _________________, the independent
accountants for the Funds and the Predecessor Funds, whose unqualified
report on the financial statements containing such information for the
five fiscal years or periods in the five year period ended February 29,
1996 is incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with the
financial statements and notes thereto and the unqualified report of
independent accountants thereon which are incorporated by
reference in the Statement of Additional Information. Further
information about the performance of the Funds is available in the
annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained free
of charge by calling 800-332-3863.
-14-
<PAGE> 19
PACIFIC HORIZON CORPORATE BOND FUND
FINANCIAL HIGHLIGHTS
Selected Data for an A Share of Common Stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
For the
period
Year 10/1/94
Ended through Year Ended September 30
2/29/96 2/28/95 1994* 1993++ 1992++ 1991++ 1990++ 1989++ 1988++
------- ------- ----- ---- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ . $ 14.86 $ 16.94 $ 16.12 $15.22 $14.79 $17.02 $17.56 $ 17.56
----- ------- ------- ------- ------ ------ ------ ------ -------
Income From Investment
Operations:
Net investment income 0.45 1.58 1.34 1.48 1.68 1.85 1.98 1.88
Net realized and unrealized
gain (loss) on investments . 0.17 (2.06) 0.82 0.95 0.52 (2.15) (0.65) 0.13
----- ------- ------- ------- ------ ------ ------ ------ -------
Total income (loss)
from investment operations 0.62 (0.48) 2.16 2.43 2.20 (0.30) 1.33 2.01
Less Dividends and Distributions:
Dividends from net investment
income (0.45) (1.58) (1.34) (1.53) (1.77) (1.93) (1.87) (2.01)
Dividends in excess of net
investment income -- (0.02) -- -- -- -- -- --
----- ------- ------- ------- ------ ------ ------ ------ -------
Total Dividends and Distributions: . (0.45) (1.60) (1.34) (1.53) (1.77) (1.93) (1.87) (2.01)
----- ------- ------- ------- ------ ------ ------ ------ -------
Net change in net asset value 0.17 (2.08) 0.82 0.90 0.43 (2.23) (0.54) 0.00
Net asset value, end of period $ . $ 15.03 $ 14.86 $ 16.94 $16.12 $15.22 $14.79 $17.02 $ 17.56
===== ======= ======= ======= ====== ====== ====== ====== =======
Total Return+ % 4.26% (2.29)% 7.05% 13.36% 36.64% (15.11)% 13.95% 0.10%
Ratios/Supplemental Data:
Net assets, end of year $ $31,372 $33,046 $46,999 $44,642 $41,807 $40,528 $46,426 $47,881
Ratio of expenses to average net %** 1.04%** 0.91%* 1.02% 1.09% 1.09% 1.06% 1.05% 1.02%
assets
Ratio of net investment
income to average net assets %** 7.32%x** 7.85%* 8.14% 9.42% 11.16% 11.65% 11.35% 10.63%
Portfolio Turnover N/A N/A 154.34% 251.97% 54.79% 83.92% 88.48% 133.29%
1987++ 1986++
------ ------
<S> <C> <C>
Net asset value, beginning of
period $ 17.72 $ 16.85
------- -------
Income From Investment
Operations:
Net investment income 2.17 2.11
Net realized and unrealized
gain (loss) on investments (0.17) 0.92
------- -------
Total income (loss)
from investment operations 2.00 3.03
Less Dividends and Distributions:
Dividends from net investment (2.16) (2.16)
income
Dividends in excess of net -- --
investment income
Total Dividends and Distributions: (2.16) (2.16)
Net change in net asset value (0.16) 0.87
------- -------
Net asset value, end of period $ 17.56 $ 17.72
======= =======
Total Return (6.03)% 37.57%
Ratios/Supplemental Data:
Net assets, end of year $47,561 $45,138
Ratio of expenses to average net 1.12% 0.93%
assets
Ratio of net investment
income to average net assets 12.04% 11.79%
Portfolio Turnover 79.41% 112.80%
</TABLE>
-------------------------------------------------------
+ The total return figures do not include the effect of the maximum 4.50%
sales charge on A shares and are not annualized for the period October
1, 1994 through February 28, 1995.
++ The financial highlights for the years ended September 30, 1986, 1987,
1988, 1989, 1990, 1991, 1992 and 1993 are for Bunker Hill Income
Securities, Inc., a closed-end fund.
* Includes the combined results of operations of Bunker Hill Income
Securities, Inc. and the Corporate Bond Fund.
** Reflects the Corporate Bond Fund's proportionate share of the Corporate
Bond Master Portfolio's expenses and fee waivers and expense
reimbursements by the Corporate Bond Master Portfolio's Investment
Advisor and Administrator and the Corporate Bond Fund's Administrator
and Distributor. Such fee waivers and expense reimbursements
-15-
<PAGE> 20
had the effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by
____%, 0.90% (annualized) and 0.16% for the years or periods ended February
29, 1996, February 28, 1995 and September 30, 1994, respectively.
x Annualized.
N/A Not applicable.
-16-
<PAGE> 21
INTERMEDIATE BOND FUND
- ----------------------
Selected Data for an A Share of Common Stock outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
For the period
January 24, 1994
(commencement
For the year For the year of operations)
Ended Ended through
February 29, 1996 February 28, 1995 February 28, 1994
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net asset value per share, $ . $ 9.81 $ 10.00
beginning of period ------- ------- --------
Income from Investment Operations:
Net investment income 0.59 0.08
Net realized and unrealized loss . (0.37) (0.19)
on securities ------- ------- --------
Total income (loss) from
investment operations 0.22 (0.11)
Less Dividends:
Dividends from net investment
income . (0.59) (0.08)
------- ------- --------
Net change in net asset value . (0.37) (0.19)
------- ------- --------
Net asset value per share, end
of period $ . $ 9.44 $ 9.81
======= ======= =======
Total Return++ % 2.27% (1.10)%
Ratios/supplemental data:
Net assets, end of period
(000) $ $ 1,964 $ 356
Ratio of expenses to average
net assets* % 0.00% 0.00%+
Ratio to nets investment
income to average
net assets* % 6.43% 5.70%+
- -------------------------------------------------------
</TABLE>
* Reflects the Intermediate Bond Fund's proportionate share of the
Intermediate Bond Master Portfolio's expenses and fee waivers and expense
reimbursements by the Intermediate Bond Master Portfolio's Investment
Adviser and Administrator and the Intermediate Bond Fund's Administrator and
Distributor. Such fee waivers and expense reimbursements had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net income to average net assets by ____% 17.95% and 160.20%
(annualized) for the periods ended February 29, 1996, February 28, 1995 and
February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum
4.50% sales charge on A shares.
-17-
<PAGE> 22
U.S. GOVERNMENT SECURITIES FUND
- -------------------------------
Selected Data for an A Share of Common Stock outstanding throughout
each of the periods indicated.
<TABLE>
<CAPTION>
Year Ended Period
------------------------------------------------------------- Ended
February February February February February February February
29, 28, 28, 28, 29, 28, 28,
1996 1995 1994 1993 1992 1991 1990**
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value per share, beginning of period . . $ . $9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59 9.62
----- ----- -------- -------- -------- -------- ------
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . 0.55 0.45 0.70 0.81 0.87 0.44
Net realized and unrealized gain
(loss) on securities . . . . . . . . . . . . . (0.54) (0.11) 0.37 0.37 0.29 (0.03)
----- ----- -------- -------- -------- -------- ------
Total income from investment
operations . . . . . . . . . . . . . . . . . . . 0.01 0.34 1.07 1.18 1.16 0.41
----- ----- -------- -------- -------- -------- ------
Less Dividends and Distributions:
Dividends from net investment
income . . . . . . . . . . . . . . . . . . . (0.52) (0.45) (0.70) (0.81) (0.87) (0.44)
Distributions from net realized gains
on securities . . . . . . . . . . . . . . . . --. (0.16) (0.38) (0.03) --. --.
Tax return of capital . . . . . . . . . . . . . (0.03) (0.09) --. --. --. --.
----- ----- -------- -------- -------- -------- ------
Total dividends and distributions . . . . . . . . (0.55) (0.70) (1.08) (0.84) (0.87) (0.44)
----- ----- -------- -------- -------- -------- ------
Net change in net asset value per share . . . . . . (0.54) (0.36) (0.01) 0.34 0.29 (0.03)
----- ----- -------- -------- -------- -------- ------
Net asset value per share, end of
period . . . . . . . . . . . . . . . . . . . $ . $9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59
===== ===== ======== ======== ======== ======== =========
Total return++ . . . . . . . . . . . . . . . . . . % 0.30% 3.40% 10.92% 12.45% 12.73% 4.28%xx(a)
Ratios/Supplemental Data:
Net assets, end of period (000) $ $87,354 $157,984 $119,127 $100,444 $ 7,466 $ 3,562
Ratio of expenses to average net
assets*** . . . . . . . . . . . . . . . . . % 1.15% 0.96% 0.51% 0.37% 0.39% 0.51%+
Ratio of net investment income
to average net assets *** . . . . . . . . . . % 5.57% 4.45% 6.80% 7.60% 8.88% 9.06%+
Portfolio turnover rate . . . . . . . . . . . % 189% 255% 252% 165% 80% 4%
Year Period
Ended Ended
August August
31, 31,
1989 1988*
---- -----
<S> <C> <C>
Net asset value per share, beginning of period . . $ 9.50 $ 9.55
------ -------
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . 0.86 0.56
Net realized and unrealized gain
(loss) on securities . . . . . . . . . . . . 0.12 (0.05)
------ -------
Total income from investment
operations . . . . . . . . . . . . . . . . . . 0.98 0.51
------ -------
Less Dividends and Distributions:
Dividends from net investment
income . . . . . . . . . . . . . . . . . . . (0.86) (0.56)
Distributions from net realized gains
on securities . . . . . . . . . . . . . . . . --- --
Tax return of capital . . . . . . . . . . . . -- --
Total dividends and distributions . . . . . . . (0.86) (0.56)
------ -------
Net change in net asset value per share . . . . . 0.12 (0.05)
------ -------
Net asset value per share, end of
period . . . . . . . . . . . . . . . . . . . $ 9.62 $ 9.50
====== =======
Total return++ . . . . . . . . . . . . . . . . . . 10.81%(a) 5.34%xx(a)
Ratios/Supplemental Data:
Net assets, end of period (000) $2,986 $ 1,784
Ratio of expenses to average net
assets*** . . . . . . . . . . . . . . . . . 0.70% --
Ratio of net investment income
to average net assets *** . . . . . . . . . . 9.02% 9.46%+
Portfolio turnover rate . . . . . . . . . . . 5% 1%
</TABLE>
* For the period January 7, 1988 (commencement of operations) through
August 31, 1988.
* * For the period September 1, 1989 through February 28, 1990.
* * * Net of fees waived and expenses reimbursed which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by ____%, 0.00%,
0.04%, 0.59%, 0.75%, 3.91%, 6.87% (annualized), 4.49% and 28.66%
(annualized), respectively.
+ Annualized.
++ The total return figures listed do not include the effect of the maximum
4.50% sales charge on A shares.
x Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served
as investment adviser commencing April 22, 1992.
xx Not annualized.
(a) Unaudited.
-18-
<PAGE> 23
FUND INVESTMENTS
INVESTMENT OBJECTIVES
The Funds seek current income consistent with reasonable investment risk. The
Intermediate Bond Fund also seeks capital appreciation, while the Corporate
Bond Fund seeks to maximize current income and the U.S. Government Securities
Fund strives to maintain principal.
The CORPORATE BOND FUND seeks to achieve its objective through investment
primarily in a diversified portfolio of investment grade corporate debt
securities.
The INTERMEDIATE BOND FUND seeks to achieve its objective through investment in
a flexible mix of various investment grade corporate and government fixed
income securities, mortgage-backed securities, municipal securities and cash
equivalents. The Intermediate Bond Fund may be appropriate for investors who
want interest income from a diversified portfolio of debt securities and
capital appreciation.
The U.S. GOVERNMENT SECURITIES FUND invests mainly in certificates issued by
the Government National Mortgage Association ("GNMA"), a U.S. Government
corporation within the Department of Housing and Urban Development. The U.S.
Government Securities Fund is appropriate for investors who want income from
U.S. Government securities to help meet today's expenses and relative stability
of investment but are willing to accept some price and yield variations.
THE CORPORATE AND INTERMEDIATE BOND FUNDS SEEK TO ACHIEVE THEIR RESPECTIVE
INVESTMENT OBJECTIVES BY INVESTING ALL OF THEIR INVESTABLE ASSETS IN THEIR
RESPECTIVE MASTER PORTFOLIOS. EACH MASTER PORTFOLIO HAS THE SAME INVESTMENT
OBJECTIVE AS ITS RESPECTIVE FUND. EITHER FUND MAY WITHDRAW ITS INVESTMENT IN
ITS RESPECTIVE MASTER PORTFOLIO AT ANY TIME, IF THE BOARD OF DIRECTORS OF THE
COMPANY DETERMINES THAT SUCH ACTION IS IN THE BEST INTERESTS OF THAT PARTICULAR
FUND. UPON ANY SUCH WITHDRAWAL, THE BOARD OF DIRECTORS WOULD CONSIDER WHAT
ACTION MIGHT BE TAKEN, INCLUDING THE INVESTMENT OF ALL OF THE ASSETS OF THAT
FUND IN ANOTHER POOLED INVESTMENT ENTITY HAVING THE SAME INVESTMENT OBJECTIVE
AS THE FUND OR THE HIRING OF AN INVESTMENT ADVISER TO MANAGE THE FUND'S ASSETS
IN ACCORDANCE WITH THE INVESTMENT POLICIES DESCRIBED BELOW WITH RESPECT TO ITS
MASTER PORTFOLIO.
BECAUSE THE INVESTMENT CHARACTERISTICS OF CORPORATE AND INTERMEDIATE BOND FUNDS
WILL CORRESPOND TO THOSE OF THE RESPECTIVE CORPORATE BOND AND INTERMEDIATE BOND
MASTER PORTFOLIOS, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF
AND TECHNIQUES EMPLOYED BY THE CORPORATE BOND AND INTERMEDIATE BOND MASTER
PORTFOLIOS AND THE U.S. GOVERNMENT SECURITIES FUND.
-19-
<PAGE> 24
WHILE EACH MASTER PORTFOLIO, AND THE U.S. GOVERNMENT SECURITIES FUND, STRIVES
TO ATTAIN ITS RESPECTIVE INVESTMENT OBJECTIVE, THERE CAN BE NO ASSURANCE THAT
IT WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
CORPORATE BOND MASTER PORTFOLIO - GENERAL INVESTMENTS
The Corporate Bond Master Portfolio is a diversified portfolio which will
invest substantially all of its assets in investment grade corporate debt
obligations (at least 65% of total assets under normal circumstances) such as
bonds, debentures, notes and securities convertible into or, exchangeable for,
or with rights to purchase, common or preferred stocks. Investment grade debt
securities ordinarily carry lower rates of interest income than lower quality
debt securities with similar maturities. The securities obtained upon
conversion of a convertible security may be retained for a period of time
pending their orderly disposition.
The Corporate Bond Master Portfolio may invest up to 20% of its total assets
(determined at the time of purchase) in debt obligations of foreign issuers,
including Yankee bonds (dollar-denominated bonds sold in the United States by
non-U.S. issuers) and Eurobonds (bonds issued in a country and sometimes a
currency other than the country of the issuer). The Corporate Bond Master
Portfolio may also hold a portion of its assets in cash, money market
instruments such as bank obligations (including certificates of deposit,
bankers' acceptances and time deposits issued by domestic and foreign banks and
foreign branches of U.S. banks that have total assets of more than $2.5 billion
and interest-bearing savings deposits in commercial banks in amounts not
exceeding 5% of its total assets) and commercial paper (commercial paper must
be rated at the time of purchase at least A-1 or A-2 by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Prime 1 or Prime 2 by Moody's
Investors Service, Inc. ("Moody's"), F-1+ or F-1 by Fitch Investors Service,
Inc. ("Fitch")) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, asset-backed and mortgage-backed securities, and
bonds of supranational entities. Obligations of some of the U.S. Government
agencies and instrumentalities, such as the Small Business Administration and
the Maritime Administration, are backed by the full faith and credit of the
U.S.; others, like the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, including the Student Loan Marketing
Association, are backed solely by the issuer's credit. There is no assurance
that the U.S. Government would support a U.S. Government-sponsored entity if it
was not required to do so by law.
The Corporate Bond Master Portfolio will normally invest at least 75% of its
total assets in investment grade corporate securities and securities issued by
the U.S. Government, its agencies or instrumentalities. Investment grade
securities are securities rated at the time of purchase in the four highest
ratings categories by S&P or by Moody's, or if not rated, determined by Bank of
America to be of comparable quality to securities with such ratings.
-20-
<PAGE> 25
The four highest ratings categories are AAA, AA, A and BBB by S&P and Fitch and
Aaa, Aa, A and Baa by Moody's. Bonds in the fourth category are more subject
than those in the top three categories to changes in economic or other
conditions that could lead to a weakened capacity to make payments of interest
and principal. The Corporate Bond Master Portfolio may invest up to 25% of its
total assets in lower quality, higher yielding securities. Such securities are
rated below investment grade, carry a higher degree of risk and are considered
to be speculative by S&P, Moody's or Fitch. Debt securities will be rated at
the time of purchase at least "B" by S&P, Moody's or Fitch, or if unrated, will
be determined by Bank of America to be of comparable quality to securities with
such ratings. Ratings are described more fully in the Appendix to this
Prospectus.
For temporary defensive purposes, or at times when Bank of America believes
such a position is warranted by uncertain or unusual market conditions, the
Corporate Bond Master Portfolio may invest without limitation in securities
issued or guaranteed by the U.S Government, its agencies and instrumentalities,
money market securities and cash. To the extent the Corporate Bond Master
Portfolio invests in such instruments, it will not be invested in accordance
with the investment policies designed for it to realize its investment
objective.
In the event that the rating of any security held by the Corporate Bond Master
Portfolio falls below the required rating, the Portfolio will not be obligated
to dispose of such security and may continue to hold the obligation if, in the
opinion of Bank of America, such investment is considered appropriate under the
circumstances.
The market value of debt securities and thus the Corporate Bond Master
Portfolio's net asset value per share is expected to vary with changes in
interest rates. The value of the Corporate Bond Master Portfolio's investments
will normally fall when prevailing interest rates rise and rise when interest
rates fall. Interest rate fluctuations can be expected to affect the Corporate
Bond Master Portfolio's earnings. In an effort to preserve the capital of the
Corporate Bond Master Portfolio when interest rates are generally rising, Bank
of America may shorten the average weighted maturity of the securities in the
Corporate Bond Master Portfolio's investments. Because the principal values of
the securities with shorter maturities are less affected by rising interest
rates, a portfolio with a shorter average weighted maturity will generally
diminish less in value during such periods than a portfolio with a longer
average weighted maturity. Because securities with shorter maturities,
however, generally have a lower yield to maturity, the Corporate Bond Master
Portfolio's current return based on its net asset value will generally be lower
as a result of such action than it would have been had such action not been
taken.
INTERMEDIATE BOND MASTER PORTFOLIO - GENERAL INVESTMENTS
The Intermediate Bond Master Portfolio is a diversified portfolio which will
invest substantially all of its assets in investment grade intermediate and
longer term bonds, which consist of corporate and governmental fixed income
obligations, mortgage-backed securities, municipal securities and cash
equivalents.
-21-
<PAGE> 26
Investment grade bonds are bonds that are rated within the four highest rating
categories by a nationally recognized statistical rating organization, i.e. BBB
or better by S&P, Duff & Phelps Credit Rating Co. ("D&P") or Fitch or Baa or
better by Moody's. While bonds with ratings are regarded as having adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay interest and
repay principal. Bonds with the lowest investment grade rating (i.e. BBB or
Baa) do not have outstanding investment characteristics and may have
speculative characteristics as well. Unrated securities will be purchased only
if Bank of America determines that they are of comparable quality to the rated
securities in which the Intermediate Bond Master Portfolio may invest.
Corporate bonds will be diversified by investment in bonds issued by different
companies in different industries.
Mortgage-backed securities, such as GNMA, FNMA and FHLMC securities, will be
guaranteed as to principal and interest, but not market value, by the U.S.
Government or one of its agencies or instrumentalities. The Intermediate Bond
Master Portfolio will not invest more than 35% of its net assets in mortgage-
backed securities. There is the risk that corporate bonds might be called by
the issuer if the bond interest rate is higher than currently prevailing
interest rates. Similarly, a risk associated with mortgage-backed securities
is early paydown of principal resulting from the refinancing of the underlying
mortgages. The rate of such prepayments of principal, and hence the life of
the security, will primarily be a function of current market rates. In periods
of falling interest rates, the rate of prepayments tends to increase. During
such periods, the reinvestment of prepayment proceeds will generally be at
lower rates than the rates on the prepaid obligations.
The Intermediate Bond Master Portfolio may also invest, from time to time, in
obligations issued by state and local governmental issuers ("Municipal
Securities"). The purchase of Municipal Securities may be advantageous when,
as a result of prevailing economic, regulatory or other circumstances, the
performance of such securities, on a pre-tax basis, is comparable to that of
corporate or U.S. Government obligations. Dividends received by shareholders
which are attributable to interest income received from Municipal Securities
generally will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Intermediate Bond Master Portfolio are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds held by the
Intermediate Bond Master Portfolio are in most cases revenue securities and are
not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of such private activity bonds is usually directly related to
the credit standing of the corporate user of the facility involved.
-22-
<PAGE> 27
The Intermediate Bond Master Portfolio may also include "moral obligation"
securities, which are normally issued by special purpose public authorities.
If the issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Interest income is expected to be the primary basis for investment return from
an investment in the Intermediate Bond Master Portfolio, and capital
appreciation the secondary basis. The Intermediate Bond Master Portfolio will
attempt to achieve capital appreciation by moderate market timing in response
to anticipated interest rate changes. The Intermediate Bond Master Portfolio
will also attempt to take advantage of undervalued sectors while selling bonds
in overvalued sectors. However, since investments will normally consist of
bonds and mortgage-backed securities, the ability to achieve capital
appreciation is limited.
As with the Corporate Bond Master Portfolio, the value of the securities held
in the Intermediate Bond Master Portfolio will tend to vary inversely with
changes in prevailing interest rates. When, in the evaluation of Bank of
America, there is a high probability that there will be a decline in the bond
market, up to 75% of the total assets of the Intermediate Bond Master Portfolio
may be held in cash equivalents as a temporary defensive strategy. To the
extent that the Intermediate Bond Master Portfolio invests in such instruments,
it will not be invested in accordance with the investment policies designed for
it to realize its investment objective. As described immediately above under
"Corporate Bond Master Portfolio" such cash equivalents may include the
following short-term, interest bearing instruments: obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
certificates of deposit, bankers' acceptances, time deposits and other
interest-bearing deposits issued by domestic and foreign banks and foreign
branches of U.S. banks, asset-backed securities, foreign government securities,
and commercial paper issued by U.S. and foreign issuers which is rated at the
time of purchase at least Prime-2 by Moody's or A-2 by S&P.
U.S. GOVERNMENT SECURITIES FUND - GENERAL INVESTMENTS
Certificates issued by GNMA ("GNMA Certificates") are backed by the full faith
and credit of the U.S. Government. Securities like those included in the U.S.
Government Securities Fund's portfolio have historically had a very low risk of
loss of principal if held to maturity. As with the Corporate Bond and
Intermediate Bond Master Portfolios, due to changes in interest rates, the
market value of these securities and thus the U.S. Government Securities Fund's
net asset value per share is expected to vary. The value of the U.S.
Government Securities Fund's portfolio will normally fall when prevailing
interest rates rise and rise when interest rates fall. Interest rate
fluctuations can be expected to affect the U.S. Government Securities Fund's
dividends.
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As a fundamental policy, the U.S. Government Securities Fund will at all times
invest at least 65% of its assets in GNMA Certificates. The rest of its assets
will be invested in other securities of the U.S. Government (and its agencies
and instrumentalities) that are backed by the full faith and credit of the
Government, in GNMA Real Estate Mortgage Investment Conduit Securities ("GNMA
REMICs"), in options and futures contracts and as described in "Other
Investment Practices and Considerations" below. Examples of other types of U.S.
Government obligations that the U.S. Government Securities Fund may hold
include U.S. Treasury bills, notes and bonds, and obligations of the Small
Business Administration and the Maritime Administration.
Despite the fundamental policy described above, the U.S. Government Securities
Fund retains the ability at any time for defensive purposes, or to maintain
liquidity, to invest in U.S. Government securities, commercial paper rated in
the highest rating category at the time of purchase by Standard & Poor's or
Moody's, or money market funds eligible for investment by national banks that
invest in U.S. Government agency securities. Investments in money market funds
will be made subject to the requirements of applicable securities laws, and
will require the U.S. Government Securities Fund to pay its pro rata share of
the advisory and other fees charged by the money market fund in which it
invests (which fees will be in addition to those the U.S. Government Securities
Fund pays for its own operations). The U.S. Government Securities Fund may
also hold cash when Bank of America determines such a defensive position is
warranted in light of market conditions.
FUNDAMENTAL LIMITATIONS
The investment objective of the Portfolios may not be changed without a vote by
the holders of a majority of the outstanding shares of a Portfolio or of the
outstanding interests of a Portfolio, respectively. Policies requiring such a
vote to effect a change are known as "fundamental." A number of the other
fundamental investment limitations are summarized below.
The Corporate Bond Fund nor the Corporate Bond Master Portfolio may not:
1. Purchase securities (except securities issued by the U.S. Government,
its agencies or instrumentalities) if, as a result more than 5% of
its total assets will be invested in the securities of any one
issuer, except that up to 25% of its total assets may be invested
without regard to this 5% limitation; provided that all of the assets
of the Fund may be invested in the Portfolio or another investment
company;
2. Make loans, although it may invest in debt securities, enter into
repurchase agreements and lend its portfolio securities as discussed
herein; or
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3. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except
that: (a) it may, to the extent appropriate to its investment
objective, invest in securities issued by companies which purchase or
sell commodities or commodity contracts or which invest in such
programs; and (b) it may purchase and sell futures contracts and
options on futures.
The Intermediate Bond Fund and the Intermediate Bond Master Portfolio may not:
1. Purchase securities (except securities issued by the U.S. Government,
its agencies or instrumentalities) if, as a result, more than 5% of
its total assets will be invested in the securities of any one issuer
or it would own more than 10% of the voting securities of such
issuer, except that up to 25% of its total assets may be invested
without regard to these limitations; and provided that all of its
assets may be invested in a diversified, open-end management
investment company, or a series thereof, with substantially the same
investment objectives, policies and restrictions without regard to
the limitations set forth in this paragraph;
2. Make loans to other persons except that it may make time or demand
deposits with banks, provided that time deposits shall not have an
aggregate value in excess of 10% of its net assets, and may purchase
bonds, debentures or similar obligations that are publicly
distributed, may loan portfolio securities not in excess of 10% of
the value of its total assets, and may enter into repurchase
agreements as long as repurchase agreements maturing in more than
seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase
or sell futures contracts on financial instruments, such as bank
certificates of deposit and U.S. Government securities, foreign
currencies and stock indexes and options on any such futures if such
options are written by other persons and if (i) the futures or
options are listed on a national securities or commodities exchange,
(ii) the aggregate premiums paid on all such options that are held at
any time do not exceed 20% of its total net assets, and (iii) the
aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
The U.S. Government Securities Fund may not:
1. Under normal circumstances invest less than 65% of its total assets
in GNMA Certificates.
2. Make loans, although it may invest in debt securities, enter into
repurchase agreements and lend its portfolio securities.
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3. Purchase or sell commodities or commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that: (a) a Fund
may, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or
commodity contracts or which invest in such programs; and (b) a Fund may
purchase and sell futures contracts and options on futures contracts.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in full in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
GNMA CERTIFICATES. The Intermediate Bond Master Portfolio and the U.S.
Government Securities Fund may invest in GNMA Certificates. These are
mortgage-backed debt securities representing fractional ownership of a pool of
mortgage loans. They are issued by lenders (such as savings and loan
associations, commercial banks and mortgage bankers) approved by the Federal
Housing Administration which meet criteria imposed by GNMA. The lender
assembles a specified pool of mortgage loans, all of which are insured by the
Federal Housing Administration or the Farmers' Home Administration, and applies
to GNMA for approval of the pool. Upon approval, GNMA provides its commitment
to guarantee timely payment of principal and interest on the GNMA certificates
secured by the mortgage loans in the pool.
GNMA Certificates usually bear a nominal rate of interest equal to the
effective rate on the mortgage loans in the pool less .5%, which is the fee
charged by the issuer and GNMA. The U.S. Government Securities Fund receives
monthly payments of principal and interest (less the fee mentioned above) from
its investments in GNMA Certificates. The actual yield on the Intermediate
Bond Master Portfolio's and the U.S. Government Securities Fund's investments,
calculated by dividing the interest payments by the purchase price for the GNMA
Certificate, may differ significantly from the nominal interest rate. This
difference is due to variations of the lives of the mortgages in the pool and
to the impossibility of anticipating the effective interest rate at which
future principal payments might be reinvested.
GNMA Certificates have in the past provided higher yields than direct
investments in U.S. Treasury obligations, although there is no assurance they
will continue to do so in the future.
If mortgage loans in the pool are prepaid (because of either voluntary
prepayments, which are more likely during periods of falling interest rates, or
because of foreclosure), the principal payments are passed through to the
Certificate holders. Because of these
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prepayments, the life of a GNMA Certificate may be substantially shorter than
the time remaining until maturity of the mortgages in the pool.
The U.S. Government Securities Fund will normally reinvest amounts reserved
from prepayments in other GNMA Certificates. Depending on prevailing interest
rates, the reinvestment may be at higher or lower rates than the yield the U.S.
Government Securities Fund was receiving on the Certificate that was prepaid.
As a result, GNMA Certificates are not as effective at "locking-in" high
interest rates during periods of declining rates as are typical non-callable
fixed rate securities.
As opposed to bonds, where principal is normally returned in a lump sum at
maturity, the principal underlying a GNMA Certificate is paid back over the
life of the loan. The Intermediate Bond Master Portfolio and the U.S.
Government Securities Fund will purchase GNMA Certificates known as "modified
pass-through" certificates, on which timely payment of principal and interest
is guaranteed. The Intermediate Bond Master Portfolio and the U.S. Government
Securities Fund may also purchase "variable rate" GNMA Certificates, which are
backed by pools of variable rate mortgages, as well as other types of
Certificates that are backed by GNMA's guarantee.
GNMA REMICS. The Intermediate Bond Master Portfolio and the U.S. Government
Securities Fund may invest in GNMA REMICs which are collateralized mortgage
obligations ("CMOs"). GNMA REMICs provide the holder with a specified interest
in the cash flow of a pool of underlying mortgages or other mortgage-backed
securities. GNMA REMICs are issued in multiple classes, each with a specified
fixed or floating interest rate and a final distribution date. Although the
relative payment rights of these classes can be structured in a number of
different ways, most often payments of principal are applied to the GNMA REMIC
classes in the order of their respective stated maturities. GNMA REMICs can
expose a Fund to more volatility and interest rate risk than other types of
asset-backed obligations.
ASSET-BACKED SECURITIES. The Corporate Bond and Intermediate Bond Master
Portfolios may purchase asset-backed securities. Asset-backed securities
consist of undivided fractional interests in pools of mortgages, consumer loans
or receivables held in a trust. Examples include mortgage-backed securities,
certificates for automobile receivables (CARS) and credit card receivables
(CARDS). Payments of principal and interest on the mortgages, loans or
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's par value
until exhausted. Ultimately, asset-backed securities are dependent upon
payment of the mortgages, consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse to the entity that originated the
loans or receivables. All asset-backed securities purchased by the Corporate
Bond Master Portfolio will either be issued or
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guaranteed by a U.S. Government entity or rated AAA by S&P, Aaa by Moody's or
have an equivalent rating from any other rating agency.
FOREIGN SECURITIES. Subject to its investment objective and the policies
stated above, the Corporate Bond and Intermediate Bond Master Portfolios may
invest in securities of foreign issuers that may or may not be publicly traded
in the United States, including Yankee bonds (dollar-denominated bonds sold in
the United States by non-U.S. issuers) and Eurobonds (bonds issued in a country
and sometimes a currency other than the country of the issuer). It is
currently the intention of the Corporate and Intermediate Bond Master
Portfolios to invest no more than 20% and 25% of their respective net assets
(at the time of purchase) in foreign securities.
RISKS ASSOCIATED WITH HIGH YIELD/HIGH RISK SECURITIES, FOREIGN SECURITIES AND
ASSET-BACKED SECURITIES. There are particular risks associated with the high
yield/high risk securities that the Corporate Bond Master Portfolio may hold,
including (a) the relative youth and growth of the market for such securities,
(b) the sensitivity of such securities to interest rate and economic changes,
(c) the lower degree of protection of principal and interest payments, (d) the
relatively low trading market liquidity for the securities, (e) the impact that
legislation may have on the high yield bond market (and, in turn, on the
Corporate Bond Master Portfolio's net asset value and investment practices) and
(f) the creditworthiness of the issuers of such securities.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress which would negatively
affect their ability to meet their principal and interest payment obligations,
to meet projected business goals and to obtain additional financing. An
economic downturn could also disrupt the market for lower-rated bonds and
negatively affect the value of outstanding bonds and the ability of issuers to
repay principal and interest.
If the issuer of a lower-rated bond held by a Master Portfolio defaulted, that
Master Portfolio could incur additional expenses to seek recovery. Adverse
publicity and investor perceptions, whether or not they are based on
fundamental analysis, could also decrease the values and liquidity of lower-
rated securities held by that Master Portfolio, especially in a thinly traded
market.
A Master Portfolio's investments in foreign securities, whether made directly
or indirectly, involve certain inherent risks, including political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns and changes in foreign currency exchange rates and
the possibility of adverse changes in investment or exchange control
regulations. There is typically less information publicly available about a
foreign company than about a U.S. company. Moreover, these companies may be
subject to less stringent reserve, auditing and reporting requirements than
their U.S. counterparts. Additionally, foreign markets are generally not as
developed or efficient as those in the U.S., and in most foreign markets volume
and liquidity are less than in the U.S. There is
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generally less government supervision and regulation of foreign exchanges,
brokers and companies than in the U.S. There is also the possibility that
foreign governments could expropriate assets or levy confiscatory taxes, set
limitations on the removal of assets or suffer adverse diplomatic developments.
Because of these and other factors, foreign securities acquired by a Master
Portfolio may be subject to greater price fluctuation than securities of U.S.
companies.
An asset-backed security's underlying assets may be prepaid with the result of
shortening the certificates' weighted average life. Prepayment rates vary
widely and may be affected by changes in market interest rates. It is not
possible to accurately predict the average life of a particular pool of
mortgages, loans or receivables. The proceeds of prepayments received by a
Master Portfolio must be reinvested in securities whose yields reflect interest
rates prevailing at the time. Thus, a Master Portfolio's ability to maintain a
portfolio which includes high-yielding asset-backed securities will be
adversely affected to the extent reinvestments are in lower yielding
securities. The actual maturity and realized yield will therefore vary based
upon the prepayment experience of the underlying asset pool and prevailing
interest rates at the time of prepayment. Asset-backed securities may be
subject to greater risk of default during periods of economic downturn than
other instruments. Also, while the secondary market for asset-backed
securities is ordinarily quite liquid, in times of financial stress the
secondary market may not be as liquid as the market for other types of
securities, which could result in a Master Portfolio's experiencing difficulty
in valuing or liquidating such securities.
OPTIONS. The Corporate Bond Master Portfolio may write covered put and call
options and purchase put and call options on U.S. or foreign securities that
are traded on United States and foreign securities exchanges and in over-the-
counter markets. The Corporate Bond Master Portfolio's options transactions
will be limited as follows: a) not more than 5% of the total assets of the
Corporate Bond Master Portfolio may be invested in options; b) the obligations
of the Corporate Bond Master Portfolio under put options it writes may not
exceed 50% of its net assets; and c) the aggregate premiums on all options
purchased by the Corporate Bond Master Portfolio may not exceed 25% of its net
assets. The Intermediate Bond Master Portfolio may purchase put and call
options on listed securities so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Intermediate Bond Master Portfolio.
The Intermediate Bond Master Portfolio may not write put options but may write
fully covered call options as long as the Intermediate Bond Master Portfolio
remains fully covered throughout the life of the option, either by owning the
optioned securities or possessing a call issued by another writer that is
identical in all respects to the call written by the Intermediate Bond Master
Portfolio.
The U.S. Government Securities Fund may sell, or "write," covered call options
on securities it owns in order to obtain the premium for doing so, and may
purchase put options on securities as a hedging technique. Options written by
the U.S. Government Securities Fund will not exceed 25% of its total assets
(taken at market value on the date written) and
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options purchased by the U.S. Government Securities Fund will not exceed 5% of
its total assets.
Call options written by a Portfolio gives the holder the right to buy the
underlying security from the Portfolio at a stated exercise price upon
exercising the option at any time prior to its expiration. A call option
written by a Portfolio is "covered" if the particular Portfolio owns or has an
absolute right (such as by conversion) to the underlying security covered by
the call. A call option is also covered if a Portfolio holds a call on the
same security and in the same principal amount as the call written and the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash, government
securities or other high grade debt obligations in a segregated account with
its custodian.
Put options written by the Corporate Bond Master Portfolio give the holder the
right to sell the underlying security to the particular Portfolio at a stated
exercise price. A put option written by the Corporate Bond Master Portfolio is
"covered" if that Portfolio maintains cash or high grade debt obligations with
a value equal to the exercise price in a segregated account with its custodian,
or holds a put on the same security and in the same principal amount as the put
written and the exercise price of the put held is equal to or greater than the
exercise price of the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities. In addition, a foreign exchange may
impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
The Portfolios may purchase put options to hedge against a decline in the value
of a portfolio. By using put options in this way, a Portfolio will reduce any
profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option plus transaction costs. A
Portfolio may purchase call options to hedge against an increase in the price
of securities or indexes that the Portfolio anticipates purchasing in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by a Portfolio upon exercise of the
option. Unless the price of the underlying security rises sufficiently, the
option may expire worthless to the Portfolio.
The restrictions discussed in "Options" do not apply to options on futures
contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Corporate Bond
Portfolio may enter into contracts for the purchase or sale for future delivery
of fixed-income securities, or contracts based on financial indices including
any index of United States government securities or foreign government
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securities and may purchase and write put and call options to buy or sell
futures contracts.
The Intermediate Bond Master Portfolio may purchase and sell interest rate
futures contracts (and purchase related options) as a hedge against changes
resulting from market conditions in the values of the securities held by the
Portfolio or which it intends to purchase and where the transactions are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio.
The U.S. Government Securities Fund may enter into financial futures contracts
or purchase or sell options on such futures as a hedge against anticipated
interest rate fluctuations. Such fluctuations could have an effect on
securities that the U.S. Government Securities Fund holds in its portfolio or
intends to sell.
A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. The purchaser of a
futures contract on an index agrees to take or make delivery of an amount of
cash equal to the difference between a specified multiple of the value of the
index on the expiration date of the contract ("current contract value") and the
price at which the contract was originally struck. No physical delivery of the
securities underlying the index is made. Options on futures contracts written
or purchased by a Portfolio may be traded on United States or foreign
exchanges. These investment techniques would be used to hedge against
anticipated future changes in interest or exchange rates which otherwise might
either adversely affect the value of the Portfolio's portfolio securities. A
Portfolio may not purchase or sell a futures contract or purchase a related
option unless immediately after any such transaction the sum of the aggregate
amount of margin deposits on its existing futures positions and the amount of
premiums paid for related options does not exceed 5% of that Portfolio's total
assets (after taking into account certain technical adjustments). In order to
prevent leverage in connection with the purchase of futures contracts or call
options thereon by a Portfolio, an amount of cash, cash equivalents or liquid
high grade debt securities equal to the market value of the obligation under
the futures contracts (less any related margin deposits) will be maintained in
a segregated account with the custodian. Furthermore, a Portfolio's ability to
engage in options and futures transactions may be limited by tax
considerations. More information about futures contracts and related options
may be found in Appendix B to the Statement of Additional Information.
INTEREST RATE AND CURRENCY SWAPS. The Corporate Bond Master Portfolio may
enter into interest rate and currency swaps for both hedging and non-hedging
purposes. The Corporate Bond Master Portfolio will typically use interest rate
swaps to shorten the effective duration of its portfolio. An interest rate
swap involves the exchange of a Portfolio with another party of their
respective rights to receive interest, e.g., an exchange of fixed rate payments
for floating rate payments. For example, if the Corporate Bond Master
Portfolio holds an
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interest-paying security whose interest rate is reset once a year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset daily. Such a swap position would offset
changes in the value of the underlying security because of subsequent changes
in interest rates. It is designed to protect the Corporate Bond Master
Portfolio from a decline in the value of the underlying security due to rising
rates, but would also limit its ability to benefit from falling interest rates.
Currency swaps involve the exchange of their respective rights to make or
receive payments in specified currencies.
The Corporate Bond Master Portfolio will only enter into interest rate swaps on
a net basis, which means that the two payment streams are netted out, with the
Corporate Bond Master Portfolio receiving or paying, as the case may be, only
the net amount of the two payments. Interest rate swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate swaps is limited to the net amount
of interest payments that the Corporate Bond Master Portfolio is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Corporate Bond Master Portfolio's risk of loss consists of the net amount of
interest payments that the Corporate Bond Master Portfolio is contractually
entitled to receive. In contrast, currency swaps usually involve the delivery
of the entire principal value of one designated currency in exchange for the
other designated currency. Therefore, the entire principal value of a currency
swap is subject to the risk that the other party to the swap will default on
its contractual delivery obligations.
POTENTIAL RISKS OF OPTIONS, FUTURES AND SWAPS. The use of options, futures and
swaps is highly specialized activity which involves investment techniques and
risks different from those associated with customary investments. If Bank of
America should be incorrect in its forecasts of market values, interest rates
or currency exchange rates, a Portfolio may not achieve the anticipated
benefits of the techniques or may realize losses, and its investment
performance may be less favorable than if these strategies had not been used.
A Portfolio's ability to dispose of its positions in futures contracts and
options will depend on the availability of liquid markets in such instruments.
Markets in options and futures with respect to a number of securities are
relatively new and still developing. If a secondary market does not exist with
respect to an option purchased or written by a Portfolio over-the-counter, it
might not be possible to effect a closing transaction in the option (i.e.,
dispose of the option) with the result that (i) an option purchased by a
Portfolio would have to be exercised in order for that Portfolio to realize any
profit and (ii) a Portfolio may not be able to sell portfolio securities
covering an option written by it until the option expires or it delivers the
underlying futures contract upon exercise. Therefore, no assurance can be
given that a Portfolio will be able to utilize these instruments effectively
for the purposes set forth above.
PARTICIPATIONS. The Corporate Bond Master Portfolio may purchase from domestic
financial institutions participation interests in high quality debt securities.
A participation interest gives a Portfolio an undivided interest in the
security in the proportion that the Portfolio's participation interest bears to
the total principal amount of the security. Participation
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interests may have fixed, floating or variable rates of interest, and will have
remaining maturities of thirteen months or less (as defined by the Securities
and Exchange Commission). The Corporate Bond Master Portfolio intends only to
purchase participations from an entity or syndicate, and does not intend to
serve as a co-lender in any participation. For certain participation
interests, the Corporate Bond Master Portfolio will have the right to demand
payment, on not more than 30 days' notice, for all or any part of that
Portfolio's participation interest in the security, plus accrued interest. As
to these instruments, the Corporate Bond Master Portfolio intends to exercise
its right to demand payment only upon a default under the terms of the
security, as needed to provide liquidity, or to maintain or improve the quality
of its investment portfolio. It is possible that a participation interest
might be deemed to be an extension of credit by the Corporate Bond Master
Portfolio to the issuing financial institution that is not a direct interest in
the credit of the obligor of the underlying security and is not directly
entitled to the protection of any collateral security provided by such obligor.
In such event, the ability of the Corporate Bond Master Portfolio to obtain
repayment might depend on the issuing financial institution.
VARIABLE RATE INSTRUMENTS. The Intermediate Bond Master Portfolio may invest
in variable and floating rate instruments, which may include master demand
notes. Although payable on demand by the Intermediate Bond Master Portfolio,
master demand notes may not be marketable. Consequently, the ability to redeem
such notes may depend on the borrower's ability to pay which will be
continuously monitored by Bank of America. Such notes will be purchased only
from domestic corporations that either (a) are rated Aa or better by Moody's or
AA or better by S&P, (b) have commercial paper rated at least Prime-2 by
Moody's or A-2 by S&P or the equivalent by another nationally recognized
statistical rating organization ("NRSRO"), (c) are backed by a bank letter of
credit or (d) are determined by Bank of America to be of a quality comparable
to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. Each of the Portfolios may invest in securities
issued by other investment companies. The Intermediate Bond Master Portfolio
and the U.S. Government Securities Fund may invest in securities of other
investment companies which seek to maintain a $1.00 net asset value per share
(i.e., "money market funds"). The Intermediate Bond Master Portfolio may
invest in money market funds which invest in short-term debt securities, and
the U.S. Government Securities Fund may invest in money market funds eligible
for investment by national banks that invest in U.S. Government agency
securities. No more than 10% of the value of each Portfolio's total assets
will be invested in securities of other investment companies, with no more than
5% invested in the securities of any one investment company. As a shareholder
of another investment company, the Portfolios would bear, along with other
shareholders, their pro rata portion of the other investment company's
expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Portfolios may buy securities subject to the
seller's agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Portfolios will enter
into repurchase agreements only
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with financial institutions (such as banks and broker-dealers) deemed
creditworthy by Bank of America, under guidelines approved by the Portfolio's
Board of Trustees. It is intended that such agreements for the Corporate Bond
Master Portfolio and U.S. Government Securities Fund will not have maturities
longer than 60 days. During the term of any repurchase agreement the seller
must maintain the value of the securities subject to the agreement in an amount
that is greater than the repurchase price. Bank of America then continually
monitors that value. Nonetheless, should the seller default on its obligations
under the agreement, the Portfolios would be exposed to possible loss due to
adverse market action or delays connected with the disposition of the
underlying obligations.
The Intermediate Bond Master Portfolio will only enter into repurchase
agreements with a bank if it has a commercial paper rating of A-2 or better by
S&P or Prime-2 or better by Moody's, or the equivalent from another NRSRO.
Repurchase agreements maturing in more than seven days will not exceed 10% of
the value of the total assets of the Intermediate Bond Master Portfolio. The
Intermediate Bond Master Portfolio will only enter into repurchase agreements
for debt obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, certificates of deposit, bankers' acceptances or
commercial paper.
Repurchase agreements are considered to be loans under the Investment Company
Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these agreements a Portfolio sells portfolio securities to financial
institutions (such as banks and broker-dealers) and agrees to buy them back
later at an agreed upon time and price. When a Portfolio enters into a reverse
repurchase agreement, it places in a separate custodial account either liquid
assets or other high grade debt securities that have a value equal to or
greater than the repurchase price. The account is then continuously monitored
by the Bank of America to make sure that an appropriate value is maintained.
Reverse repurchase agreements involve the risk that the value of portfolio
securities a Portfolio relinquishes may decline below the price the Portfolio
must pay when the transaction closes. Reverse repurchase agreements are
considered to be borrowings by the Portfolios under the 1940 Act. Borrowings
may magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of a Portfolio's outstanding shares. A
Portfolio will only enter into reverse repurchase agreements to avoid the need
to sell portfolio securities to meet redemption requests during unfavorable
market conditions.
The Intermediate Bond Master Portfolio will only enter into a reverse repurchase
agreements with a bank if it has a commercial paper rating of A-2 or better by
S&P or Prime-2 or better by Moody's, or the equivalent from another NRSRO.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Portfolios may purchase securities on a "when-issued" basis and purchase or
sell securities
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<PAGE> 39
on a "forward commitment" basis. Additionally, the Corporate Bond Master
Portfolio and U.S. Government Securities Fund may purchase or sell securities
on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit a Portfolio to lock in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. Delayed settlement refers to a transaction in the
secondary market that will settle some time in the future. These transactions
involve the risk that the price or yield obtained may be less favorable than
the price or yield available when the delivery takes place. The Portfolios
will set aside in a segregated account cash or liquid securities equal to the
amount of any when-issued forward commitment or delayed settlement transaction.
When-issued purchases, forward commitments and delayed settlements are not
expected to exceed 25% of the value of a Portfolio's total assets under normal
circumstances. These transactions will not be entered into for speculative
purposes, but primarily in order to hedge against anticipated changes in
interest rates.
SECURITIES LENDING. In order to earn additional income, a Portfolio may lend
its portfolio securities to financial institutions (such as banks and brokers)
that Bank of America considers to be of good standing. If the financial
institution should become bankrupt, however, the particular Portfolio could
experience delays in recovering its securities. A securities loan will only be
made when, in the judgment of Bank of America, the possible reward from the
loan justifies the possible risks. In addition, such loans will not be made by
the particular Portfolio if, as a result, the value of securities loaned by the
Corporate Bond Master Portfolio, the U.S. Government Securities Fund or the
Intermediate Bond Master Portfolio exceeds 30%, 30% and 10% of their respective
total assets. Securities loans will be fully collateralized.
ILLIQUID SECURITIES. The Corporate Bond 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. If, after the time of
acquisition, events cause this limit to be exceeded, the Corporate Bond Master
Portfolio will take steps to reduce the aggregate amount of illiquid securities
as soon as is reasonably practicable. The Corporate Bond Master Portfolio
intends that investments in securities that are not registered under the
Securities Act of 1933 but may be purchased by institutional buyers under Rule
144A and for which a liquid trading market exists as determined by the Board of
Trustees of that Portfolio or Bank of America (pursuant to guidelines adopted
by the Board), will not be subject to the Corporate Bond Master Portfolio's 15%
limitation on illiquid securities. This investment practice could have the
effect of increasing the level of illiquidity in the Corporate Bond Master
Portfolio during any period that institutional buyers under Rule 144A became
uninterested in purchasing these restricted securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the
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<PAGE> 40
same securities as the Portfolios. When a purchase or sale of the same
security is made at substantially the same time on behalf of the Portfolios and
another investment company or account, available investments or opportunities
for sales will be equitably allocated pursuant to procedures of Bank of
America. In some instances, this investment procedure may adversely affect the
price paid or received by a Portfolio or the size of the position obtained or
sold by a Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Portfolios'
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to a Portfolio are not less favorable than
what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Although
no commissions are paid on bond transactions, purchases and sales are at net
prices which reflect dealers' mark-ups and mark-downs, and a higher portfolio
turnover rate for bond investments will result in the payment of more dealer
mark-ups and mark-downs than would otherwise be the case. Turnover may require
payment of brokerage commissions, impose other transaction costs and could
increase substantially the amount of income received by the Portfolio that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). The Intermediate Bond Master Portfolio's annual
portfolio turnover is not expected to exceed 300%, although the Portfolios'
annual portfolio turnover rates will not be a limiting factor in making
investment decisions.
MASTER-FEEDER STRUCTURE. The Corporate Bond and Intermediate Bond Funds are
open-end investment portfolios that seek to achieve their investment objective
by investing all of their investable assets in each Fund's respective Master
Portfolio which has the same investment objective. A Fund may withdraw its
investment in the particular Master Portfolio at any time if the Board of
Directors of the Company determines that it is in the best interest of a Fund
to do so. Upon such withdrawal, the Board of Directors would consider what
action might be taken, including the investment of all of the assets of that
Fund in another pooled investment entity having the same investment objective
as the Fund or the hiring of an investment adviser to manage the Fund's assets
in accordance with the investment policies described above with respect to its
Master Portfolio. See "Expense Summary," "Fund Investments" and "Fund
Management" for a description of this investment objective and the investment
policies, restrictions, management and expenses of the Funds and the Master
Portfolios.
The Master Portfolios are separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Funds and other entities that may invest in the Master
Portfolios from time to time (e.g., other
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<PAGE> 41
investment companies and commingled trust funds) will each be liable for all
obligations of their Master Portfolio. However, the risk of a Fund's incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance exists and a Portfolio itself is unable to meet
its obligations. Accordingly, the Company's Board of Directors believes that
neither a Fund nor its shareholders will be adversely affected by reason of
that Fund's investing in the particular Master Portfolio. As stated above, the
investment objective of a Fund and the particular Master Portfolio is a
fundamental policy and may not be changed, in the case of the Fund, without the
vote of its shareholders or, in the case of the Master Portfolio, without the
vote of its interestholders. Whenever a Fund is requested to vote on matters
pertaining to the investment objective or a fundamental policy of the
corresponding Master Portfolio, the Fund will hold a meeting of its
shareholders and will cast its vote in the same proportion as the votes cast by
the Fund's shareholders. A Fund will vote any shares for which it receives no
voting instructions in the same proportion as the shares for which it does
receive voting instructions. As with any mutual fund, other investors in the
Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the Fund's shareholders). This could
result in a Fund's withdrawal of its investment in the Master Portfolio, and in
increased costs and expenses for the Fund. Further, the withdrawal of other
entities that may from time to time invest in the Master Portfolio could have
an adverse effect on the performance of the Master Portfolio and its Fund, such
as decreased economies of scale and increased per share operating expenses. In
addition, the total withdrawal by another investment company as an investor in
a Master Portfolio will cause the Master Portfolio to terminate automatically
in 120 days unless a Fund and any other investors in that Master Portfolio
unanimously agree to continue the business of the Master Portfolio. As a Fund
is required to submit such matters to a vote of its shareholders, it will be
required to incur the expenses of shareholder meetings in connection with such
withdrawals. If unanimous agreement is not reached to continue the Master
Portfolio, the Board of Directors of the Company would need to consider
alternative arrangements for that Fund, such as those described above. The
policy of a Fund, and other similar investment companies, to invest their
investable assets in trusts such as its corresponding Master Portfolio is a
relatively recent development in the mutual fund industry and, consequently,
there is a lack of substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest in
the Master Portfolio which may have higher or lower fees and expenses than
those of its corresponding Fund and which may therefore have different
performance results than that Fund. Information concerning whether an
investment in a Master Portfolio may be available through another entity
investing in a Master Portfolio may be obtained by calling 800-332-3863.
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<PAGE> 42
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING EACH FUND'S SHARES AND
REGARDING EACH FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL INVESTMENT SUBSEQUENT 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
401(k) Account $ $
------ ------
</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
awards certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
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<PAGE> 43
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue three classes of shares. A shares are sold to investors choosing
the front-end sales charge alternative. B shares are sold to investors choosing
the deferred sales charge alternative. K shares are neither subject to a
front-end sales charge or a contingent deferred sales charge. K shares, however,
are sold only to: (a) businesses and other organizations that participate in the
401(k) Daily Advantage(R) Retirement Plan Program sponsored by Bank of America;
and (b) individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end sales load
if (i) such redemption occurred within 30 days prior to the purchase order, and
(ii) such other open-end investment company was not distributed and advised by
Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates. The three classes of shares in each Fund represent interests in the
same portfolio of investments of the particular Fund, have the same rights and
are identical in all respects, except that A shares bear the expenses of a
Shareholder Service Plan. B shares bear the expenses of a Distribution and
Services Plan and have exclusive voting rights with respect to the Distribution
and Services Plan. K shares bear the expenses of a Distribution Plan and
Administrative and Shareholder Services Plan and have exclusive voting rights
with respect to such Plans. The three classes also have different exchange
privileges, as described below. B shares also bear the expenses of the deferred
sales charge arrangements and any expenses resulting from such arrangements. The
net income attributable to A, B and K shares and the dividends payable on A, B
and K shares will be reduced by the amount of the (a) Shareholder Services Plan
fees attributable to A shares, (b) Distribution and Services Plan fees
attributable to B shares, (c) Distribution Plan fees and Administrative and
Shareholder Service Plan fees attributable to K shares, respectively and (d) the
incremental expenses associated with such plans. Lastly, B shares of a Fund held
for 8 years will automatically convert into A shares of the particular Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on the A shares.
Each class calculates its net asset value ("NAV") as follows:
NAV = (Value of Assets Attributable to the Class) - (Liabilities
Attributable to the Class)
----------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Master Portfolios' and the U.S. Government Securities Fund's investments
are valued at market value or, where market quotations are not readily
available, at fair value as determinedin good faith by the Master Portfolios
or U.S. Government Securities Fund, as appropriate, pursuant to procedures
adopted by the Master Portfolios' Board of Trustees or the U.S. Government
Securities Fund's Board of Directors. Short-term debt securities with
maturities
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<PAGE> 44
of sixty days or less are valued at amortized cost, which approximates market
value. For further information about valuing securities, see the Statement of
Additional Information. For price and yield information, call (800) 346-2087.
The per share net asset values of A, B and K shares will diverge due to the
different distribution fees and other expenses borne by the Classes.
A Shares Sales Load. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge" or "sales charge") for the A shares of the
Funds begin at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
<TABLE>
<CAPTION>
Dealer's
As a % of As a % of Reallowance
Offering Net Asset as a % of
Amount of Transaction Price Value Offering Price*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00** 0.00** 0.00**
</TABLE>
*Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
LARGE PURCHASE EXEMPTION. To the extent that no other A share no-load exemption
is available, the foregoing schedule of sales loads does not apply to purchases
of A shares of $1,000,000 or more. If a customer who is not a participant in
Bank of America's 401(k) Daily Advantage Retirement Plan Program purchases
$1,000,000 or more of A shares and redeems such shares, a contingent deferred
sales load will be imposed as follows:
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<PAGE> 45
<TABLE>
<CAPTION>
Number of Years Applicable Contingent
Elapsed Since Purchase Deferred Sales Load
---------------------- ---------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the costs of the shares held for the longest period of time.
Although no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $ 3 million, 0.50% of the next $47
million and 0.25% thereafter.
B SHARES DEFERRED SALES CHARGE. B shares may be purchased at net asset
value per share without the imposition of a sales charge at the time of
purchase. The Funds' distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time the
shares are purchased. The proceeds of the contingent deferred sales charges and
the ongoing distribution plan fees described below are used to reimburse the
Funds' distributor for its expenses, including the compensation of broker-
dealers.
B shares that are redeemed within 6 years of purchase are subject to
the contingent deferred sales charge at the rates set forth below,
charged as a percentage of the lesser of the current market value or
the cost of the shares being redeemed. Accordingly, no sales charge
will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
B shares will convert to A shares on the first business day of the
month following the eighth anniversary of the date of purchase unless
the B shares have been exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund.
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<PAGE> 46
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge (as a
Number of Years percentage of dollar amount
Elapsed Since Purchase* subject to the charge)
- ----------------------- ---------------------------
<S> <C>
Less than one . . . . . . . . . . . . . . . . . . . . . . 5.0%
More than one, but less
than two . . . . . . . . . . . . . . . . . . . . . . . 4.0%
More than two, but less
than three . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than three, but less
than four . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than four, but less
than five . . . . . . . . . . . . . . . . . . . . . . . 2.0%
More than five, but less
than six . . . . . . . . . . . . . . . . . . . . . . . 1.0%
After six years . . . . . . . . . . . . . . . . . . . . .None
- -----------------------------------
</TABLE>
* The time period during which Pacific Horizon shares of the Pacific
Horizon Prime Fund acquired through an exchange are held is not included when
the amount of the contingent deferred sales charge is calculated.
In determining whether a contingent deferred sales charge is applicable to
a redemption of B 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 B shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B shares above the total amount of payments for
the purchase of B shares during the preceding 6 years; then of amounts
representing the cost of B shares held beyond the applicable contingent deferred
sales charge period; and finally, of amounts representing the cost of the B
shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a
cost of $1,000), that you have not exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund, that in the third year after purchase the net asset
value per share is $12, and that during the three-year period you had acquired
10 additional shares through dividend reinvestment. If at such time you make
your first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the
applicable rate in the third year after purchase).
K SHARES. Bank of America will compensate Affiliated Brokers for its
customers who invested in a Fund and are participants in the 401(k) Daily
Advantage(R) Retirement Plan Program. The
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<PAGE> 47
Affiliated Brokers will be compensated by Bank of America at the rate of 1%
of the first $1 million of combined Pacific Horizon Funds' and Time Horizon
Funds' K shares in each 401(k) Daily Advantage(R) Retirement Plan Program.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on
the following types of transactions:
- - reinvestment of dividends or distributions;
- - accounts of corporate/business retirement plans (such as 401(k),
403(b)(7), 457 and Keogh accounts) which are sponsored by the Funds'
administrator and were invested in a Fund as of July 1, 1996 so long as the
account remains open on the Company's books;
- - accounts of employer-sponsored employee pension or retirement plans
(other than 403(b) plans) which make direct investments in a Fund and were
invested in a Fund as of July 1, 1996 as long as the account remains open on the
Company's books;
- - 403(b) plans invested in a Fund as of December 7, 1995;
- - any purchase of shares by an investment adviser regulated by federal or
state governmental authority when the investment adviser is purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account) other than purchases for
403(b) plans; provided that investment advisers who have invested 403(b) plans
in a Fund on behalf of existing and new clients as of December 7, 1995 may
continue to invest on a no-load basis;
- - accounts opened by a bank, trust company or thrift institution, acting as
a fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company affiliate
of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open on
the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares
of a 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;
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<PAGE> 48
- - any purchase of shares, provided you were the beneficial owner of shares
of Bunker Hill Income Securities, Inc. on the date of its reorganization into
the Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan
described below.
Additionally, some individuals are not required to pay a front-end sales
load when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors;
- - U.S. - based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but worked abroad)
of Bank of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of Bank
of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers
having agreements with the Funds' distributor pertaining to the sale of shares
of a Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouse and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
a Fund (or any other fund in the Pacific Horizon Family of Funds) prior to July
1, 1992, so long as their account remains open on the Company's books; and
- - holders of the BankAmericard with appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to B shares is not charged on (1) exchanges described under
"Shareholder Services - Can I Exchange My Investment From One Fund to Another?,"
(2) redemptions in connection with minimum required distributions from IRA
accounts due to the shareholder reaching age 70 1/2; (3) redemptions in
connection with a shareholder's death or disability (as defined in the Internal
Revenue Code); and (4) involuntary redemptions as a result of an account's net
asset value remaining below $500 after sixty days' written notice. In addition,
no contingent deferred sales charge is charged on shares acquired through the
reinvestment of dividends or distributions.
RIGHTS OF ACCUMULATION. When buying A shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate
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<PAGE> 49
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). Shares of any investment portfolio of Time Horizon Funds (a
"Time Horizon Fund"), an open-end investment company managed by Bank of America
generally will not be included when determining reduced sales loads under the
rights of accumulation program, except that you may aggregate your investment in
Pacific Horizon Funds and Time Horizon Funds in order to qualify for the Large
Purchase Exemption.
To qualify for a reduced sales load on A shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
Aggressive Growth Fund, the Pacific Horizon Capital Income Fund and shares of
the Company's money market funds that can be traced back to the purchase of
shares carrying a sales load (or any combination thereof) with an aggregate
current value of $90,000. If you subsequently purchase additional A shares
carrying a sales load of a Fund with a current value of $10,000, the load
applicable to the subsequent purchase would be reduced to 3.75% of the offering
price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon
Fund within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A shares carrying a sales load purchased during that
period count as a credit toward completion of the Letter of Intent. Any
investments you make during the period receive the discounted sales load based
on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent. Shares of Time Horizon Funds will generally not be
included when determining reduced sales loads under the letter of intent program
unless you are a participant in the 401(k) Daily Advantage Retirement Plan
Program.
While signing a Letter of Intent does not bind you to purchase, or the
Company to sell, the full amount indicated at the sales load in effect at the
time of signing, you must complete the intended purchase to obtain the reduced
sales load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
-45-
<PAGE> 50
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 exceeds the amount indicated in your Letter of
Intent, you will recieve 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 converted offering price
applicable to a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent
will redeem an appropriate number of shares held in escrow to realize the
difference.
If you would like to participate, complete the Letter of Intent on your
Account Application. If you have any questions regarding the Letter of Intent,
call 800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Funds permit you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular
circumstances it is more advantageous to invest in A shares and incur a front-
end sales charge and an ongoing shareholder service plan fee; to invest in B
shares and have the entire initial purchase price invested in a Fund with the
investment thereafter being subject to a contingent deferred sales charge and
ongoing distribution and service plan fees; or to invest in K shares and incur
neither a front-end sales charge nor a contingent deferred sales charge. K
shares do incur fees under a Distribution and Services Plan. K shares of a
Fund, however, are available to: (a) businesses or other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America; and (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the front-end sales charge alternative (A
shares) because similar sales charge reductions are not available for purchases
under the contingent deferred sales charge alternative (B shares). Moreover, A
shares would not be subject to ongoing distribution and services plan fees, as
described below. However, because front-end sales charges are deducted at the
time of purchase, such investors who pay a front-end sales charge would not
have all their funds invested initially. The Company will not accept any order
for B shares from an investor who is eligible to purchase A shares without a
sales load or from an investor eligible to purchase K shares.
-46-
<PAGE> 51
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in a Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing shareholder service and distribution fees related to B shares may
exceed the front-end sales charge and ongoing shareholder service fees related
to A shares. However, such investors must weigh this consideration against the
fact that not all their funds will be invested initially. Furthermore, the
ongoing shareholder service and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
contingent deferred sales charge alternative.
Certain other investors might determine it to be more advantageous to have all
their funds invested initially in B shares, although subject to continuing
shareholder service plan and distribution plan fees, and to a contingent
deferred sales charge for a 6 year period of time.
-47-
<PAGE> 52
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
<TABLE>
<CAPTION>
TO BUY SHARES
Opening an Account Adding to an Account
--------------------------------------------------------------------------------
<S> <C> <C>
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Fund's transfer agent)
Contact them directly Contact them directly for
for instructions. instructions.
--------------------------------------------------------------------------------
Through the Distributor
(if you are or will be the shareholder of record on the Company's books)
By Mail
Mail all subsequent
Complete Account investments to:
Application and mail it Pacific Horizon Funds,
with a check (payable to Inc.
the appropriate Fund) to File No. 54634
the address on the Los Angeles, CA 90074-
Account Application. 4634
--------------------------------------------------------------------------------
In Person
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219-3035 Deliver Account
Application and your Deliver your payment
payment directly to the directly to the address
address on the left. on the left.
--------------------------------------------------------------------------------
By Wire
Initial purchases of Contact the Funds'
shares into a new transfer agent at 800-
account may not be made 346-2087 for complete
by wire. wiring instructions.
Instruct your bank to
transmit immediately
available funds for
purchase of shares of a
particular Fund in your
name.
Be sure to include your
name and your Fund
account number.
Consult your bank for information on remitting
funds by wire and any associated bank charges.
--------------------------------------------------------------------------------
</TABLE>
-48-
<PAGE> 53
TO BUY SHARES
<TABLE>
<CAPTION>
Opening an Account Adding to an Account
--------------------------------------------------------------------------------
<S> <C> <C>
By TeleTrade TeleTrade Privileges may Purchases may be made in
(a service permitting not be used to make an the minimum amount of
transfers of money from initial purchase. $500 and the maximum
your checking, NOW or bank amount of $50,000 per
money market account) transaction as soon as
appropriate information
regarding your bank
account has been
established on your Fund
account. This
information may be
provided on the Account
Application or in a
signature guaranteed
letter of instruction to
the Transfer Agent.
Signature guarantees are
discussed under "How to
Sell Shares".
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services"
section for additional important information about
the TeleTrade Privilege.
You may use other investment options, including automatic investments
and exchanges, to invest in your Fund account.
Please refer to the section entitled "Shareholder Services" for more information.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public
offering price calculated at the next close of regular trading on the
Exchange (currently 4:00 p.m. Eastern time) after your purchase
order is received in proper form by the Funds' transfer agent, BISYS
Fund Services, Inc. (the "Transfer Agent"), at its Columbus office.
If you purchase shares through Bank of America, your broker or
another Service Organization, the entity involved is responsible for
transmitting your order and required funds to the Transfer Agent on a
timely basis in accordance with the procedures in this Prospectus.
Share purchases (and redemptions) executed through Bank of America or
a Service Organization are executed only on days on which the
particular institution and the Funds are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m.
Eastern time on a business day will be effected at the public offering
price calculated at 4:00 p.m. Eastern time on that day, if the Service
Organization transmits your order to the Transfer Agent by the end
-49-
<PAGE> 54
of the Transfer Agent's business day. Except as provided in the
following two sentences, if the order is not received in proper form
by a Service Organization by 4:00 p.m. Eastern time or not received by
the Transfer Agent by the close of 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 Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent.
In these instances orders received by the entity by 4:00 p.m. Eastern
time on a business day will be effected as of 4:00 p.m. Eastern time
that day if the order is actually received by the Transfer Agent not
later than the next business morning accompanied by payment in federal
funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are
purchasing A, B or K shares. Certificates for shares will no longer
be issued.
Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be
imposed by the Transfer Agent. All payments should be in U.S.
dollars and, to avoid fees and delays, should be drawn only on U.S.
banks. Please remember that the Company reserves the right to reject
any purchase order.
You should note that Bank of America, Service Organizations and
registered investment advisers may charge a separate fee or
transaction charge to their clients related to their investment in
Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest.
Bank of America and Service Organizations may also impose minimum
customer account and other requirements in addition to those
imposed by a Fund. If you purchase or redeem shares directly from a
Fund, you may do so without incurring any charges other than those
described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem,"
shares. The value of the shares you redeem may be more or less than
your cost, depending on 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,
-50-
<PAGE> 55
you must arrange with Bank of America or your Service
Organization for delivery of the required application(s) to the
Transfer Agent.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
TO SELL SHARES
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Transfer Agent)
--------------------------------------------------------------------------------
Contact them directly for instructions.
--------------------------------------------------------------------------------
Through the Distributor
(if you are a shareholder of record on the Company's books)
<S> <C>
--------------------------------------------------------------------------------
By Mail Send a signed, written request (each owner, including
each joint owner, must sign) to the Transfer Agent.
Pacific Horizon
Corporate Bond Fund, If you hold stock certificates for the shares being
Intermediate Bond Fund redeemed, make sure to endorse them for transfer,
or U.S. Government have your signature on them guaranteed by your bank
Securities Fund or another guarantor institution (as described in the
c/o Pacific Horizon section entitled "What Kind Of Paperwork Is Involved
Funds, Inc. In Selling Shares?") and include them with your
P.O. Box 80221 request.
Los Angeles, CA 90080-
9909
--------------------------------------------------------------------------------
In Person Deliver your signed, written request (each owner,
including each joint owner, must sign) and any
BISYS Fund Services, certificates (endorsed for transfer and signature
Inc. guaranteed as described in the section entitled "What
3435 Stelzer Road Kind Of Paperwork Is Involved In Selling Shares?") to
Columbus, OH 43219- the address on the left.
3035
</TABLE>
-51-
<PAGE> 56
<TABLE>
<CAPTION>
TO SELL SHARES
-------------------------------------------------------------------------------
<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 below
in the section entitled "What Kind Of Paperwork Is
Involved In Selling Shares?".
Redemption proceeds will normally be wired the
business day after your request and any other
necessary documents have been received by the
Transfer Agent.
Wire Privileges apply automatically unless you
indicate on the Account Application or in a
subsequent written notice to the Transfer Agent that
you do not wish to have them. Requests must be for
at least $1,000 and may be subject to limits on
frequency and 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.
-------------------------------------------------------------------------------
By Check You may write Redemption Checks ("Checks") payable to
any payee from your Fund account in the amount of
$500 or more. The Transfer Agent (as your agent)
will redeem the necessary number of shares to cover
the Check when it is presented for payment.
You will continue earning dividends on shares
redeemed in this manner until the Check actually
clears the Transfer Agent.
You may request this Privilege on an Account
Application that has been signed by the registered
owner(s) and a set of Checks will then be sent to the
registered owner(s) at the address of record.
There is no charge for the use of Checks, although
the Transfer Agent will charge for any "stop payment"
requests made by you, or if a Check cannot be honored
due to insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed
by Check.
</TABLE>
-52-
<PAGE> 57
<TABLE>
TO SELL SHARES
-------------------------------------------------------------------------------
<S> <C>
By TeleTrade You may redeem Fund shares (minimum of $500 and
(a service permitting maximum of $50,000 per transaction) by telephone
transfers of money to after appropriate information regarding your bank
your checking, NOW or account has been established on your Fund account.
bank money market This information may be provided on the Account
account) Application or in a signature guaranteed letter of
instruction to the Transfer Agent. Signature
guarantee requirements are discussed in the section
entitled "What Kind Of Paperwork Is Involved In
Selling Shares?".
Redemption orders may be placed by calling
800-346-2087.
TeleTrade Privileges apply automatically unless you
indicate on the Account Application or in a
subsequent written notice to the Transfer Agent that
you do not wish to have them.
You should refer to the "Shareholder Services"
section for additional important information about
the TeleTrade Privilege.
-------------------------------------------------------------------------------
Other redemption options, including exchanges and automatic
withdrawals, are also available. Please refer to the section entitled
"Shareholder Services" for more information.
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Transfer
Agent at its Columbus office. Although the Funds impose no charge
when A shares are redeemed (except pursuant to the Large Purchase
Exemption described above), if you purchase shares through Bank of
America or a Service Organization, they may charge a fee for providing
certain services in connection with investments in Fund shares.
When you redeem your B shares within 6 years of purchase, (or longer if
your shares have been exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund), you may be subject to a contingent
deferred sales charge as described above.
The Fund imposes no charge when K shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA
and non-working spousal IRA accounts) involuntarily if, after sixty
days' written notice, the account's net asset value remains below a
$500 minimum balance. The contingent deferred sales charge will not be
imposed upon such involuntary redemptions.
-53-
<PAGE> 58
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each
joint owner. When redeeming shares, you should indicate whether you are
redeeming A, B or K shares. If you own both A or K and B shares of a
Fund, A or K shares will be redeemed first unless you request
otherwise. Certain types of redemption requests as well as all
endorsed share certificates will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for
(i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of
record on the Company's books, or (iii) an amount of $50,000 or less if
the address of record has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a
member of the FDIC; (ii) a trust company; (iii) a member firm of a
national securities exchange; or (iv) another eligible guarantor
institution. Guarantees must be signed by an authorized signatory of the
guarantor institution and be accompanied by the words "Signature
Guaranteed." The Transfer Agent will not accept guarantees from
notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the
Transfer Agent receives a request in proper form, except as provided by
the rules of the Securities and Exchange Commission. If the shares to be
redeemed have been purchased by check or by TeleTrade, the Company
will, upon the clearance of the purchase check or TeleTrade payment,
mail the redemption proceeds within seven business days. This does
not apply to situations where a Fund receives payment in cash or
immediately available funds for the purchase of shares. The Company may
suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of
shares) for such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for
transmitting redemption orders and crediting their customers' accounts
with redemption proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of
a Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of
your redemption trade date without paying a sales load. Upon such a
reinvestment, the Funds' distributor will credit to your account any
contingent deferred sales charge imposed on any redeemed B shares or any
Pacific Horizon shares of
-54-
<PAGE> 59
the Pacific Horizon Prime Fund. Shares so reinvested will be
purchased at a price equal to the net asset value next determined
after the Transfer Agent receives a reinstatement request and payment in
proper form.
If 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 Corporate Bond Fund and Intermediate Bond Fund are
entitled to dividends and distributions arising from the net
investment income and net realized gains, if any, earned on
investments in the particular Master Portfolio which are allocable to
that Fund. Fund shares begin earning dividends the day after payment in
federal funds is received for such shares through the business day such
shares are redeemed. Each Fund's net realized gains (after reduction
for capital loss carryforwards, if any) are distributed at least
annually. Dividends from each Fund's net investment income are declared
daily and paid no later than the fifth business day of the month next
following the month in which it is declared. Dividends from net
investment income payable to shareholders who redeem all their shares
of a Fund will be paid in cash within five business days after such
shares are redeemed. Distributions from net realized capital gains
payable to shareholders who redeem all their shares of a Fund will be
paid in cash within ten days after the close of the period for which
it is declared.
You will automatically receive dividends and capital gain
distributions in additional shares of the same class of shares of the
Fund for which the dividend was declared without a sales load unless
you: (i) elect in writing to receive payment in cash; or (ii) elect to
participate in the Directed Distribution Plan described in the
section entitled "Can My Dividends From A Fund Be Invested In Other
Funds?".
To elect to receive payment in cash, or to revoke such election, you
must do so in writing to the Transfer Agent, c/o Pacific Horizon
Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. The
election or revocation will become effective with respect to dividends
paid after it is received and processed by the Transfer Agent.
-55-
<PAGE> 60
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others
described in this Prospectus may not be available for, or may have
different conditions imposed on them than as described in this
Prospectus with respect to certain clients of Bank of America and
particular Service Organizations. Consult these entities for more
information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"),
including IRAs set up under a Simplified Employee Pension Plan ("SEP-
IRAs") and IRA "Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN
MANY CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to B shares 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 Funds' distributor at 800-332-3863.
Investors should also read the IRA Disclosure Statement and the Bank
Custodial Agreement for further details on eligibility, service fees and
tax implications, and consult their tax advisers.
Additionally, K shares are available to business and other
organizations that participate in the 401(k) Daily Advantage(R)
Retirement Plan Program sponsored by Bank of America.
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. Specifically, A shares may be exchanged for
other A shares, B shares may be exchanged for other B shares and K shares
may be exchanged for other K shares. NO ADDITIONAL SALES LOAD WILL BE
INCURRED WHEN EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A
SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME HORIZON FUNDS. A
and B shares may be exchanged for other A and B shares, respectively,
or for Pacific Horizon shares of the Pacific Horizon Prime Fund
-56-
<PAGE> 61
without the payment of any contingent deferred sales charge at the
time the exchange is made. In addition, Pacific Horizon shares of the
Pacific Horizon Prime Fund that were acquired through an exchange of B
shares may be exchanged for B shares without the payment of any
contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred
sales charge payable upon redemption of B shares, the holding period of
the shares originally held will be added to the holding period of the
shares acquired through exchange unless the shares acquired through
the exchange are Pacific Horizon shares of the Pacific Horizon Prime Fund.
The time period during which Pacific Horizon shares of the Pacific
Horizon Prime Fund acquired through an exchange are held is not
included when the amount of the contingent deferred sales charge is
calculated.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above.
An investment in a Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and
are subject to the minimum initial investment requirements of the particular
fund into which the exchange is being made. You may obtain prospectuses
regarding the funds into which you wish to make an exchange from your Service
Organization or the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below entitled, "What Is Teletrade?" for
a description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service
Organization or the Funds' distributor.
The Funds reserve the right to reject any exchange request and the
Exchange Privilege may be modified or terminated at any time. At
least 60 days' notice of any material modification to or termination of
the Exchange Privilege will be given to shareholders except where notice
is not required under the regulations of the Securities and Exchange
Commission.
-57-
<PAGE> 62
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC
TRANSFERS OF MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN
ESTABLISHED FUND ACCOUNT. THE SERVICE MAY BE USED LIKE AN "ELECTRONIC
CHECK" TO MOVE MONEY BETWEEN AN ACCOUNT AT A FINANCIAL INSTITUTION AND A
FUND ACCOUNT WITH A SINGLE TELEPHONE CALL.
Purchase and redemption proceeds with respect to TeleTrade
transactions will be transferred between your Fund account and the
checking, NOW or bank money market account designated by you. Only an
account maintained at a domestic financial institution that is an
Automated Clearing House member may be so designated. TeleTrade
purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the
transaction. Redemption proceeds will be on deposit in your account at
your financial institution generally two business days after the
redemption request is received by the Transfer Agent. You may also
request receipt of your redemption proceeds by check, which will be
payable to the registered owners of your Fund account and will be sent
only to the address of record.
You should note that the Transfer Agent may act upon a telephone
redemption request (including a telephone wire redemptions) 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. 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
-58-
<PAGE> 63
is an Automated Clearing House member are eligible. The Automatic
Investment Program is one means by which you may use Dollar Cost Averaging in
making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written
request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any
time by mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt.
The Funds may modify or terminate this Privilege at any time or charge a
service fee, although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC
WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU
MAY WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A
MONTHLY, QUARTERLY, SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC
WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual 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 each Fund's
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<PAGE> 64
sales load. Use of this Plan may also be disadvantageous for B shares due
to the potential need to pay a contingent deferred sales charge.
CAN MY DIVIDENDS FROM A FUND
BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently
charged for effecting these transactions.
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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 anytime to terminate your
participation by notifying the appropriate federal agency in writing.
Further, the Fund may terminate your participation after 30 days'
notice.
THE BUSINESS OF THE FUND
Fund Management
The business affairs of 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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SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser for the Portfolios. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank
holding company. Its principal offices are located at 555
California Street, San Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that
provides commercial banking and trust business through an extensive
system of branches across the western United States. Bank of
America's principal banking affiliates operate branches in ten U.S.
states as well as corporate banking, business credit and thrift
offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries. Bank of America is the
successor by merger to Security Pacific National Bank ("Security
Pacific"), which previously served as investment adviser to the
company since it commenced operations.
In separate advisory agreements with Master Trust and the Company
(collectively, the "Advisory Agreements"), Bank of America has agreed to manage
the Portfolios' investments and to be responsible for, place orders for, and
make decisions with respect to, all purchases and sales of the Portfolios'
securities. The investment advisory agreement with respect to the
Intermediate Bond Master Portfolio also provides that Bank of America may:
1) in its discretion, provide advisory services through its own employees or
employees of one or more of its affiliates that are under the common
control of Bank of America's parent, BankAmerica Corporation, provided such
employees are under the management of Bank of America and 2) employ a
sub-adviser provided that Bank of America remains fully responsible to
the Intermediate Bond Master Portfolio for the acts and omissions of the
sub-adviser.
Portfolio management services for the Portfolios are conducted by the
Fixed Income Division of the Investment Management Services Group of
Bank of America.
For the services provided and expenses assumed under the Advisory
Agreements, Bank of America is entitled to receive a fee at the annual rate of
0.45% of each of the Corporate Bond Master Portfolio's and Intermediate Bond
Master Portfolio's respective average daily net assets and 0.35% of the
U.S. Government Securities Fund's average daily net assets. These amounts may
be reduced pursuant to undertakings by Bank of America. (See the information
below under "Fee Waivers.") Bank of America waived a portion of its investment
advisory fee payable by each of the Master Portfolios for the fiscal year ended
February 29, 1996. For the fiscal year ended February 29, 1996, the U.S.
Government Securities Fund paid investment advisory fees to Bank of America
at an effective annual rate of 0.35% of such Fund's average daily net assets.
Prior to its reorganization into the Corporate Bond Fund, the Corporate
Predecessor Fund was advised by Security Pacific Investment Management, Inc.
("SPIM"), an affiliate of Bank of America, until December 8, 1993 when
SPIM transferred its rights and obligations under its
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advisory agreement with the Corporate Predecessor Fund (the "Prior
Agreement") to Bank of America, which thereafter served as adviser to the
Corporate Predecessor Fund. The Prior Agreement provided that the adviser
would receive a fee, computed weekly and paid quarterly, based upon the
average daily net assets of the Corporate Predecessor Fund at the annual
rate of 0.50% on the first $100 million in net assets, and 0.35% with
respect to the excess over $100 million. The Corporate Predecessor
Fund bore investment advisory and administration fees during the
period October 1, 1993 to April 24, 1994 at the annual rate of 0.50% of
such Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees
under the Shareholder Services Plan, Distribution and Services Plan,
Distribution Plan and Administrative and Shareholder Services Plan as
described under "Plan Payments," and may receive fees charged directly to their
accounts in connection with investments in shares of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds and
the Master Portfolios. Concord is an indirect, wholly-owned subsidiary of
The BISYS Group, Inc. Its offices are located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
Under its administration agreements with the Company and Master Trust,
Concord has agreed to: pay the costs of maintaining the offices of the
Company and the Master Portfolios; provide a facility to receive purchase and
redemption orders; provide statistical and research data, data processing
services and clerical services; coordinate the preparation of reports to
Fund shareholders, interestholders of the Master Portfolios and the Securities
and Exchange Commission; prepare tax returns; maintain the registration or
qualification of each Fund's shares for sale under state securities laws;
maintain the books and records of the Funds and the Master Portfolios;
calculate the net asset value of the Funds and the Master Portfolios and
calculate the dividends and capital gains distributions paid to shareholders;
serve as dividend disbursing agent for the Master Portfolios; and generally
assist in all aspects of the operations of the Funds and the Master
Portfolios.
For its services as administrator, Concord is entitled to receive an
administration fee from the U.S. Government Securities Fund at the annual
rate of 0.20% of such Fund's average net assets, and an administration
fee at the annual rate of 0.15% of each of the Corporate Bond Fund's and
Intermediate Bond Fund's respective average daily net assets. Concord
also is entitled to receive an administration fee from the Master
Portfolio's net assets, at an annual rate of 0.05% of each such Master
Portfolio's average daily net assets. These amounts may be reduced pursuant
to undertakings by Concord. (See the information below under "Fee Waivers.")
During the fiscal year ended February 29, 1996, Concord waived a portion of its
administration fee payable by the Intermediate Bond Fund, Corporate Bond
Fund and each of the Master Portfolios. During the fiscal year ended February
29, 1996, the U.S. Government Securities Fund paid Concord administration
fees at an effective annual rate of 0.20% of such Fund's average daily net
assets.
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Pursuant to the authority granted in its administration agreements,
Concord has entered into agreements with PFPC, Inc. ("PFFC") (with
respect to the Corporate Bond Fund, Intermediate Bond Fund and the
Master Portfolios) and The Bank of New York ("BONY") (with respect to the
U.S. Government Securities Fund) under which PFPC (and an offshore
affiliate of PFPC) and BONY perform certain of the services listed
above including calculating the net asset value of the Funds and the
Master Portfolios, calculating dividends and capital gains
distributions to shareholders, and maintaining the books and records of
the Funds and the Master Portfolios. In connection with providing
services, the Corporate Bond Fund, Intermediate Bond Fund and the
Master Portfolios bear all fees and expenses charged by PFPC, and the
U.S. Government Securities Fund bears all Fees and expenses charged by
BONY.
Pursuant to the Prior Agreement, the adviser was responsible for
providing administrative services to the Corporate Predecessor Fund.
The cost of such services were governed under the Prior Agreement.
During the Corporate Predecessor Fund's last two fiscal years, Concord
provided certain administrative services to the Corporate Predecessor
Fund pursuant to a Sub-Administration Agreement with SPIM. For these
services, SPIM paid Concord a Fee of 0.10% (annualized) of the average net
assets of the Corporate Predecessor Fund for the period October 1, 1993 to
April 24, 1994. This renumeration was borne by SPIM and not by the
Corporate Predecessor Fund.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial
Group, Inc. (the "Distributor"). The Distributor is an indirect,
wholly-owned subsidiary of The BISYS Group, Inc. and is located at
3435 Stelzer Road, Columbus, Ohio 43219.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Corporate Bond
Fund, Intermediate Bond Fund and the Master Portfolios. The Bank of New
York, 90 Washington Street, New York, New York 10286, serves as
Custodian of the U.S. Government Securities Fund. BISYS Fund
Services, Inc. is the transfer and dividend disbursing agent for each of
the Funds and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all
expenses in connection with the performance of their services and the
Funds and Master Portfolios bear the expenses incurred in their
operations. Expenses can be reduced by voluntary fee waivers and
expense reimbursements by Bank of America and other service providers, as
well as by certain expense limitations imposed by state securities
regulators. Periodically, during the course of each Fund's fiscal
year, Bank of America, Concord and/or the Distributor may
prospectively choose not to receive fee payments and/or may assume
certain expenses of the Funds or Master Portfolios as
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a result of competitive pressures and in order to preserve and protect the
business and reputation of Concord and Bank of America. However, the
service providers retain the ability to discontinue such fee waivers
and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU
SHOULD SAVE YOUR ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION
YOU WILL NEED TO CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR
ULTIMATE SALE OR EXCHANGE OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of
some of the important tax considerations generally affecting the Funds and
their shareholders. Consult your tax adviser with specific
reference to your own tax situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986,
as amended (the "Code"), and Management intends that each Fund will so
qualify in future years as long as such qualification is in the best
interest of its shareholders. As a result of this qualification,
each Fund generally is not required to pay federal income taxes to
the extent its earnings are distributed in accordance with the Code. It
is expected that the Master Portfolios will not be subject to federal
income taxes. Each Master Portfolio intends to qualify as a
partnership (or other pass-through entity) for federal income tax
purposes. As such, the Master Portfolios are not subject to tax and the
Corporate Bond Fund and Intermediate Bond Fund will be treated for
federal income tax purposes as recognizing a pro rata share of their
corresponding Master Portfolio's income and expenses and owning a pro
rata share of their corresponding Master Portfolio's assets. The
Corporate Bond Fund's and Intermediate Bond Fund's status as regulated
investment companies is dependent on, among other things, their
corresponding Master Portfolio's continued qualification as a
partnership (or other pass-through entity) for federal income tax
purposes.
Distributions (whether received in cash or additional shares) derived
from ordinary income and/or the excess of net short-term capital gains
over net long-term capital loss are taxable to you as ordinary income.
The Company expects that none of the dividends paid by the Funds will
qualify for the dividends-received deduction for domestic
corporations.
Any distribution you receive comprised of the excess of net long-term
capital gains over net short-term capital losses ("capital gain
dividend") will be taxable to you as a long-term capital gain no
matter how long you have held Fund shares.
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A distribution paid to you by a Fund in January of a particular year
will be deemed for tax purposes to have been received by the
shareholder on December 31 of the preceding year, if the dividend was
declared and payable to shareholders of record on a specified date in
October, November or December of that preceding year.
If you are considering buying shares of a Fund on or just before the
record date of a capital gain dividend, you should be aware that the amount
of a forthcoming dividend, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or
exchange of Fund shares, depending upon the tax basis of your shares and
their price at the time of such redemption or exchange. If you hold
Fund shares for six months or less and during that time receive a capital
gain dividend on those shares, any loss on the sale or exchange of
those shares will be treated as a long-term capital loss to the extent
of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of
Fund shares in your tax basis when determining your gain (or loss) on a
redemption or exchange of these shares. However, if you exchange such
shares for shares of another investment portfolio of the Company within 90
days of the purchase and are able to reduce the sales load on the new
shares through the Exchange Privilege, the reduction may not be
included in the tax basis of your exchanged shares for the purpose of
calculating your gain or loss from the exchange. It may be included in
the tax basis of the new shares, subject to the same limitations.
Certain realized gains or losses on the sale or retirement of foreign
bonds held by the Corporate Master Portfolio, to the extent
attributable to fluctuations in currency or exchange rules, as well as
other gains or losses attributable to exchange rate fluctuations, are
typically treated as ordinary income or loss. Such income or loss may
increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of
foreign currency gains and losses, income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by
the Corporate Bond Fund may be treated for federal income tax
purposes as a return of capital, or in some circumstances, as capital
gain. Generally, your tax basis in your Corporate Bond Fund shares
will be reduced to the extent that an amount distributed to you is
treated as a return of capital.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax
consequences which may differ from such federal tax consequences as
described above.
A substantial portion of the dividends that you receive from the U.S.
Government Securities Fund are derived from such Fund's investments in
U.S. Government obligations. These dividends may not be entitled to the
same exemptions from state and local taxes that would have been
available if you had purchased U.S. Government obligations directly.
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MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL
TOTAL RETURN, AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE
INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE
RESULTS.
Average annual total return reflects the average annual percentage
change in value of an investment in a Fund over the period being
measured, while aggregate total return reflects the total percentage
change in value over the period being measured. Yield measures the net
income of a Fund over a specified 30 day period.
Periodically, a Fund's total return (calculated on an average annual
total return and/or an aggregate total return basis for various
periods), and yield may be quoted in advertisements or in
communications to shareholders. Both methods of calculating total
return assume dividends and capital gains distributions made by such
Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A shares and the applicable
contingent deferred sales charge for B shares.
Each Fund may also advertise total return data without reflecting the
sales load imposed on the purchase of Fund shares in accordance with the
rules of the Securities and Exchange Commission. Quotations that do not
reflect the sales load will, of course, be higher than quotations
that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share
(which may differ from the net income per share used for accounting
purposes) during a 30 day (or one month) period by the maximum
offering price per share on the last day of the measuring period, and
then annualizing the result on a semi-annual basis. The 30 day or one
month measuring period will be identified along with any yield
quotation to which it relates.
Each Fund may compare its total return and yield to that of other
mutual funds with similar investment objectives and to bond and other
relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor mutual fund
performance.
For example, a Fund's total return may be compared to the Consumer
Price Index or to data prepared by Lipper Analytical Services, Inc.;
Donoghue's Money Fund Report; Mutual Fund Forecaster; Morningstar;
Micropal; Wiesenberger Investment Companies Services; or CDA
Investment Technologies, Inc.
Total return data as reported in national financial publications such as
MONEY, FORBES, BARRON'S, THE WALL STREET JOURNAL and THE NEW YORK TIMES,
or in local or regional publications, may also
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be used in comparing Fund performance. Each Fund's total return also may
be compared to indices such: as the Dow Jones Industrial Average; the
Standard & Poor's 500 Stock Index; the Shearson Lehman Bond Indexes;
the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Because a Fund's performance will fluctuate, it should not be compared
with bank deposits, savings accounts and similar investments that
often provide an agreed or guaranteed fixed yield for a stated period of
time. Performance is generally a function of the kind and quality of
the instruments in a portfolio, portfolio maturity, operating
expenses and market conditions. Not included in a Fund's calculations of
total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating
balance requirements or fees based upon account transactions, assets or
income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER
27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR
VALUE PER SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND
UNISSUED SHARES INTO ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million
shares of Class E Common Stock, 150 million shares of Class E --
Special Series 3 Common Stock and 50 million shares of Class E -
Special Series 5 Common Stock, representing interests in the U.S.
Government Securities Fund; 40 million shares of Class M Common Stock, 60
million shares of Class M -- Special Series 3 Common Stock and 50
million shares of Class M - Special Series 5 Common Stock,
representing interests in the Intermediate Bond Fund and 40 million
shares of Class W Common Stock, 60 million shares of Class W --
Special Series 3 Common Stock and 50 million shares of Class W -
Special Series 3 Common Stock, representing interests in the Corporate
Bond Fund; and additional classes of shares representing interests in
other investment portfolios of the Company. Class E, M and W Common
Stock are the "A" shares, Class E, M and W -- Special Series 3 Common
Stock are the "B" shares and Class E, M and W - Special Series 5
Common Stock are the "K" shares. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class E
Common Stock, Class E -- Special Series 3 Common Stock, Class E -
Special Series 5 Common Stock, Class M Common Stock, Class M --
Special Series 3 Common Stock, Class M - Special Series 5 Common
Stock, Class W Common Stock, Class W - Special Series 3 Common Stock or
Class W - Special Series 5 Common Stock) into one or more series. For
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more information about the Company's other portfolios, contact the
Company at the telephone number listed on the inside cover page.
Shares representing interests in the Funds are entitled to participate in
the dividends and distributions declared by the Board of Directors and in
the net distributable assets of the particular Fund on
liquidation. Fund shares have no preemptive rights and only such
conversion and exchange rights as the Board may grant in its
discretion. When issued for payment as described in this Prospectus,
Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Fund shares have
cumulative voting rights to the extent that may be required by
applicable law. Additionally, shareholders will vote in the aggregate and
not by class or series, except as required by law (or when
permitted by the Board of Directors). Only A shares will vote on
matters relating solely to A shares, only B shares will vote on
matters relating solely to B shares and only K shares will vote on
matters (such as the distribution and services plan described below)
relating solely to K shares. The Funds do not presently intend to
hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the
directors holding office has been elected by the shareholders. At
that time, the directors then in office will call a shareholders'
meeting for the election of directors. Under certain circumstances,
however, shareholders have the right to call a shareholder meeting to
consider the removal of one or more directors. Such meetings will be
held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law
and the Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR
THE A SHARES, A DISTRIBUTION AND SERVICES PLAN FOR B SHARES AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE
AND SHAREHOLDER SERVICES PLAN FOR K SHARES
The Company has adopted a Shareholder Service Plan for A shares, under
which the A shares of each Fund reimburse the Distributor for
shareholder servicing fees the Distributor pays to Service
Organizations. The Company has also adopted a Distribution and
Services Plan pursuant to Rule 12b-1 under the 1940 Act, under which the
B and K shares of the Fund reimburse the Distributor for services
rendered and costs incurred in connection with distribution
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of the B and K shares and for shareholder servicing fees the Distributor
pays to Service Organizations. The Company has adopted a Distribution Plan
pursuant to Rule 12b-1 under the 1940 Act under which the K shares of the Fund
reimburse the Distributor for services rendered and costs incurred in connection
with distribution of the K shares. The Company has also adopted an
Administrative and Shareholder Services Plan for K Shares, under which K shares
of the Fund reimburse the Distributor for administrative and shareholder
servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER 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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of such Fund's average daily net assets of such
Fund's A shares. Excluded from this calculation, however, are all shares
acquired via a transfer of assets from trust and agency accounts at Bank of
America. This amount may be reduced pursuant to undertakings by the
Distributor. During the fiscal year ended February 29, 1996, the Distributor
waived all payments under the Plan with respect to the Corporate Bond and
Intermediate Bond Funds. For the same period, the U.S. Government Securities
Fund made payments under the Plan at an effective annual rate of 0.25%
of such Fund's average daily net assets.
If in any month the Distributor is due more monies than are
immediately payable because of the percentage limitation described above,
the unpaid amount is "carried forward" from month to month while the Plan
is in effect until such time when it may be paid. However, any "carried
forward" amounts will not be payable beyond the fiscal year during which the
amounts are accrued. No interest, carrying or other finance charge is
borne by a Fund with respect to the amount "carried forward."
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.
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DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, each
Fund pays the Distributor for distribution expenses primarily intended to
result in the sale of such Fund's B and K shares and with respect to B
shares for shareholder servicing expenses. Such distribution expenses
include expenses incurred in connection with advertising and marketing
each Fund's B and K shares; payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate
planning firms for assistance in connection with the
distribution of B and K shares; and expenses incurred in connection
with preparing, printing and distributing prospectuses and statements of
additional information for the Funds (except those used for
regulatory purposes, for solicitation or distribution to existing or
potential A shareholders, or for distribution to existing B and K
shareholders of the Funds) and in implementing and operating the
Distribution and Services Plan and Distribution Plan.
Shareholder servicing expenses under the Distribution and Services Plan and
Administrative and Shareholder Service Plan include, but are not limited
to, expenses incurred in connection with shareholder services
provided by the Distributor and payments to Service Organizations
for the provision of support services with respect to the beneficial
owners of B and K shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their
investments. Administrative services under the Administrative
Services Plan include, but are not limited to, expenses incurred in
connection with administrative services provided by the Distributor and
payments to Service Organizations for the provision of administrative
services to beneficial owners of K shares such as establishing and
maintaining accounts and records relating to their clients who invest
in K shares, providing information to the Funds necessary for
accounting or sub-accounting, and providing information periodically to
clients showing their position in B or K shares.
Under the Distribution and Services Plan and Distribution Plan,
payments by a Fund for distribution expenses may not exceed 0.75%
(annualized), of the average daily net assets of such Fund's B or K
shares. Under the Distribution and Services Plan and Administrative and
Shareholder Services Plans; payments for shareholder servicing expenses
may not exceed 0.25% (annualized) of the average daily net assets of
such Fund's B or K shares. Under the Administrative and Shareholder
Services Plan payments for administrative service expenses may not exceed
0.75% (annualized) of the average daily net assets of a Fund's K shares.
The total of all 12b-1 fees, administrative services fees and shareholder
service fees may not exceed, in the aggregate, the annual rate of 1.00%
of the average daily net assets of a Fund's K shares. These amounts may
be reduced pursuant to undertakings by the Distributor. Payments
for distribution expenses under the Distribution and Services Plan
and Distribution Plan are subject to Rule 12b-1 of the 1940 Act.
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The Company will obtain a representation from the Service
Organizations (and from Bank of America and Concord) that they are or
will be licensed as dealers as required by applicable law or will not
engage in activities which would require them to be so licensed.
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APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa --
judged to be the best quality, carry the smallest degree of
investment risk and are generally referred to as "gilt edged"; Aa --
judged to be of high quality by all standards; A -- deemed to have
many favorable investment attributes and considered as upper medium
grade obligations; Baa -- considered as medium grade obligations, i.e.
they are neither highly protected nor poorly secured; Ba, B, Caa, Ca, C
- -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally
lack characteristics of the desirable investment, Caa represents bonds
which are in poor standing, Ca represents a high degree of speculation and
C represents the lowest rated class of bonds); Caa, Ca and C bonds may be
in default. Moody's applies numerical modifiers 1, 2 and 3 in each
generic classification from Aa to B in its bond rating systems. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic rating category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific
obligation. Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
considered to be extremely strong. Debt rated "AA" is considered to
have a very strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than debt of a higher rated category. Debt rated "BBB" is regarded as
having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and to repay principal for debt in
this category than for higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt
rated "C1" is reserved for income bonds on which no interest is being
paid. Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized. The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
Excerpts from Fitch's description of its corporate bond ratings: "AAA" --
considered to be investment grade and of the highest credit
quality. Capacity to pay interest and repay principal is considered to be
exceptionally strong; "AA" -- judged to be investment grade and of very high
credit quality, although the capacity to pay interest and repay principal is
not quite as strong as
-73-
<PAGE> 78
bonds rated "AAA"; "A" -- deemed investment grade and of high credit
quality, although the capacity to pay interest and repay principal may be
somewhat more susceptible to the adverse changes in economic conditions
and circumstances than bonds with higher ratings; "BBB" is regarded as
having satisfactory credit quality with an adequate capacity to pay interest
and repay principal although adverse changes in economic conditions and
circumstances are more likely to impair timely payment than for higher rated
categories; "BB," "B," "CCC," "CC," "C," " DDD," "DD," and "D" -- regarded
as speculative investments. The ratings "BB" to "C" represent the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value
through reorganization of liquidation. The ratings from "AA" to "C" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding
timely payment is considered to be strong. Those issues determined
to possess extremely strong safety characteristics are denoted with
a plus (+) sign designation. The designation "A-2" indicates the
capacity for timely payment is satisfactory, however, the relative
degree of safety is not as high as for issues designated "A-1." Moody's
commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity
in excess of 9 months. The rating "Prime-1" is the highest commercial
paper rating assigned by Moody's. Issuers rated "Prime-1" (or related
supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers
rated "Prime-2" (or related supporting institutions) are considered
to have a strong capacity for repayment of short-term promissory
obligations.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The
designation "F-1" indicates that the securities possess very strong
credit quality. Those securities determined to possess exceptionally
strong credit quality are denoted with a plus (+) sign designation.
Securities rated "F-2" are considered to possess good credit quality.
Issues assigned this rating have a satisfactory degree of assurance for
timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a
nationally recognized statistical rating organization.
-74-
<PAGE> 79
PACIFIC HORIZON FUNDS, INC.
International Equity Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Measuring Performance
4. General Description of Registrant . . . Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund . . . . . . . . . The Business of the Fund
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . How to Buy Shares;
Shareholder Services;
The Business of the Fund;
Plan Payments; Measuring
Performance
8. Redemption or Repurchase . . . . . . . . How to Sell Shares;
Shareholder Services;
Plan Payments
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 80
PROSPECTUS
________________, 1996
PACIFIC HORIZON INTERNATIONAL EQUITY FUND
(Investment Portfolio Offered by Pacific Horizon Funds, Inc.)
The PACIFIC HORIZON INTERNATIONAL EQUITY FUND (the "Fund") is a diversified
mutual fund whose investment objective is to seek long-term capital growth
primarily through investments in foreign equity securities.
Unlike most other investment companies which invest directly in portfolio
securities, the Fund seeks to achieve its investment objective by investing all
of its investable assets in a fund of an open-end, management investment
company (the "Master Portfolio") having the same investment objective as that
of the Fund. The Fund will 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 __ for
additional information regarding this structure.
This Prospectus describes three classes from which investors may choose. A
shares are sold with a front-end sales charge. B shares are sold with a
contingent deferred sales charge. K shares are not subject to either a
front-end sales charge or a contingent deferred sales charge.
The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America National Trust
and Savings Association ("Bank of America" or the "investment adviser") serves
as the Fund's investment adviser. Based in San Francisco, California, Bank of
America and its affiliates have over $__ billion under management, including
over $__ 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
<PAGE> 81
time, is dated _______________, 1996 and is incorporated by reference into this
Prospectus.
Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U. S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. Investment in the Fund involves
investment risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is part of a Registration Statement that has been filed with
the Securities and Exchange Commission in Washington, D.C. under the Securities
Act of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than
as contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made.
<PAGE> 82
CONTENTS
<TABLE>
<S> <C>
EXPENSE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FUND INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TYPES OF INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FUNDAMENTAL LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS . . . . . . . . . . . . . . . .
SHAREHOLDER GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WHAT IS MY MINIMUM INVESTMENT IN THE FUND? . . . . . . . . . . . . .
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE? . . . . . . . . .
HOW ARE SHARES PRICED? . . . . . . . . . . . . . . . . . . . . . . .
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES? . . . . . . . . . .
HOW CAN I BUY SHARES? . . . . . . . . . . . . . . . . . . . . . . . .
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES? . . . . . . . . . . . .
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE? . . . . . . . . . . . . .
HOW TO SELL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HOW DO I REDEEM MY SHARES? . . . . . . . . . . . . . . . . . . . . .
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL? . . . . . . . . .
WHAT KIND OF PAPERWORK IS INVOLVED IN
SELLING SHARES? . . . . . . . . . . . . . . . . . . . . . . . . . .
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS? . . . . . . . . . .
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER
I HAVE REDEEMED SHARES? . . . . . . . . . . . . . . . . . . . . . .
DIVIDEND AND DISTRIBUTION POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CAN I USE THE FUND IN MY RETIREMENT PLAN? . . . . . . . . . . . . . . . . . .
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER? . . . . . . . . . . . .
WHAT IS TELETRADE? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT? . . . . . . . . . .
CAN I ARRANGE PERIODIC WITHDRAWALS? . . . . . . . . . . . . . . . . . . . . .
CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IS THERE A SALARY DEDUCTION PLAN AVAILABLE? . . . . . . . . . . . . . . . . .
THE BUSINESS OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FUND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SERVICE PROVIDERS . . . . . . . . . . . . . . . . . . . . . . . . . .
TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MEASURING PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PLAN PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
3
<PAGE> 83
<TABLE>
<S> <C>
Distributor: Investment Adviser:
Concord Financial Group, Inc. Bank of America National Trust
3435 Stelzer Road and Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
</TABLE>
4
<PAGE> 84
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers three classes of shares. A shares are
offered at net asset value plus a front-end sales charge (see page ___ of the
Prospectus for an explanation of net asset value per share) and are subject to
a shareholder servicing fee. B shares are offered at net asset value without a
front-end sales charge but are subject to a contingent deferred sales charge
plus distribution and shareholder servicing fees. K shares are offered at net
asset value with neither a front-end sales charge nor a contingent deferred
sales charge, but are subject to distribution, administrative servicing and
shareholder servicing fees. B shares of the Fund held for 8 years will
automatically convert to A shares of the Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund and payments by the
Master Portfolio which are allocable to the Fund. Operating expenses include
fees for portfolio management, maintenance of shareholder accounts, general
administration, distribution (in the case of B and K shares only), shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A, B and K shares and their estimated operating expenses (including the
operating expenses of the Master Portfolio which are allocable to the Fund) for
the first twelve months of operations. A hypothetical example based on the
summary is also shown.
5
<PAGE> 85
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES A Shares B Shares K Shares
-------- -------- --------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds, whichever
is lower) None1 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets after
expense reimbursements)
Management Fees (after fee waivers) 0.__% 0.__% 0.__%
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses (after expense reimbursements)+ 0.__% 0.__% 0.__%
----- ----- -----
Total Operating Expenses (After fee waivers and
expense reimbursements)+ ____% ____% ____%
===== ===== =====
</TABLE>
EXAMPLE: Assume the annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here's how
much you would have paid in total expenses if you closed your account
after the number of years indicated:
__________________________________
1. There is no front-end sales load on combined purchase of A Shares
of the Company of $1,000,000 or more ("Large Purchase Exemption").
Unless you are a participant in Bank of America's 401(k)
Daily Advantage(R) Retirement Plan Program, A shares purchased
under the Large Purchase Exemption are subject to a contingent
deferred sales charge of 1.00% and 0.50%, respectively, on redemptions
within one and two years after purchase. The contingent deferred
sales charge is paid to Concord Financial Group, Inc. (the
"Distributor"). A Shares cannot be purchased under the Large Purchase
Exemption if there is another no-load exemption available.
Accordingly, A Shares purchased under another no-load exemption are
not subject to a contingent deferred sales charge. Although no
front-end sales load will be paid on shares purchased under the Large
Purchase Exemption, the Distributor will compensate brokers whose
customers purchase such shares at the following rates: 1.00% of the
amount under $3 million, 0.50% of the next $47 million and 0.25%
thereafter.
2. Bank of America will compensate Seafirst Investment Services, Inc.
("SISI") and BA Investment Services, Inc. ("BAIS") (BAIS
and SISI are collectively referred to herein as "Affiliated Brokers")
for its customers who have invested in the Fund and are participants in
the 401(k) Daily Advantage(R) Retirement Plan Program. The Affiliated
Brokers will be compensated by Bank of America at the rate of 1.00% of
the first $1 million of combined Pacific Horizon Funds' and Time
Horizon Funds' K shares in each 401(k) Daily Advantage(R) Retirement
Plan program.
+ 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 ____%, ____% and ____% of the average net
assets of the Fund's A, B and K shares, respectively, on an annual
basis for the first twelve months of the Fund's operations. Absent
fee waivers and/or expense reimbursement, management fees would be
___% of the average net assets, actual "Other Expenses" for the Fund's
A, B and K shares would be ____%, ____% and ___ %, respectively, of
average net assets (annualized); and "Total Operating Expenses" for
the Fund's A, B and K shares would be ___%, ___ % and ___% of average
net assets (annualized), respectively.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average daily net assets of the Fund's K shares.
Because of the Rule 12b-1, administrative and/or shareholder service
fees paid by the Fund as shown in the above table, long-term B and K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities Dealers, Inc. For a further description of shareholder
transaction expenses and the Fund's operating expenses, see the
sections entitled "Shareholder Guide", "The Business of the Fund" and
"Plan Payments" below.
6
<PAGE> 86
<TABLE>
<CAPTION>
After 1 Yr After 3 Yrs
---------- -----------
<S> <C> <C>
A shares1 $__ $__
B shares
Assuming complete
redemption at
end of period2 $__ $___
Assuming no redemption $__ $__
K shares $__ $__
</TABLE>
1 Assumes deduction at time of purchase of maximum applicable
front-end sales charge.
2 Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. The Fund
and the Master Portfolio are new and the above figures are estimates for the
first twelve months of operations only. Actual investment returns and
operating expenses may be more or less than those shown.
___________________________________________
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as
with annual operating expenses) as a Fund shareholder.
Management fees consist of:
. an investment advisory fee payable at the annual rate of 0.75%
of the Master Portfolio's average daily net assets; and
. an administration fee payable at the annual rate of 0.15% of
the Fund's average daily net assets and 0.05% of the Master
Portfolio's average daily net assets.
Currently, the most restrictive expense limitation limits the Fund's aggregate
annual expenses (including management fees and the Fund's pro rata share of
such expenses of the Master Portfolio) to 2.5% of the first $30 million of the
Fund's average daily net assets, 2% of the next $70 million and 1.5% of the
Fund's remaining average 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
7
<PAGE> 87
directly by the Fund. There can be no assurance, however, that such will be
the case or that any economics of scale that might occur if other investors
acquire shares of the Master Portfolio will be realized, inasmuch as the
Company is not aware of any other potential investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge, with respect to A shares or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to an annual distribution and services plan charge and
a contingent deferred sales charge upon redemption within the first six years
of investment, with respect to B shares. K shares are neither subject to a
front-end sales charge nor a contingent deferred sales charge, but do incur
fees under a Distribution Plan and an Administrative and Shareholder Services
Plan. See the section entitled "How to Buy Shares" below. Additionally, K
shares are available for investment by: (a) businesses or other organizations
that participate in the 401(k) Daily Advantage(R) Retirement Plan Program
sponsored by Bank of America; and (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within
30 days prior to the purchase order and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates.
FUND INVESTMENTS
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.
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
8
<PAGE> 88
principal activities of a company will be the country under whose laws the
company is organized, in which the principal trading market for the equity
securities issued by the company is located, or in which the company has over
half of its assets or derives over half of its revenues or profits. Equity
securities in which the Master Portfolio may invest consist of common stocks,
preferred stocks, securities convertible into common stocks or preferred
stocks, and warrants to purchase such securities.
The Master Portfolio may invest up to 20% of its total assets (at the time of
purchase) in convertible bonds and debt securities. These debt obligations
include U.S. Government and foreign government securities and corporate debt
securities, including Samurai and Yankee bonds and Euro-bonds. The Master
Portfolio will limit its purchases of debt securities to investment grade
obligations. "Investment grade" debt refers to those securities rated within
one of the four highest ratings categories by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Ratings Group, Division of McGraw Hill
("S&P"), Duff & Phelps Credit Co. ("D&P"), or Fitch Investors Service, Inc.
("Fitch"), or, if unrated, deemed by Bank of America to be of equivalent
quality. Securities rated in the lowest category of investment grade, Baa by
Moody's or BBB by S&P, D&P or Fitch may have speculative characteristics.
In the event that the rating of any security held by the Master Portfolio falls
below the required rating, the Master Portfolio will not be obligated to
dispose of such security and may continue to hold the security if, in the
opinion of Bank of America, such investment is considered appropriate under the
circumstances.
The Master Portfolio may also invest, without limitation, in securities of
foreign issuers in the form of American Depository Receipts ("ADRs") or other
similar securities evidencing ownership of underlying securities issued by
foreign issuers. ADRs purchased for the Master Portfolio will be included as
part of the 80% of assets in foreign equity securities. These securities may
not necessarily be denominated in the same currency as the securities
underlying the ADRs. ADRs are receipts typically issued by a United States
bank or trust company evidencing ownership of the underlying foreign
securities. Generally, ADRs, in 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.
9
<PAGE> 89
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers carry certain risks not ordinarily associated
with investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Master Portfolio will invest heavily in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will, to the extent the Master Portfolio does not adequately
hedge against such fluctuations, affect the value of securities in the Master
Portfolio so far as U.S. investors are concerned. Foreign currency exchange
rates are determined by forces of supply and demand on the foreign exchange
markets and the regulatory control of the exchanges on which the currencies
trade. These forces are themselves affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. Costs are incurred in connection with
conversions between various currencies.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or
as uniform as, those of U.S.-based companies. Foreign securities markets,
while growing in volume, have, for the most part, substantially less volume
than U.S. markets, and securities of many foreign companies are less liquid and
their prices more volatile than securities of comparable U.S.-based companies.
There is generally less government supervision and regulation of foreign
exchanges, brokers and issuers than there is in the United States. The Master
Portfolio might have greater difficulty taking appropriate legal action in a
foreign court than in a United States court.
The expense ratio of the Master Portfolio can be expected to be higher than
that of funds investing in domestic securities. The costs attributable to
investing abroad are usually higher for several reasons, such as the higher
cost of investment research, higher cost of custody of foreign securities,
higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
Interest and dividends payable on the Master Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such
taxes are not offset by credits or deductions allowed to investors under U.S.
federal income tax provisions, they may reduce the net return to the Master
Portfolios' shareholders. See "Tax Information."
ADDITIONAL INVESTMENTS. When not invested in the securities described above,
the Master Portfolio 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
10
<PAGE> 90
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.
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<PAGE> 91
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
put option written by the Master Portfolio is "covered" if the Master Portfolio
maintains cash or high grade debt obligations with a value equal to the
exercise price in a segregated account with its custodian, or holds a put on
the same security and in the same principal amount as the put written and the
exercise price of the put held is equal to or greater than the exercise price
of the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign securities exchanges are
similar to the risks of investing in foreign securities. In addition, a
foreign exchange may impose different exercise and settlement terms and
procedures and margin requirements than a U.S. exchange.
The Master Portfolio may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Master Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option plus transaction
costs. The Master Portfolio may purchase call options to hedge against an
increase in the price of securities that the Master Portfolio anticipates
purchasing in the future. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Master
Portfolio upon exercise of the option. Unless the price of the underlying
security rises sufficiently, the call option may expire worthless to the Master
Portfolio.
The Master Portfolio's options transactions will be limited as follows: a) not
more than 5% of the total assets of the Master Portfolio may be invested in
options; b) the obligations of the Master Portfolio under put options written
by the Master Portfolio may not exceed 50% of the Master Portfolio's net
assets; and c) the aggregate premiums on all options purchased by the Master
Portfolio may not exceed 25% of the Fund's net assets.
The Master Portfolio may buy put and call options on various stock indices. In
contrast to an option on a particular security, an option on a stock index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option.
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<PAGE> 92
OPTIONS ON FOREIGN CURRENCIES. The Master Portfolio may purchase and write put
and call options on foreign currencies to increase the Master Portfolio's gross
income and for the purpose of protecting against declines in the United States
dollar value of foreign currency-denominated portfolio securities and against
increases in the United States dollar cost of such securities to be acquired.
As with other kinds of options, however, writing an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and the Master Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
Purchasing an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Master Portfolio's position, the Master Portfolio may forfeit
the entire amount of the premium paid plus related transaction costs. Options
on foreign currencies written or purchased by the Master Portfolio may be
traded on United States and foreign exchanges or over-the-counter. There is no
specific percentage limitation on the Master Portfolio's investments in options
on foreign currencies.
STOCK INDEX, INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS.
The Master Portfolio may purchase and sell stock index, interest rate and
foreign currency futures contracts (as well as purchase related options) in an
effort to hedge against changes in the value of securities that the Master
Portfolio holds in its portfolio or which it intends to purchase, or as a
substitute for purchasing or selling the underlying security. Such changes
could occur as a result of market conditions or fluctuating currency exchange
rates. These transactions will only be entered into when deemed appropriate by
Bank of America to reduce the risks inherent in the management of the Master
Portfolio.
The Master Portfolio may not purchase or sell a futures contract or purchase a
related option unless immediately after any such transaction the sum of the
aggregate amount of initial margin deposits on its existing futures positions
and the amount of premiums paid for related options does not exceed 5% of the
Master Portfolio's total assets (after taking into account certain technical
adjustments).
More information regarding futures contracts and related options can be found
in Appendix B to the Statement of Additional Information.
POTENTIAL RISKS OF OPTIONS AND FUTURES. The successful use of the foregoing
investment techniques depends on the ability of Bank of America to forecast
interest rate and currency exchange rate movements correctly. Should interest
or exchange rates move in an unexpected manner, the Master Portfolio may not
achieve the anticipated benefits of futures contracts or options or may realize
losses and thus be in a worse position than if such strategies had not been
used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to options
on currencies, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the prices of such instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses. The Master Portfolio's ability to dispose
of its positions in futures contracts, options and forward contracts will
depend on the availability of liquid markets in such instruments. Therefore,
no assurance can be given that the Master Portfolio will be able to utilize
these instruments effectively
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<PAGE> 93
for the purposes set forth above. In order to prevent leverage in connection
with the purchase of futures contracts or call options thereon by the Master
Portfolio, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the custodian. Furthermore, the Master Portfolio's ability to
engage in options and futures transactions may be limited by tax
considerations.
REPURCHASE AGREEMENTS. The Master Portfolio may buy securities subject to the
seller's agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Master Portfolio will
enter into repurchase agreements only with financial institutions (such as
banks and broker-dealers) deemed creditworthy by Bank of America, under
guidelines approved by the Master Portfolio's Board of Trustees. It is
intended that such agreements will not have maturities longer than 60 days.
During the term of any repurchase agreement, the seller must maintain the value
of the securities subject to the agreement in an amount that is greater than
the repurchase price. Bank of America then continually monitors that value.
Nonetheless, should the seller default on its obligations under the agreement,
the Master Portfolio would be exposed to possible loss due to adverse market
action or delays connected with the disposition of the underlying obligations.
Repurchase agreements are considered to be loans under the Investment Company
Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Master Portfolio may borrow money for
temporary purposes by entering into reverse repurchase agreements. Under these
agreements the Master Portfolio sells portfolio securities to financial
institutions (such as banks and broker-dealers) and agrees to buy them back at
an agreed upon time and price. When the Master Portfolio enters into a reverse
repurchase agreement, it places in a separate custodial account either liquid
assets or other high grade debt securities that have a value equal to or
greater than the repurchase price. The account is then continuously monitored
by Bank of America to make sure that an appropriate value is maintained.
Reverse repurchase agreements 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
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<PAGE> 94
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.
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. 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
15
<PAGE> 95
America. In some instances, this investment procedure may adversely affect the
price paid or received by the Master Portfolio or the size of the position
obtained or sold by the Master Portfolio.
From time to time, the Master Portfolio may pay brokerage commissions to an
affiliate of the Fund's distributor on securities acquired by the Master
Portfolio. In allocating purchase and sale orders for investment securities,
Bank of America may consider the sale of Fund shares by broker-dealers and
other financial institutions (including affiliates of Bank of America or the
Fund's distributor to the extent permitted by law), provided it believes the
quality of the transaction and the price to the Master Portfolio are not less
favorable than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Master Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Turnover
may require payment of brokerage commissions, impose other transaction costs
and could increase substantially the amount of income received by the Master
Portfolio that constitutes taxable capital gains. To the extent capital gains
are realized, distributions from those gains may be ordinary income for federal
tax purposes (see "Tax Information"). The Master Portfolio's portfolio
turnover rate is not expected to exceed 75%, although portfolio turnover will
not be a limiting factor in making investment decisions for the Master
Portfolio.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Master Portfolio which has the same investment objective. The
Fund may withdraw its investment in the Master Portfolio at any time if the
Board of Directors of the Company determines that it is in the best interest of
the Fund to do so. Upon any such withdrawal, the Board of Directors would
consider what action might be taken, including the investment of all of the
assets of the Fund in another pooled investment entity having the same
investment objective as the Fund or the hiring of an investment adviser to
manage the Fund's assets in accordance with the investment policies described
above with respect to the Master Portfolio. See "Expense Summary," "Fund
Investments" and "Fund Management" for a description of this investment
objective and the investment policies, restrictions, management and expenses of
the Fund and the Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Fund and other entities that may invest in the Master Portfolio
from time to time (e.g., other investment companies and commingled trust funds)
will each be liable for all obligations of the Master Portfolio. However, the
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
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<PAGE> 96
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.
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<PAGE> 97
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 INVESTMENT SUBSEQUENT 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 $2,500 No minimum
(MORE THAN ONE PARTICIPANT)
401(K) ACCOUNT $_________ $___________
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
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<PAGE> 98
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues three classes of shares. A shares are sold to investors
choosing the initial sales charge alternative, B shares are sold to investors
choosing the deferred sales charge alternative. K shares are neither subject
to a front-end sales charge nor a contingent deferred sales charge. K shares,
however, are sold to: (a) businesses and other organizations that participate
in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored by Bank of
America; and (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order and, (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates. The three classes of shares each represent
interests in the same portfolio of investments of the Fund, have the same
rights and are identical in all respects, except that A shares bear the
expenses of a Shareholder Service Plan. B shares bear the expenses of a
Distribution and Services Plan and have exclusive voting rights with respect to
the Distribution and Services Plan. K shares bear the expenses of a
Distribution Plan and Administrative and Shareholder Services Plan and have
exclusive voting rights with respect to such plans. B shares also bear the
expenses of the deferred sales charge arrangements and any expenses resulting
from such arrangements. The three classes also have different exchange
privileges, as described below. The net income attributable to A, B and K
shares and the dividends payable on A, B and K shares will be reduced by the
amount of (a) Shareholder Service Plan fees attributable to A shares; (b) the
Distribution and Services Plan fees attributable to B shares and the
Distribution Plan fees and Administrative and Shareholder Services Plan fees
attributable to K shares, respectively, and (c) the incremental expenses
associated with such plans. Lastly, B shares of the Fund held for 8 years will
automatically convert into A shares of the Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A shares. Each
class calculates its net asset value ("NAV") as follows:
<TABLE>
<S> <C>
NAV = (Value of Assets Attributable to the Class) - (Liabilities Attributable to the Class)
-------------------------------------------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
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 Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Fund pursuant to procedures adopted by
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<PAGE> 99
the Fund's Board of Directors. Short-term debt securities are valued at
amortized cost, which approximates market value. Trading in foreign securities
is generally completed prior to the end of regular trading on the Exchange.
Trading may occur in foreign securities, however, on Saturdays and U.S.
holidays and at other times when the Exchange is closed. As a result, there
may be delays in reflecting changes in the market values of foreign securities
in the calculation of the net asset value per share of the Fund on days when
net asset value is not calculated and on which shareholders of the Fund cannot
redeem due to changes in values of securities traded in foreign markets. For
further information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
The per share net asset values of A, B and K shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge" or "sales charge") for the A shares of the Fund
begins at 4.50% and may decrease as the amount you invest increases, as shown
in the following chart:
<TABLE>
<CAPTION>
Amount of Transaction As a % of As a % of Dealer's
offering net asset Reallowance
price value as a % of
offering price*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00* 0.00* 0.00*
</TABLE>
*Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
LARGE PURCHASE EXEMPTION. To the extent that no other A share no-load
exemption is available, the foregoing schedule of sales loads does not apply to
purchases of A shares of $1,000,000 or more. If a customer who is not a
participant in Bank of 401(k) America's Daily Advantage(R) Retirement
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<PAGE> 100
Plan Program purchases $1,000,000 or more of A shares and redeems such shares,
a contingent deferred sales load will be imposed as follows:
<TABLE>
<CAPTION>
Number of Years Applicable Contingent
Elapsed Since Purchase Deferred Sales Load
---------------------- --------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a
contingent deferred sales charge is applicable to a redemption of such shares,
the calculation will be made in a manner that results in the lowest possible
rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value of
your holdings of shares above the total amount of payments for the purchase of
shares during the preceding 2 years; then of amounts representing the cost of
shares held beyond the applicable contingent deferred sales charge period; and
finally, of amounts representing the cost of the shares held for the longest
period of time. Although no front end sales load will be paid on Large
Purchase Exemptions, the Distributor will compensate brokers whose customers
purchase shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B shares may be purchased at net
asset value per share without the imposition of a sales charge at the time of
purchase. The Fund's distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time
the shares are purchased. The proceeds of the contingent deferred sales
charges and the ongoing distribution and services plan fees described below are
used to reimburse the Fund's distributor for its expenses, including the
compensation of broker-dealers.
B shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no charge will
be assessed on shares derived from reinvestment of dividends or capital gains
distributions. B shares will convert to A shares on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund.
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<PAGE> 101
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Number of Years (as a percentage of dollar
Elapsed Since Purchase* amount to the charge)
- ----------------------- ---------------------
<S> <C>
Less than one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0%
More than one, but less
than two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0%
More than two, but less
than three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than three, but less
than four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than four, but less
than five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
More than five, but less
than six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
After six years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
- ---------------------------------
</TABLE>
* The time period during which Pacific Horizon shares of the Pacific
Horizon Prime Fund acquired through an exchange are held is not
included when the amount of the contingent deferred sales charge is
calculated.
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B shares above the total amount of payments for
the purchase of B shares during the preceding 6 years; then of amounts
representing the cost of B shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the B shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund, that in the third year after purchase the net asset
value per share is $12, and that during the three-year period you had acquired
10 additional shares through dividend reinvestment. If at such time you make
your first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the
applicable rate in the third year after purchase).
22
<PAGE> 102
K SHARES. Bank of America will compensate Affiliated Brokers for its customers
who invested in the Fund and are participants in the 401(k) Daily Advantage(R)
Retirement Plan Program. The Affiliated Brokers will be compensated by Bank of
America at the rate of 1% of the first $1 million of combined Pacific Horizon
Funds' and Time Horizon Funds' K shares in each 401(k) Daily Advantage(R)
Retirement Plan Program.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on
the following types of transactions:
. reinvestment of dividends or distributions;
. accounts of corporate/business retirement plans (such as 401(k), 403(b)(7),
457 and Keogh accounts) which are sponsored by a Fund's administrator and were
invested in a Fund as of July 1, 1996 so long as the account remains open on
the Company's books;
. accounts of employer-sponsored employee pension or retirement plans (other
than 403(b) plans) which make direct investments in a Fund and were invested in
a Fund as of July 1, 1996 so long as the account remains open on the Company's
books;
. 403(b) plans invested in a Fund as of December 7, 1995;
. any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for its
own account or for an account for which it is authorized to make investment
decisions (i.e., a discretionary account) other than purchases for 403(b) plans
provided that investment advisers who have invested 403(b) plans in the Fund on
behalf of existing and new funds as of December 7, 1995 may continue to invest
on a no-load basis;
. accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
. any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
. any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account remains
open on the Company's books;
. 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;
23
<PAGE> 103
. any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
. any purchase of shares pursuant to the Reinstatement Privilege described
below; and
. any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
. members of the Company's Board of Directors;
. U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, 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
BankAmeriChoice Program (initial award only; a sales load will apply to
subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to B shares is not charged on (1) exchanges described under
"Shareholder Services - Can I Exchange My Investment From One Fund to
Another?;" (2) redemptions in connection with minimum required distributions
from IRA accounts due to the shareholders reaching age 70-1/2; (3) redemptions
in connection with a shareholder's death or disability (as defined in the
Internal Revenue Code); and (4) involuntary redemptions as a result of an
account's net asset value remaining below $500 after sixty days' written
notice. In addition, no contingent deferred sales charge is charged on shares
acquired through the reinvestment of dividends or distributions.
RIGHTS OF ACCUMULATION. When buying A shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own
24
<PAGE> 104
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). Shares of any
investment portfolio of Time Horizon Funds (a "Time Horizon Fund"), an open-end
investment company managed by Bank of America, generally will not be included
when determining reduced sales loads under the rights of accumulation program,
except that you may aggregate your investment in Pacific Horizon Funds and Time
Horizon Funds in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
shares carrying a sales load 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 on A shares by
means of a written Letter of Intent, which expresses your non- binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon Fund within a period of 13 months, beginning up to 90 days prior to the
date of the Letter's execution. A shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment
is fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent. Shares of Time Horizon Funds will generally not be
included when determining reduced sales loads under the letter of intent
program unless you are a participant in the 401(k) Daily Advantage(R)
Retirement Plan Program.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will
25
<PAGE> 105
be in the form of additional shares credited to your account at the then
current offering price applicable to a single purchase of the total amount of
the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent
will redeem an appropriate number of shares held in escrow to realize the
difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Fund permit you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular
circumstances it is more advantageous to invest in A shares and incur a
front-end sales charge and an ongoing shareholder service plan fee; invest in B
shares and have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a contingent deferred sales charge and
ongoing distribution and services plan fees; or invest in K shares and incur
neither a front-end sales charge nor a contingent deferred sales charge. K
shares, however, do incur fees under a Distribution Plan and an Administrative
and Shareholder Services Plan. K shares of the Fund, however, are available
to: (a) businesses or other organizations that participate in the 401(k) Daily
Advantage(R) Retirement Plan Program sponsored by Bank of America; and (b)
individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end sales
load if (i) such redemption occurred within 30 days prior to the purchase order
and (ii) such other open-end investment company was not distributed and advised
by Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the front-end sales charge alternative (A
shares) because similar sales charge reductions are not available for purchases
under the contingent deferred sales charge alternative (B shares). Moreover, A
shares would not be subject to ongoing distribution and services plan fees, as
described below. However, because front-end sales charges are deducted at the
time of purchase, such investors who pay a front-end sales charge would not
have all their funds invested initially. The Company will not accept any order
for B shares from an investor who is eligible to purchase A shares without a
sales load.
Investors not qualifying for a reduced initial sales charge who expect to
maintain their investment in the Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing distribution and services plan fees related to B shares may exceed
the front-end sales charge and ongoing shareholder service fees related to A
shares. However, such investors must weigh this consideration against the fact
that not all their funds will be
26
<PAGE> 106
invested initially. Furthermore, the ongoing distribution and services plan
fees may be offset to the extent any return is realized on the additional funds
initially invested under the contingent deferred sales charge alternative.
Certain investors might determine it to be more advantageous to have all their
funds invested initially in B shares, although subject to continuing
distribution and services plan fees, and to a contingent deferred sales charge
for a 6-year period of time.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Fund's transfer agent)
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete Account Application Mail all subsequent investments
and mail it with a check 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 Deliver Account Application Deliver your payment directly to
and your payment directly to the address on the left.
BISYS Fund Services Inc., the address on the left.
3435 Stelzer Road
Columbus, OH 43219-3035
BY WIRE Initial purchases of shares Contact the Fund's transfer agent
into a new account may not be at 800-346-2087 for complete
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.
</TABLE>
27
<PAGE> 107
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
Consult your bank for information on remitting funds by wire and
any associated bank charges.
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers of be used to make an initial minimum amount of $500 and the
money from your checking, NOW or bank purchase. maximum amount of $50,000 per
money market account) transaction as soon as
appropriate information regarding
your bank account has been
established on your Fund account.
This information may be provided
on the Account Application or in
a signature guaranteed letter of
instruction to the Transfer
Agent. Signature guarantees are
discussed under "How to Sell
Shares."
Call 800-346-2087 to make your
purchase.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next 12:00 p.m. Eastern time after your purchase order is received in
proper form by the Fund's transfer agent, BISYS Fund Services, Inc. (the
"Transfer Agent"), at its Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order
and required funds to the Transfer Agent on a timely basis in accordance with
the procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 12:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 12:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of 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
28
<PAGE> 108
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.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or K
shares. Certificates for shares will no longer be issued.
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
America and Service Organizations may also impose minimum customer account and
other requirements in addition to those imposed by the Fund. If you purchase
or redeem shares directly from the Fund, you may do so without incurring any
charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also
the shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
29
<PAGE> 109
<TABLE>
<CAPTION>
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each joint owner, must sign)
International Equity Fund to the Transfer Agent.
c/o Pacific Horizon Funds,
Inc., P.O. Box 80221, Los
Angeles, California 90080-
9909
IN PERSON
BISYS Fund Services, Inc. Deliver your signed, written request (each owner, including each joint owner, must
3435 Stelzer Road sign) to the address on the left.
Columbus, OH
43219-3035
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>
30
<PAGE> 110
<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of $50,000 per transaction)
(a service permitting by telephone after appropriate information regarding your bank account has been
transfers of money to your established on your Fund account. This information may be provided on the Account
checking, NOW or bank money Application or in a signature guaranteed letter of instruction to the Transfer
market account) Agent. Signature guarantee requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent that you do not
wish to have them.
You should refer to the "Shareholder Services" section for additional important
information about the TeleTrade Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
AUTOMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO
THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Fund itself imposes no charge when A shares are redeemed
(except pursuant to the Large Purchase Exemption described above), if you
purchase shares through Bank of America or a Service Organization, they may
charge a fee for providing certain services in connection with investments in
Fund shares.
When you redeem your B shares within 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund), you may be subject to a contingent deferred sales charge as
described above.
The Fund imposes no charge when K shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
The contingent deferred sales charge will not be imposed upon such involuntary
redemptions.
31
<PAGE> 111
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A,
B or K shares. If you own both A or K and B shares of the Fund, A or K shares
will be redeemed first unless you request otherwise. 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.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives
payment in cash or immediately available funds for the purchase of shares. The
Company may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend the recordation of the transfer of shares)
for such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of
the Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment,
the Fund's distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B shares or any Pacific Horizon shares of
the Pacific Horizon Prime Fund. Shares so reinvested will be purchased at a
price equal to the net
32
<PAGE> 112
asset value next determined after the Transfer Agent receives a reinstatement
request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends and distributions arising
from the net investment income and net realized gains, if any, earned on
investments in the Master Portfolio which are allocable to the Fund. The
Fund's net income and net realized capital gains (if any) are distributed at
least annually. Distributions are paid within five business days after the end
of the year.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, at P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
33
<PAGE> 113
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 B shares 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.
Additionally, K shares are available to businesses and other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America.
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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.
Specifically, A shares may be exchanged for other A shares, B shares may be
exchanged for other B shares and K shares may be exchanged for other K shares.
NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING A SHARES PURCHASED
WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME
HORIZON FUNDS. A AND B SHARES MAY BE EXCHANGED FOR OTHER A AND B SHARES,
RESPECTIVELY, OR FOR PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND
WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE TIME THE
EXCHANGE IS MADE. IN ADDITION, PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON
PRIME FUND THAT WERE ACQUIRED THROUGH AN EXCHANGE OF B SHARES, MAY BE EXCHANGED
FOR B SHARES WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE
TIME THE EXCHANGE IS MADE. IN DETERMINING THE HOLDING PERIOD FOR CALCULATING
THE CONTINGENT DEFERRED SALES CHARGE PAYABLE UPON REDEMPTION OF B SHARES, THE
HOLDING PERIOD OF THE SHARES ORIGINALLY HELD WILL BE ADDED TO THE HOLDING
PERIOD OF THE SHARES ACQUIRED THROUGH THE EXCHANGE UNLESS THE SHARES ACQUIRED
THROUGH THE EXCHANGE ARE PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME
FUND. THE TIME PERIOD DURING WHICH PACIFIC HORIZON SHARES OF THE PACIFIC
HORIZON PRIME FUND ACQUIRED THROUGH AN EXCHANGE ARE HELD IS NOT INCLUDED WHEN
THE AMOUNT OF THE CONTINGENT DEFERRED SALES CHARGE IS CALCULATED.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the
cost of the shares being redeemed. This means that this charge will not be
imposed upon increases in net asset value above the initial purchase price or
upon reinvested dividends. In determining whether a contingent deferred sales
charge is applicable to a redemption of such shares, the calculation will be
made in a manner that results in the lowest possible rate. It will be assumed
that the redemption is made first of amounts representing shares acquired
pursuant to the reinvestment of dividends and distributions; then of amounts
representing the increase in net asset value of your holdings of shares above
the total amount of payments for the purchase of shares during the preceding 2
years; then of amounts representing the cost of shares held beyond the
applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
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Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding
the funds into which you wish to make an exchange from your Service
Organization or the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below regarding TeleTrade for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or
the Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice
of any material modification to or termination of the Exchange Privilege will
be given to shareholders except where notice is not required under the
regulations of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will be payable to the registered owners of
your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including telephone wire redemptions) 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 identify of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
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redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by
mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
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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 B shares
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
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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."
EXPENSES
Operating expenses borne by the Fund and the Master Portfolio include taxes,
fees and expenses of the directors, trustees and officers, administration,
custodial and transfer agency fees, certain insurance premiums, outside
auditing and legal expenses, cost of shareholder/interestholder reports and
meetings and any extraordinary expenses. Fund expenses also include Securities
and Exchange Commission fees, state securities qualification fees, cost of
preparing and printing prospectuses and statements of additional information
for regulatory purposes and for distribution to existing shareholders, and
certain shareholder servicing fees. Master Portfolio expenses include
investment advisory fees. Except as noted in this Prospectus, the service
contractors bear all expenses in connection with the performance of their
services, and the Fund and the Master Portfolio bear the expenses incurred in
their operations.
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Master Portfolio. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
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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.
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,
Distribution and Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments" below, and may
receive fees charged directly to their accounts in connection with investments
in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Master Portfolio. Concord is an indirect, wholly-owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master Portfolio;
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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 43219-3035.
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 the
Master Portfolio bear the expenses incurred in their operations. Expenses can
be reduced by voluntary fee waivers and expense reimbursements by Bank of
America and other service providers as well as by certain expense limitations
imposed by state securities regulators. Periodically, during the course of the
Fund's fiscal year, Bank of America, Concord and/or the Distributor may
prospectively choose not to
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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.
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, as amended, (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.
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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 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 a shareholder will be entitled either (a) to credit their
proportionate amount of such taxes against his U.S. federal income tax
liabilities, or (b) if they itemize their deductions, to deduct such
proportionate amounts from their U.S. income.
Certain realized gains or losses on the sale or retirement of foreign bonds
held by the Master Portfolio, to the extent attributable to fluctuations in
currency or exchange rates, as well as other gains or losses attributable to
exchange rate fluctuations, are typically treated as ordinary income or loss.
Such income or loss may increase or decrease (or possibly eliminate) income
available 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
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shares will be reduced to the extent that an amount distributed to you is
treated as a return of capital.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends paid to any investor (i) who has provided either
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure properly to include on this return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
State and Local Taxes
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE
ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN. PERFORMANCE
INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be
quoted in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by the Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A shares and the applicable contingent
deferred sales charge for B 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;
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or CDA Investment Technologies, Inc. Total return data as reported in national
financial publications such as MONEY, FORBES, BARRON'S, THE WALL STREET JOURNAL
and THE NEW YORK TIMES, or in local or regional publications, may also be used
in comparing Fund performance. The Fund's total return also may be compared to
indices such as: the Dow Jones Industrial Average; the 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, 60 million shares of Class T--Special Series 3 Common
Stock and 50 million shares of Class T--Special Series 5 Common Stock,
representing interests in the Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class T
Common Stock is the A shares; Class T--Special Series 3 Common Stock is the B
shares and Class T--Special Series 5 Common Stock is the K shares. The Board
of Directors may similarly classify or reclassify any class of shares
(including unissued Class T Common Stock, Class T--Special Series 3 Common
Stock or Class T--Special Series 5 Common Stock) into one or more series. For
more information about the Company's other portfolios, contact the Company at
the telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no
preemptive rights and only such conversion and exchange
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rights as the Board may grant in its discretion. When issued for payment as
described in this Prospectus, Fund shares will be fully paid and
non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights
to the extent that may be required by applicable law. Additionally,
shareholders will vote in the aggregate and not by class or series, except as
required by law (or when permitted by the Board of Directors). Only A shares
will vote on matters relating solely to A shares, B shares will vote on matters
relating solely to B shares and K shares will vote on matters (such as the
distribution and services plan described below) relating solely to K shares.
The Fund does not presently intend to hold annual meetings of shareholders to
elect directors or for other business unless and until such time as less than a
majority of the directors holding office has been elected by the shareholders.
At that time, the directors then in office will call a shareholders' meeting
for the election of directors. Under certain circumstances, however,
shareholders have the right to call a shareholder meeting to consider the
removal of one or more directors. Such meetings will be held when requested by
the shareholders of 10% or more of the Company's outstanding shares of common
stock. The Fund will assist in shareholder communications in such matters to
the extent required by law and the Company's undertaking with the Securities
and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR A SHARES, A
DISTRIBUTION AND SERVICES PLAN FOR
B SHARES AND A DISTRIBUTION PLAN AND AN
ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K SHARES.
The Company has adopted a Shareholder Service Plan for A shares, under which
the A shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has also
adopted a Distribution and Services Plan pursuant to Rule 12b-1 under the 1940
Act, under which the B shares of the Fund reimburse the Distributor for
services rendered and costs incurred in connection with distribution of the B
shares and for shareholder servicing fees the Distributor pays to Service
Organizations. The Company has adopted a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act under which the K shares of the Fund reimburse the
Distributor for services rendered and costs incurred in connection with
distribution of the K shares. The Company has also adopted an Administrative
and Shareholder Services Plan for K shares, under which K shares of the Fund
reimburse the Distributor for administrative and shareholder servicing fees the
Distributor pays to Service Organizations.
46
<PAGE> 126
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.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, the Fund pays
the Distributor for distribution expenses primarily intended to result in the
sale of the Fund's B shares and with respect to B shares, for shareholder
servicing expenses. Such distribution expenses include expenses incurred in
connection with advertising and marketing the Fund's B shares; payments to
Service Organizations for assistance in connection with the distribution of B
shares; and expenses incurred in connection with preparing, printing and
distributing prospectuses for the Fund (except those used for regulatory
purposes, for solicitation or distribution to existing or potential A
shareholders or for distribution to existing B and K shareholders of the Fund)
and in implementing and operating the Distribution and Services Plan and
Distribution Plan.
47
<PAGE> 127
Shareholder servicing expenses under the Distribution and Services Plan and
Administrative and Shareholder Services Plan include, but are not limited to,
expenses incurred in connection with shareholder services provided by the
Distributor and payments to Service Organizations for the provision of support
services with respect to the beneficial owners of B and K shares, such as
assisting clients in processing exchange and redemption requests and in
changing dividend options and account descriptions and responding to client
inquiries concerning their investments. Administrative services under the
Administrative Services Plan include, but are not limited to, expenses incurred
in connection with administrative services provided by the Distributor and
payments to Service Organizations for the provision of administrative services
to beneficial owners of K shares such as establishing and maintaining accounts
and records relating to their clients who invest in K shares, providing
information to the Fund necessary for accounting or sub-accounting; and
providing information periodically to clients showing their position in K
shares.
Under the Distribution and Services Plan and Distribution Plan, payments by the
Fund for distribution expenses may not exceed 0.75% (annualized), of the
average daily net assets of the Fund's B or K shares. Under the Distribution
and Services Plan and Administrative and Shareholder Services Plan, payments
for shareholder servicing expenses may not exceed 0.25% (annualized) of the
average daily net assets of the Fund's B or K shares. Under the Administrative
and Shareholder Services Plan payments for administrative service expenses may
not exceed 0.75% (annualized) of the average daily net assets of the Fund's K
shares. The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of the Fund's K shares. These amounts may
be reduced pursuant to undertakings by the Distributor. Payments for
distribution expenses under the Distribution and Services Plan and Distribution
Plan are subject to Rule 12b-1 under the 1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
____________________________________________________
48
<PAGE> 128
PACIFIC HORIZON FUNDS, INC.
Asset Allocation Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Measuring Performance
4. General Description of Registrant . . . Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund . . . . . . . . . The Business of the Fund
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . How to Buy Shares;
Shareholder Services;
The Business of the Fund;
Plan Payments; Measuring
Performance
8. Redemption or Repurchase . . . . . . . . How to Sell Shares;
Shareholder Services;
Plan Payments
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 129
PROSPECTUS
________________, 1996
PACIFIC HORIZON ASSET ALLOCATION FUND
Investment Portfolio Offered by Pacific Horizon Funds, Inc.
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Fund") is a diversified mutual
fund whose investment objective is to obtain long-term growth from capital
appreciation and dividend and interest income. The Fund seeks to achieve its
objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT
COMPANY (THE "MASTER PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT
OF THE FUND. THE FUND WILL PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET
ASSET VALUE. THE NET ASSET VALUE OF THE FUND WILL RESPOND TO INCREASES AND
DECREASES IN THE VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES
AND CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON PAGE __ FOR ADDITIONAL
INFORMATION REGARDING THIS STRUCTURE.
This Prospectus describes three classes from which investors may choose. A
shares are sold with a front-end sales charge. B shares are sold with a
contingent deferred sales charge. K shares are not subject to either a
front-end sales charge or a contingent deferred sales charge.
The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America National Trust
and Savings Associaton ("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 $__ billion under
management, including over $__ 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 ____________, 1996 and is
incorporated by reference into this Prospectus.
<PAGE> 130
Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. Investment in the Fund involves
investment risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is part of a Registration Statement that has been filed with
the Securities and Exchange Commission in Washington, D.C. under the Securities
Act of 1933.
No person has been authorized to give any information or to make any
representations 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.
-2-
<PAGE> 131
CONTENTS
EXPENSE SUMMARY
FINANCIAL HIGHLIGHTS
FUND INVESTMENTS
INVESTMENT OBJECTIVE
TYPES OF INVESTMENTS
FUNDAMENTAL LIMITATIONS
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE
HOW TO BUY SHARES
What is My Minimum Investment In The Fund?
What Alternative Sales Arrangements Are Available?
How Are Shares Priced?
How Do I Decide Whether To Buy A, B or K Shares?
How Can I Buy Shares?
What Price Will I Receive When I Buy Shares?
What Else Should I Know To Make A Purchase?
HOW TO SELL SHARES
How Do I Redeem My Shares?
What NAV Will I Receive For Shares I Want To Sell?
What Kind of Paperwork Is Involved In Selling Shares?
How Quickly Can I Receive My Redemption Proceeds?
Do I Have any Reinstatement Privileges After I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES
CAN I USE THE FUND IN MY RETIREMENT PLAN?
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
WHAT IS TELETRADE?
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
CAN I ARRANGE PERIODIC WITHDRAWALS?
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND
FUND MANAGEMENT
Expenses
Service Providers
TAX INFORMATION
MEASURING PERFORMANCE
DESCRIPTION OF SHARES
PLAN PAYMENTS
-3-
<PAGE> 132
<TABLE>
<S> <C>
Distributor: Investment Adviser:
Concord Financial Group, Inc. Bank of America National Trust
3435 Stelzer Road and Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
</TABLE>
-4-
<PAGE> 133
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or
selling shares of the Fund. The Fund offers three classes of shares.
A shares are offered at net asset value plus a front-end sales charge
(see page ___ of the Prospectus for an explanation of net asset value
per share) and are subject to a shareholder servicing fee. B shares
are offered at net asset value without a front-end sales charge but
are subject to a contingent deferred sales charge plus distribution
and shareholder servicing fees. K shares are offered at net asset
value with neither a front-end sales charge nor a contingent deferred
sales charge, but are subject to distribution, administrative and
shareholder servicing fees. B shares of the Fund held for 8 years
will convert to A shares of the Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund and
payments by the Master Portfolio which are allocable to the Fund.
Operating expenses include fees for portfolio management, maintenance
of shareholder accounts, general administration, distribution (in the
case of B and K shares only), shareholder servicing, accounting and
other services.
Below is a summary of the shareholder transaction expenses imposed by
the Fund for A, B and K shares and their estimated operating expenses
(including the operating expenses of the Master Portfolio which are
allocable to the Fund) expected to be incurred during the current
fiscal year. This information has been restated to assume that
current fees had been in effect during the previous fiscal year.
Actual expenses may vary. A hypothetical example based on the
summary is also shown.
<TABLE>
<CAPTION>
A Shares B Shares K Shares
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds, whichever
is lower) None(1) 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+ ____% ____% ____%
12b-1 Fee* 0 % 0.75% 0 %
Administrative Service Fee* 0 % 0 % 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses (After Expense Reimbursements) ____% ____% ____%
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements) ____% ____% ____%
<FN>
1. There is no front-end sales load on combined purchases of A
shares of the Company of $1,000,000 or more ("Large Purchase
Exemption"). Unless you are a participant in Bank of America's
401(k) Daily Advantage(R) Retirement Plan Program, A shares
purchased under the Large Purchase Exemption are subject to a
contingent deferred sales charge of 1.00% and 0.50%,
respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A Shares
cannot be purchased under the Large Purchase Exemption if
there is another no-load exemption available. Accordingly, A
Shares purchased under another no-
</TABLE>
-5-
<PAGE> 134
load exemption are not subject to a contingent deferred sales
charge. Although no front-end sales load will be paid on
shares purchased under the Large Purchase Exemption, the
Distributor will compensate brokers whose customers purchase
such shares at the following rates: 1.00% of the amount under
$3 million, 0.50% of the next $47 million and 0.25%
thereafter.
2. Bank of America will compensate Seafirst Investment Services,
Inc. ("SISI") and BA Investment Services, Inc. ("BAIS") (BAIS
and SISI are collectively referred to herein as "Affiliated
Brokers") for its customers who have invested in the Fund and
are participants in the 401(k) Daily Advantage Retirement
Plan Program. The Affiliated Brokers will be compensated by
Bank of America at the rate of 1.00% of the first $1 million
of combined Pacific Horizon Funds' and Time Horizon Funds' K
shares in each 401(k) Daily Advantage Retirement Plan
Program.
+ 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
___%, ___% and ___% of the average net assets of the Funds A,
B and K shares, respectively, on an annual basis. Absent
expense reimbursement, management fees would be ___% of the
average net assets, "Other Expenses" for the Fund's A, B and
K shares would be ___%, ___% and ___%, respectively, of
average net assets (annualized); and "Total Operating
Expenses" for the Fund's A, B and K shares would be ____%,
____% and ____% of average net assets (annualized),
respectively.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate,
the annual rate of 1.00% of the average daily net assets of
the Fund's K shares. Because of the Rule 12b-1,
administrative and/or shareholder service fees paid by the
Fund as shown in the above table, long term B and K
shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. For a further
description of shareholder transaction expenses and the
Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Fund" and "Plan
Payments" below.
-6-
<PAGE> 135
EXAMPLE: Assume the annual return is 5% and operating expenses
are the same as those stated above. For every $1,000 you invest,
here's how much you would have paid in total expenses if you
closed your account after the number of years indicated:
<TABLE>
<CAPTION>
After 1 Yr After 3 Yrs After 5 Yrs After 10 Yrs
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
A shares(1) $___ $___ $___ $___
B shares
Assuming complete
redemption at
end of period(2) $___ $___ $___ $___(3)
Assuming no redemption $___ $___ $___ $___(3)
K shares $___ $___ $___ $___
<FN>
1 Assumes deduction at time of purchase of maximum applicable
front-end sales charge.
2 Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3 Assumes conversion of B shares to A shares after 8 years.
Note: The preceding operating expenses and example should not be
considered a representation of future investment returns and
operating expenses. Actual investment returns and operating
expenses may be more or less than those shown.
</TABLE>
___________________________________________
This expense information is provided to help you understand the
expenses you would bear either directly (as with transaction
expenses) or indirectly (as with annual operating expenses) as a Fund
shareholder.
Management fees consist of:
- an investment advisory fee payable at the annual rate of
0.55% of the Master Portfolio's average daily net assets;
and
- an administration fee payable at the annual rate of 0.15%
of the Fund's average daily net assets and 0.05% of the
Master Portfolio's average daily net assets.
Currently, the most restrictive expense limitation limits the Fund's
aggregate annual expenses (including management fees and the Fund's
pro rata share of such expenses of the Master Portfolio) to 2.5% of
the first $30 million of the Fund's 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
-7-
<PAGE> 136
directly by the Fund. There can be no assurance, however, that such
will be the case or that any economies of scale that might occur if
other investors acquire shares of the Master Portfolio will be
realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the
purchase, the length of time you expect to hold the shares and other
circumstances. You should determine whether under your particular
circumstances it is more advantageous to incur a front-end sales
charge with respect to A shares, or to have the entire initial
purchase price invested in the Fund with the investment thereafter
being subject to an annual distribution and services plan charge and a
contingent deferred sales charge upon redemption within the first six
years of investment, with respect to B shares. K shares are not
subject to either a front-end sales charge or a contingent deferred
sales charge, but do incur fees under a Distribution Plan and an
Administrative and Shareholder Services Plan. See the section
entitled "How to Buy Shares" below. K shares, however, are available
for investment by: (a) businesses or other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program
sponsored by Bank of America; and (b) individuals investing proceeds
from a redemption of shares from another open-end investment company
on which such individual paid a front-end sales load if (i) such
redemption occurred within 30 days prior to the purchase order and
(ii) such other open-end investment company was not distributed and
advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates.
-8-
<PAGE> 137
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment
results for the Fund for the periods indicated. During the periods
shown, the Fund did not offer B or K shares. Actual investment
results of the B and K shares may be different. This information has
been audited by ___________________, independent accountants, whose
unqualified report on the financial statements containing such
information is incorporated by reference in the Statement of
Additional Information.
The Financial Highlights should be read in conjunction with the
financial statements and notes thereto and the unqualified report of
independent accountants which are incorporated by reference in the
Statement of Additional Information. Further information about the
performance of the Fund is available in the annual report to
shareholders. Both the Statement of Additional Information and the
annual report to shareholders may be obtained from the Fund free of
charge by calling 800-332-3863.
Selected data for an A share of common stock outstanding throughout
each of the periods indicated:
<TABLE>
<CAPTION>
For the period
January 18, 1994
For the year For the year (commencement of
ended ended operations)
February 29, February 28, through February 28,
1996 1995 1994
---- ------- -------
<S> <C> <C>
Net asset value per share,
beginning of period $ 14.84 $ 15.00
------- -------
Income from Investment
Operations:
Net investment income 0.48 0.03
Net realized and unrealized
gain (loss) on securities 0.24 (0.19)
Total gain (loss) from
investment operations 0.72 (0.16)
Less Dividends:
Dividends from net investment
income (0.41) --
------- -------
Net change in net asset value 0.31 (0.16)
Net asset value per share, end
of period $ 15.15 $ 14.84
======= =======
Total Return++ 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period
(000) $5,694 $666
Ratio of expenses to average
net assets* 0.00% 0.00%+
Ratio of net investment
income to average net assets* 4.25% 4.20%+
<FN>
- -------------------------------------------------------
* Reflects the Fund's proportionate share of the fee waivers
and expense reimbursements by the Master Portfolio's
Investment Adviser and Administrator and the Fund's
Administrator and Distributor. Such fee waivers and expense
reimbursements had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of
net investment income to average net assets by ____%, 7.89%
and 83.95% (annualized) for the periods ended February 29,
1996, February 28, 1995 and February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period
ended February 28, 1994, and do not include the effect of the
maximum 4.50% sales charge on A shares.
</TABLE>
-9-
<PAGE> 138
FUND INVESTMENTS
The Pacific Horizon Asset Allocation Fund seeks long-term growth from
capital appreciation and dividend and interest income. The Fund
seeks to achieve its objective through a balanced approach to
investment using bonds, equity securities and cash equivalents.
The Fund may be appropriate for investors who want:
- long-term capital appreciation; and
- current dividend and interest income.
INVESTMENT OBJECTIVE
THE OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH LONG-TERM
GROWTH FROM CAPITAL APPRECIATION AND DIVIDEND AND INTEREST INCOME.
THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN THE MASTER PORTFOLIO. THE MASTER
PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND. WHILE THE
MASTER PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE
CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO
THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE
VARIOUS INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE MASTER
PORTFOLIO.
TYPES OF INVESTMENTS
IN GENERAL. The Master Portfolio is a diversified portfolio which
will invest substantially all of its assets through a balanced
approach using bonds, equity securities and cash equivalents.
Investments in equity securities will be limited to common stocks
included in either the Dow Jones Industrial Average or the Standard
and Poor's 500 Index. Bonds acquired by the Master Portfolio will be
investment grade at the time of purchase, and may include corporate
and government obligations, mortgage-backed securities and municipal
securities. Investment grade bonds are bonds that are rated in one
of the four highest rating categories by a nationally recognized
statistical rating organization, i.e., BBB or better by Standard &
Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch") or Baa
or better by Moody's Investors Service, Inc. ("Moody's"). While
bonds with such ratings are regarded as having adequate capacity to
pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay
interest and repay principal. Bonds with the lowest investment grade
rating (i.e., BBB or Baa) do not have outstanding investment
characteristics and may have speculative characteristics as well.
Unrated securities will be purchased only if Bank of America
determines that they are of comparable quality to the
-10-
<PAGE> 139
rated securities in which the Master Portfolio may invest. Under
normal market conditions at least 25% of the Master Portfolio's total
assets will be invested in fixed income senior securities.
Mortgage-backed securities, such as GNMA, FNMA and FHLMC securities,
will be guaranteed as to principal and interest, but not market
value, by the U.S. Government or one of its agencies or
instrumentalities. The Master Portfolio will not invest more than
35% of its net assets in mortgage-backed securities. There is the
risk that corporate bonds might be called by the issuer if the bond
interest rate is higher than currently prevailing interest rates.
Similarly, a risk associated with mortgage- backed securities is
early paydown resulting from refinancing of the underlying mortgages.
The rate of such prepayments, and hence the life of the security,
will primarily be a function of current market rates. In periods of
falling interest rates, the rate of prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds will
generally be at lower rates than the rates on the prepaid
obligations.
The Master Portfolio may also invest, from time to time, in
obligations issued by state and local governmental issuers
("Municipal Securities"). The purchase of Municipal Securities may
be advantageous when, as a result of prevailing economic, regulatory
or other circumstances, the performance of such securities, on a
pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. Dividends received by shareholders which are
attributable to interest income received from Municipal Securities
generally will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may
be held by the Master Portfolio are "general obligation" securities
and "revenue" securities. General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special
excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Master
Portfolio are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. Consequently, the
credit quality of such private activity bonds is usually directly
related to the credit standing of the corporate user of the facility
involved.
The Master Portfolio may also include "moral obligation" securities,
which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its debt
service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.
The value of securities held by the Master Portfolio will vary with
changes in interest rates and market and economic conditions.
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<PAGE> 140
As used in this Prospectus, "cash equivalents" are the following
short-term, interest bearing instruments: obligations issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities, certificates of deposit, bankers' acceptances,
time deposits and other interest-bearing deposits issued by domestic
and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued
by U.S. and foreign issuers which is rated at the time of purchase at
least Prime-2 by Moody's or A-2 by S&P.
The Master Portfolio may also make other investments as described
more fully below under "Other Investment Practices and
Considerations."
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund and the Master Portfolio may not
be changed without a vote by the holders of a majority of the
outstanding shares of the Fund or of the outstanding interests of the
Master Portfolio, respectively. Policies requiring such a vote to
effect a change are known as "fundamental." A number of the other
fundamental investment limitations are summarized below. Neither the
Fund nor the Master Portfolio may:
1. Purchase securities (except securities issued by the
U.S. Government, its agencies or instrumentalities) if, as a
result, more than 5% of its total assets will be invested in the
securities of any one issuer or it would own more than 10% of
the voting securities of such issuer, except that up to 25% of
its total assets may be invested without regard to these
limitations; and provided that all of its assets may be invested
in a diversified, open-end management investment company, or a
series thereof, with substantially the same investment
objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons except that it may make
time or demand deposits with banks, provided that time deposits
shall not have an aggregate value in excess of 10% of its net
assets, and may purchase bonds, debentures or similar
obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its total
assets, and may enter into repurchase agreements as long as
repurchase agreements maturing in more than seven days do not
exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it
may purchase or sell futures contracts on financial instruments,
such as bank certificates of deposit and U.S. Government
securities, foreign currencies and stock indexes and options on
any such futures if such options are written by other persons
and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums
paid on all such options that are held at any time do not exceed
20% of its total net assets, and (iii) the aggregate margin
deposits required on all such futures or options thereon held at
any time do not exceed 5% of its total assets.
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<PAGE> 141
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in percentage resulting from a change in
values will not constitute a violation of that restriction.
A complete list of additional fundamental investment limitations is
set out in the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the
policies stated above, the Master Portfolio may invest in securities
of foreign issuers that may or may not be publicly traded in the
United States, including Yankee bonds (dollar- denominated bonds sold
in the United States by non-U.S. issuers) and Eurobonds (bonds issued
in a country and sometimes a currency other than the country of the
issuer). It is currently the intention of the Master Portfolio to
invest no more than 25% of its net assets (at the time of purchase)
in foreign securities. The Master Portfolio may be subjected to
additional risks associated with the holding of property abroad such
as future political and economic developments, currency fluctuations,
possible withholding of tax payments, possible seizure or
nationalization of foreign assets, possible establishment of currency
exchange control regulations or the adoption of other foreign
government restrictions that might adversely affect the payment of
principal or interest on foreign securities in the Master Portfolio,
securities of some foreign companies are less liquid, and their
prices more volatile than domestic companies, have less publicly
available information about foreign companies, and the fact that
foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies.
OPTIONS. The Master Portfolio may purchase put and call options on
listed securities and stock indexes so long as the aggregate premiums
paid for options does not exceed 2% of the net assets of the Master
Portfolio (this restriction does not apply to options on futures
contracts). Put options may be purchased in order to protect the
Master Portfolio's securities in expectation of a declining market
and call options may be purchased to benefit from anticipated price
increases in the underlying securities or index. The Master
Portfolio may not write put options but may write fully covered call
options as long as the Master Portfolio remains fully covered
throughout the life of the option, either by owning the optioned
securities or possessing a call issued by another writer that is
identical in all respects to the call written by the Master
Portfolio. For additional information relating to option trading
practices, including particular risks thereof, see the Statement of
Additional Information.
FUTURES. The Master Portfolio may purchase and sell both interest
rate and stock index futures contracts (as well as purchase related
options) as a hedge against changes resulting from market conditions
in the values of the securities held by the Master Portfolio or which
it intends to purchase and where the transactions are economically
appropriate for the reduction of risks inherent in the ongoing
management of the Master Portfolio. The Master
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<PAGE> 142
Portfolio may not purchase or sell an interest rate or stock
index futures contract or purchase a related option unless
immediately after any such transaction the sum of the aggregate
amount of margin deposits on its existing futures positions and the
amount of premiums paid for related options does not exceed 5% of the
Master Portfolio's total assets (after taking into account certain
technical adjustments). For a more detailed description of futures
contracts and options and the costs and risks related to such
instruments, see the Statement of Additional Information.
VARIABLE RATE INSTRUMENTS. The Master Portfolio may invest in
variable and floating rate instruments, which may include master
demand notes. Although payable on demand by the Master Portfolio,
master demand notes may not be marketable. Consequently, the ability
to redeem such notes may depend on the borrower's ability to pay
which will be continuously monitored by Bank of America. Such notes
will be purchased only from domestic corporations that either (a) are
rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or
the equivalent by another nationally recognized statistical rating
organization ("NRSRO"), (c) are backed by a bank letter of credit or
(d) are determined by Bank of America to be of a quality comparable
to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of
its daily cash position, the Master Portfolio may invest in
securities issued by other investment companies which invest in
short-term debt securities and which seek to maintain a $1.00 net
asset value per share (i.e., "money market funds"). 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. As a
shareholder of another investment company, the Master Portfolio would
bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Master Portfolio may enter into
repurchase agreements. Under these agreements, the Master Portfolio
will acquire securities from either a bank, which has a commercial
paper rating of A-2 or better by S&P or Prime-2 or better by Moody's
or the equivalent by another NRSRO, or a registered broker-dealer,
and the seller agrees to repurchase them within a specified time at a
fixed price (equal to the purchase price plus interest). Repurchase
agreements are considered to be loans under the Investment Company
Act of 1940 (the "1940 Act"). Repurchase agreements maturing in more
than seven days will not exceed 10% of the value of the total assets
of the Master Portfolio. Repurchase agreements will be entered into
only for debt obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of
deposit, bankers' acceptances or commercial paper, and either the
Master Portfolio's custodian or its agent will have physical
possession of the securities or the securities will be transferred to
the Master Portfolio's custodian, by appropriate entry in the Federal
Reserve Bank's records and, in either case, will be maintained in a
segregated account.
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<PAGE> 143
Bank of America will monitor the value of securities acquired under
repurchase agreements to ensure that the value of such securities
will always equal or exceed the repurchase price under the repurchase
agreement. If the other party to a repurchase agreement defaults,
the Master Portfolio might incur a loss if the value of the
securities securing the repurchase agreement declines, and might
incur disposition costs in connection with liquidating the
securities. In addition, if bankruptcy proceedings are commenced
with respect to the seller, realization of the securities by the
Master Portfolio may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Master Portfolio may enter into
reverse repurchase agreements. Under these arrangements, the Master
Portfolio will sell a security held by it to either a bank which has
a commercial paper rating of A-2 or better by S&P or Prime-2 or
better by Moody's or a registered broker-dealer, with an agreement to
repurchase the security on an agreed date, price and interest
payment. Reverse repurchase agreements involve the possible risk
that the value of portfolio securities the Master Portfolio
relinquishes may decline below the price the Master Portfolio must
pay when the transaction closes. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting
in an increase in the speculative character of the Master Portfolio's
outstanding shares.
SECURITIES LENDING. In order to earn additional income, the Master
Portfolio may lend its portfolio securities to broker- dealers that
Bank of America considers to be of good standing. Borrowers of
portfolio securities may not be affiliated directly or indirectly
with the Company or the Master Portfolio. If the broker-dealer
should become bankrupt, however, the Master Portfolio could
experience delays in recovering its securities. A securities loan
will only be made when, in Bank of America's judgment, the possible
reward from the loan justifies the possible risks. In addition, such
loans will not be made if, as a result, the value of securities
loaned by the Master Portfolio exceeds 10% of its total assets.
Securities loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Master Portfolio may purchase
asset-backed securities. Asset-backed securities consist of
undivided fractional interests in pools of consumer loans (unrelated
to mortgage loans) or receivables held in a trust. Examples include
certificates for automobile receivables (CARS) and credit card
receivables (CARDS). Payments of principal and interest on the loans
or receivables are passed through to certificate holders.
Asset-backed securities may be issued by either governmental or
non-governmental entities. Payment on asset-backed securities of
private issuers is typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies,
but usually amounts to only a fraction of the asset-backed security's
par value until exhausted. Ultimately, asset-backed securities are
dependent upon payment of the consumer loans or receivables by
individuals, and the certificate holder frequently has no recourse to
the entity that originated the loans or receivables.
-15-
<PAGE> 144
The underlying assets may be prepaid with the result of shortening
the certificates' weighted average life. Prepayment rates vary
widely and may be affected by changes in market interest rates. It
is not possible to accurately predict the average life of a
particular pool of loans or receivables. The proceeds of prepayments
received by the Master Portfolio must be reinvested in securities
whose yields reflect interest rates prevailing at the time. Thus,
the Master Portfolio's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to
the extent reinvestments are in lower yielding securities. The
actual maturity and realized yield will therefore vary based upon the
prepayment experience of the underlying asset pool and prevailing
interest rates at the time of prepayment. Asset-backed securities
may be subject to greater risk of default during periods of economic
downturn than other instruments. Also, while the secondary market
for asset-backed securities is ordinarily quite liquid, in times of
financial stress, the secondary market may not be as liquid as the
market for other types of securities, which could result in the
Master Portfolio's experiencing difficulty in valuing or liquidating
such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Master Portfolio
may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions,
which involve a commitment by the Master Portfolio to purchase or
sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Master
Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. When-issued and forward commitment
transactions involve the risk that the price or yield obtained may be
less favorable than the price or yield available when the delivery
takes place. The Master Portfolio will set aside in a segregated
account cash or liquid securities equal to the amount of any
when-issued or forward commitment transactions. The Master
Portfolio's when- issued purchases and forward commitments are not to
exceed 25% of the value of the Master Portfolio's total assets absent
unusual market conditions. The Master Portfolio does not intend to
engage in when-issued purchases and forward commitments for
speculative purposes but only in furtherance of their investment
objectives.
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. The Master
Portfolio will not invest in instruments or securities issued by Bank
of America or any of its affiliates.
MASTER PORTFOLIO TRANSACTIONS. Investment decisions for the Master
Portfolio are made independently from those for other investment
companies and accounts managed by Bank of America and its affiliated
entities. Such other investment companies and accounts may also
invest in the same securities as the Master Portfolio. When a
purchase or sale of the same security is made at substantially the
same time on behalf of the Master Portfolio and another investment
company or account, available investments or opportunities for sales
will be equitably allocated pursuant to procedures of Bank of
America. In some instances, this investment procedure may adversely
affect the price paid or received by the Master Portfolio or the size
of the position obtained or sold by the Master Portfolio.
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<PAGE> 145
In allocating purchase and sale orders for investment securities
(involving the payment of brokerage commissions or dealer
concessions), Bank of America may consider the sale of Fund shares
by broker-dealers and other financial institutions (including
affiliates of Bank of America and the Fund's distributor to the
extent permitted by law), provided it believes the quality of the
transaction and the price to the Master Portfolio are not less
favorable than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Master Portfolio's investment practices may
result in portfolio turnover greater than that of other mutual fund
portfolios. Although no commissions are paid on bond transactions,
purchases and sales are at net prices which reflect dealers' mark-ups
and mark-downs, and a higher portfolio turnover rate for bond
investments will result in the payment of more dealer mark-ups and
mark-downs than would otherwise be the case. Higher rates of
turnover may require payment of brokerage commissions, impose other
transaction costs and could increase substantially the amount of
income received by the Master Portfolio that constitutes taxable
capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax
purposes (see "Tax Information"). Master Portfolio turnover will not
be a limiting factor in making investment decisions for the Fund.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment
portfolio that seeks to achieve its investment objective by investing
all of its investable assets in the Master Portfolio, which has the
same investment objective. The Fund may withdraw its investment in
the Master Portfolio at any time if the Board of Directors of the
Company determines that it is in the best interest of the Fund to do
so. Upon any such withdrawal, the Board of Directors would consider
what action might be taken, including the investment of all of the
assets of the Fund in another pooled investment entity having the
same investment objective as the Fund or the hiring of an investment
adviser to manage the Fund's assets in accordance with the investment
policies described above with respect to the Master Portfolio. See
"Expense Summary," "Fund Investments" and "Fund Management" for a
description of this investment objective and the investment policies,
restrictions, management and expenses of the Fund and the Master
Portfolio.
The Master Portfolio is a separate series of Master Investment Trust,
Series I (the "Master Trust"), which is organized as a business trust
under the laws of Delaware. The Fund and other entities that may
invest in the Master Portfolio from time to time (e.g., other
investment companies and commingled trust funds) will each be liable
for all obligations of the Master Portfolio. However, the risk of
the Fund's incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance exists
and the Master Portfolio itself is unable to meet its obligations.
Accordingly, the Company's Board of Directors believes that neither
the Fund nor its shareholders will be adversely affected by reason of
the Fund's investing in the Master Portfolio. As stated above, the
investment objective of the Fund and the Master Portfolio is a
fundamental policy and may not be changed, in the case of the Fund,
without the vote of its shareholders or, in the case of the Master
Portfolio, without the vote of its interestholders. Whenever the
Fund is requested to
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<PAGE> 146
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.
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<PAGE> 147
- -------------------------------------------------------------------------------
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 INVESTMENT SUBSEQUENT
------------------ ----------
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
401(K) ACCOUNT $____ $____
<FN>
* The minimum investment is $100 for purchases made through Bank of
America's trust and agency accounts or a Service Organization
(defined below) whose clients have made aggregate minimum purchases
of $1,000,000. The minimum investment is $200 for BankAmericard
holders with an appropriate award certificate from BankAmeriChoice
Program.
** A regular IRA must be opened in conjunction with this account.
</TABLE>
- -------------------------------------------------------------------------------
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<PAGE> 148
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues three classes of shares. A shares are sold to
investors choosing the front-end sales charge alternative. B shares
are sold to investors choosing the deferred sales charge alternative.
K shares are neither subject to a front-end sales charge nor a
contingent deferred sales charge. K shares, however, are sold only
to: (a) businesses and other organizations that participate in the
401(k) Daily Advantage(R) Retirement Plan Program sponsored by Bank of
America; and (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption
occurred within 30 days prior to the purchase order, and (ii) such
other open-end investment company was not distributed and advised by
Concord Financial Group, Inc. and Bank of America, respectively, or
their affiliates. The three classes of shares each represent
interests in the same portfolio of investments of the Fund, have the
same rights and are identical in all respects, except that A shares
bear the expenses of a Shareholder Service Plan. B shares bear the
expenses of a Distribution and Services Plan and have exclusive
voting rights with respect to the Distribution and Services Plan. K
shares bear the expenses of a Distribution Plan and Administrative
and Shareholder Services Plan and have exclusive voting rights with
respect to such Plans. The three classes also have different
exchange privileges, as described below. B shares also bear the
expenses of the deferred sales charge arrangements and any expenses
resulting from such arrangements. The net income attributable to A,
B and K shares and the dividends payable on A, B and K shares will be
reduced by the amount of the: (a) Shareholder Service Plan fees
attributable to A shares, (b) Distribution and Services Plan fees
attributable to B shares, (c) Distribution Plan fees and
Administrative and Shareholder Services Plan fees attributable to K
shares, respectively and (d) the incremental expenses associated with
such plans. Lastly, B shares of the Fund held for 8 years will
automatically convert into A shares of the Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is
based upon each class' net asset value per share plus a front-end
sales load on A shares. Each class calculates its net asset
value ("NAV") as follows:
NAV = (Value of Assets Attributable to the Class) - (Liabilities
Attributable to the Class)
----------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading
hours on the New York Stock Exchange (the "Exchange") (currently
4:00 p.m. Eastern Time) on days the Exchange is open.
The Master Portfolio's investments are valued at market value or,
where market quotations are not readily available, at fair value as
determined in good faith by the Master Portfolio pursuant
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<PAGE> 149
to procedures adopted by the Master Portfolio's Board of Trustees.
Short-term debt securities are valued at amortized cost, which
approximates market value. For further information about valuing
securities, see the Statement of Additional Information. For price and
yield information call (800) 346- 2087.
The per share net asset values of A, B and K shares will diverge due
to the different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load,"
"sales load" "front-end sales charge" or "sales charge") for the A
shares of the Fund begins at 4.50% and may decrease as the amount you
invest increases, as shown in the following chart:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Amount of Transaction As a % of As a % of Dealer's
offering net asset Reallowance
price value as a % of
offering 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**
<FN>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the
contingent deferred sales charge.
From time to time, the Fund's distributor will make or allow
additional payments or promotional incentives in the form of cash or
other compensation such as trips to sales seminars, tickets to
sporting and other entertainment events and gifts of merchandise to
firms that sell shares of the Fund.
- --------------------------------------------------------------------------------
</TABLE>
LARGE PURCHASE EXEMPTION. To the extent that no other A share no-load
exemption is available, the foregoing schedule of sales loads does
not apply to purchases of A shares of $1,000,000 or more. If a
customer who is not a participant in Bank of America's 401(k) Daily
Advantage Retirement Plan Program purchases $1,000,000 or more of A
shares and redeems such shares, a contingent deferred sales load will
be imposed as follows:
<TABLE>
<CAPTION>
Number of Years Applicable Contingent
Elapsed Since Purchase Deferred Sales Load
---------------------- ---------------------
<S> <C>
</TABLE>
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<PAGE> 150
<TABLE>
<S> <C>
1 year 1.0%
-------------------------------------
2 years 0.5%
-------------------------------------
3 years None
-------------------------------------
</TABLE>
The contingent deferred sales load is imposed on the lesser of the
current market value or the cost of the shares being
redeemed. This means that this charge will not be imposed upon
increases in net asset value above the initial purchase price or
upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such
shares, the calculation will be made in a manner that results in the
lowest possible rate. It will be assumed that the redemption is made
first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts
representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of
shares during the preceding 2 years; then of amounts representing the
cost of shares held beyond the applicable contingent deferred sales
charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time. Although no front
end sales load will be paid on Large Purchase Exemptions,
the Distributor will compensate brokers whose customers
purchase shares at the following rates: 1.00% of the amount under
$3 million, 0.50% of the next $47 million and 0.25% thereafter.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B shares may be
purchased at net asset value per share without the imposition of a
sales charge at the time of purchase. The Fund's distributor
compensates broker-dealers that have entered into a selling
agreement with the distributor from its own funds at the time the
shares are purchased. The proceeds of the contingent deferred
sales charges and the ongoing distribution and services plan fees
described below are used to reimburse the Fund's distributor for its
expenses, including the compensation of broker-dealers.
B shares that are redeemed within 6 years of purchase are subject to
the contingent deferred sales charge at the rates set forth below,
charged as a percentage of the lesser of the current market
value or the cost of the shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no
charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. B shares will convert to
A shares on the first business day of the month following the eighth
anniversary of the date of purchase unless the B shares have been
exchanged for Pacific Horizon shares of the Pacific Horizon Prime
Fund.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge (as a
Number of Years percentage of dollar amount
Elapsed Since Purchase* subject to the charge)
----------------------- ---------------------------
<S> <C>
Less than one . . . . . . . . . . . . . . . . . . . . . . . . 5.0%
More than one, but less
than two . . . . . . . . . . . . . . . . . . . . . . . . . 4.0%
</TABLE>
-22-
<PAGE> 151
<TABLE>
. <S> <C>
More than two, but less
than three . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than three, but less
than four . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than four, but less
than five . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
More than five, but less
than six . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
After six years . . . . . . . . . . . . . . . . . . . . . . . None
---------------------------------
<FN>
* The time period during which Pacific Horizon shares of
the Pacific Horizon Prime Fund acquired through an exchange
are held is not included when the amount of the contingent
deferred sales charge is calculated.
</TABLE>
In determining whether a contingent deferred sales charge is
applicable to a redemption of B 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 B
shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset
value of your holdings of B shares above the total amount of payments
for the purchase of B shares during the preceding 6 years; then of
amounts representing the cost of B shares held beyond the applicable
contingent deferred sales charge period; and finally, of amounts
representing the cost of the B shares held for the longest period of
time.
As an example, assume that you purchased 100 shares at $10 per share
(at a cost of $1,000), that you have not exchanged for Pacific Horizon
shares of the Pacific Horizon Prime Fund, that in the third year after
purchase the net asset value per share is $12, and that during the
three-year period you had acquired 10 additional shares through
dividend reinvestment. If at such time you make your first redemption
of 50 shares (proceeds of $600), 10 shares will not be subject to the
charge because of dividend reinvestment. With respect to the remaining
40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 3.00% (the applicable rate in the third year after purchase).
K SHARES. Bank of America will compensate Affiliated Brokers for its
customers who invested in the Fund and are participants in the 401(k)
Daily Advantage(R) Retirement Plan Program. The Affiliated Brokers
will be compensated by Bank of America at the rate of 1% of the first
$1 million of combined Pacific Horizon Funds' and Time Horizon Funds'
K shares in each Daily Advantage(R) Retirement Plan Program.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales
load on the following types of transactions:
- reinvestment of dividends or distributions;
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<PAGE> 152
- - accounts of corporate/business retirement plans (such as 401(k), 403(b)(7),
457 and Keogh accounts) which are sponsored by the Fund's administrator and
were invested in the Fund as of July 1, 1996 so long as the account remains
open on the Company's books;
- - accounts of employer-sponsored employee pension or retirement plans (other
than 403(b) plans) which make direct investments in the Fund and were invested
in the Fund as of July 1, 1996 so long as the account remains open on the
Company's books;
- 403(b) plans invested in the Fund as of December 7, 1995;
- - any purchase of shares by an investment adviser regulated by federal or
state governmental authority when the investment adviser is purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account) other than purchases for
403(b) plans; provided that investment advisers who have invested 403(b) plans
in the Fund on behalf of existing and new clients as of December 7, 1995 may
continue to invest on a no-load basis;
- - accounts opened by a bank, trust company or thrift institution, acting as
a fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account remains
open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of
shares of the Fund (or any other fund in the Pacific Horizon Family of Funds)
before April 20, 1987, so long as your account remains open on the Company's
books;
- - any purchase of shares, provided you were the beneficial owner of shares
of Bunker Hill Income Securities, Inc. on the date of its reorganization into
the Pacific Horizon Corporate Bond Fund, so long as your account remains open
on the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan
described below.
Additionally, some individuals are not required to pay a front-end sales
load when purchasing Fund shares, including:
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<PAGE> 153
- members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but worked abroad)
of Bank of America or any of its affiliates, and their parents, spouses and
minor children 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; and
- - holders of the BankAmericard with an appropriate award certificate from
the BankAmeriChoice Program (initial award only; a front-end sales load will
apply to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to B shares is not charged on (1) exchanges described
under "Shareholder Services - Can I Exchange My Investment From One
Fund to Another?;" (2) redemptions in connection with minimum required
distributions from IRA accounts due to the shareholders reaching age 70-1/2;
(3) redemptions in connection with a shareholder's death or disability (as
defined in the Internal Revenue Code); and (4) involuntary redemptions as a
result of an account's net asset value remaining below $500 after sixty
days' written notice. In addition, no contingent deferred sales charge
is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in
any Pacific Horizon Fund on which you paid a front-end sales load (including
shares that carry no sales load but were obtained through an exchange and
can be traced back to shares that were acquired with a sales load). Shares
of any investment portfolio of Time Horizon Funds (a "Time Horizon Fund"), an
open-end investment company managed by Bank of America generally will not
be included when determining reduced sales loads under the rights of
accumulation program, except that you may aggregate your investment in Pacific
Horizon Funds and Time Horizon Funds in order to qualify for the Large
Purchase Exemption.
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<PAGE> 154
To qualify for a reduced sales load on A shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that
has entered into a selling and/or servicing agreement with the Fund's
distributor) must notify the Fund's transfer agent at the time of investment
that a quantity discount is applicable. Use of this service is subject to a
check of appropriate records, after which you will receive the lowest
applicable sales charge. If you want to participate you can so indicate on
your Account Application or make a subsequent written request to the Transfer
Agent.
Example: Suppose you beneficially own A shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional
A shares carrying a sales load 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 on A shares by
means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate $100,000 or more in shares of any
Pacific Horizon Fund within a period of 13 months, beginning up to 90 days
prior to the date of the Letter's execution. A shares carrying a sales
load purchased during that period count as a credit toward completion of
the Letter of Intent. Any investments you make during the period receive
the discounted sales load based on the full amount of your investment
commitment. When your commitment is fulfilled, an adjustment will be made
to reflect any reduced sales load applicable to shares purchased during the
90-day period prior to the submission of your Letter of Intent. Shares of
Time Horizon Funds will generally not be included when determining reduced
sales loads under the letter of intent program unless you are a participant
in the 401(k) Daily Advantage(R) Retirement Plan Program.
While signing a Letter of Intent does not bind you to purchase, or the
Company to sell, the full amount indicated at the sales load in effect at
the time of signing, you must complete the intended purchase to obtain the
reduced sales load. When you sign a Letter of Intent, the Company holds
in escrow shares purchased by you in an amount equal to 5% of the total
amount of your commitment. After you fulfill the terms of the Letter of
Intent, the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter
of Intent, you will receive an adjustment which reflects the further reduced
sales load applicable to your excess investment. It will be in the form
of additional shares credited to your account at the then current offering
price applicable to a single purchase of the total amount of the total
purchase.
If your aggregate investment is less than the amount you committed, you
will be requested to remit an amount equal to the difference between the sales
load actually paid and the sales load applicable to the aggregate purchases
actually made. If such remittance is not received within
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<PAGE> 155
20 days, the Transfer Agent will redeem an appropriate number of shares held
in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your
Account Application. If you have any questions regarding the Letter of
Intent, call 800-332-3863. Please read it carefully, as you will be
bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Fund permits you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular circumstances
it is more advantageous to invest in A shares and incur front-end sales charge
and an ongoing shareholder service plan fee; to invest in B shares and have the
entire initial purchase price invested in the Fund with the investment
thereafter being subject to a contingent deferred sales charge and ongoing
distribution and services plan fees; or to invest in K shares and incur neither
a front-end sales charge, or a contingent deferred sales charge. K shares do
incur fees under a Distribution Plan and an Administrative and Shareholder
Services Plan. K shares of the Fund, however, are available to (a) businesses
or other organizations that participate in the 401(k) Daily Advantage
Retirement Plan Program sponsored by Bank of America; and (b) individuals
investing proceeds from a redemption of shares from another open-end investment
company on which such individual paid a front-end sales load if (i) such
redemption occurred within 30 days prior to the purchase order and (ii) such
other open-end investment company was not distributed and advised by Concord
Financial Group, Inc. and Bank of America, respectively, or their affiliates.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the front-end sales charge alternative
(A shares) because similar sales charge reductions are not available for
purchases under the contingent deferred sales charge alternative (B
shares). Moreover, A shares would not be subject to ongoing distribution and
services plan fees, as described below. However, because front-end sales
charges are deducted at the time of purchase, such investors who pay a
front-end sales charge would not have all their funds invested initially. The
Company will not accept any order for B shares from an investor who is eligible
to purchase A shares without a sales load or from an investor eligible to
purchase K shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in the Fund for an extended period of time might
also elect the front-end sales charge alternative because over time the
accumulated continuing distribution and services plan fees related to B shares
may exceed the front-end sales charge and ongoing shareholder service fees
related to A shares. However, such investors must weigh this consideration
against the fact that not all their funds will be invested initially.
Furthermore, the ongoing distribution and services plan fees may be offset to
the extent any return is realized on the additional funds initially invested
under the contingent deferred sales charge alternative.
-27-
<PAGE> 156
Certain investors might determine it to be more advantageous to have
all their funds invested initially in B shares, although subject to
continuing distribution and services plan fees, and to a contingent deferred
sales charge for a 6-year period of time.
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<PAGE> 157
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
<TABLE>
<CAPTION>
TO BUY SHARES
Opening an Account Adding to an Account
----------------------------------------------------------------------------
<S> <C> <C>
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Fund's transfer agent)
Contact them directly Contact them directly
for instructions. for instructions.
----------------------------------------------------------------------------
Through the Distributor
(if you are or will be the shareholder of record on the Company's books)
By Mail Complete Account Mail all subsequent
Application and mail investments to:
it with a check
(payable to Pacific Pacific Horizon Funds,
Horizon Asset Inc.
Allocation Fund) to File No. 54634
the address on the Los Angeles, CA 90074-
Account Application. 4634
--------------------------------------------------------------------------------
In Person Deliver Account Deliver your payment
Application and your directly to the address
BISYS Fund Services, Inc. payment directly to on the left.
3435 Stelzer Road the address on the
Columbus, OH 43219-3035 left.
--------------------------------------------------------------------------------
By Wire Initial purchases of Contact the Fund's
shares into a new transfer agent at 800-
account may not be 346-2087 for complete
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>
-29-
<PAGE> 158
<TABLE>
<CAPTION>
TO BUY SHARES
Opening an Account Adding to an Account
<S> <C> <C>
TeleTrade Privileges Purchases may be made
By TeleTrade may not be used to in the minimum amount
(a service permitting make an initial of $500 and the maximum
transfers of money from your purchase. amount of $50,000 per
checking, NOW or bank money transaction as soon as
market account) appropriate information
regarding your bank
account has been
established on your
Fund account. This
information may be
provided on the Account
Application or in a
signature guaranteed
letter of instruction
to the Transfer Agent.
Signature guarantees
are discussed under
"How to Sell Shares."
Call 800-346-2087 to
make your purchase.
You should refer to the "Shareholder Services"
section for additional important information
about the TeleTrade Privilege.
You may use other investment options, including automatic investments
and exchanges, to invest in your Fund account.
Please refer to the section entitled "Shareholder Services"
for more information.
</TABLE>
What Price Will I Receive When I Buy Shares?
Your shares will be purchased at the Fund's public offering price calculated
at the next close of regular trading on the Exchange (currently 4:00 p.m.
Eastern time) after your purchase order is received in proper form by the
Fund's transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"),
at its Columbus office.
If you purchase shares through Bank of America, your broker or another
Service Organization, the entity involved is responsible for transmitting your
order and required funds to the Transfer Agent on a timely basis in accordance
with the procedures in this Prospectus. Share purchases (and redemptions)
executed through Bank of America or a Service Organization are executed only
on days on which the particular institution and the Fund are open for
business. Purchase orders received by a Service Organization in proper form by
4:00 p.m. Eastern time on a business day will be effected at the public
offering price calculated at 4:00 p.m. Eastern time on that day, if the
Service Organization transmits your order to the Transfer Agent by the end
of the Transfer Agent's business day. Except as provided in the following two
sentences, if the order is not received in proper form by a Service
Organization by 4:00 p.m. Eastern time or not received by the Transfer Agent by
the close of its business day, the order will be based upon the next
determined purchase price. The Company may from time to time in its sole
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<PAGE> 159
discretion appoint one or more entities as the Fund's agent to receive
irrevocable purchase and redemption orders and to transmit them on a
net basis to the Transfer Agent. In these instances orders received
by the entity by 4:00 p.m. Eastern time on a business day will be effected as
of 4:00 p.m. Eastern time that day if the order is actually received by the
Transfer Agent not later than the next business morning accompanied by
payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or
K shares. Certificates for shares will no longer be issued.
Federal regulations require you to provide a certified taxpayer
identification number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed
by the Transfer Agent. All payments should be in U.S. dollars and, to avoid
fees and delays, should be drawn only on U.S. banks. Please remember that
the Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
America and Service Organizations may also impose minimum customer account and
other requirements in addition to those imposed by the Fund. If you purchase
or redeem shares directly from the Fund, you may do so without incurring any
charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares.
The value of the shares you redeem may be more or less than your cost,
depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America,
your Broker or another Service Organization, you may redeem all or part
of your shares in accordance with the instructions pertaining to that
account. If you are also the shareholder of record on the Company's
books, you may redeem shares in accordance with the procedures described in
the chart below as well as those of your account. To use the redemption
methods described below, you must arrange with Bank of America or your
Service Organization for delivery of the required application(s) to
the Transfer Agent.
-31-
<PAGE> 160
<TABLE>
<CAPTION>
TO SELL SHARES
--------------------------------------------------------------------------------------
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Transfer Agent)
Contact them directly for instructions.
--------------------------------------------------------------------------------------
Through the Distributor
(if you are a shareholder of record on the Company's books)
--------------------------------------------------------------------------------------
By Mail
<S> <C>
Pacific Horizon Send a signed, written request (each owner, including each
Asset Allocation joint owner, must sign) to the Transfer Agent.
Fund
c/o Pacific Horizon If you hold stock certificates for the shares being
Funds, Inc. redeemed, make sure to endorse them for transfer, have your
P.O. Box 80221 signature on them guaranteed by your bank or another
Los Angeles, CA guarantor institution (as described in the section entitled
90080-9909 "What Kind Of Paperwork Is Involved In Selling Shares?")
and include them with your request.
--------------------------------------------------------------------------------------
In Person
BISYS Fund Deliver your signed, written request (each owner, including
Services, Inc. each joint owner, must sign) and any certificates (endorsed
3435 Stelzer Road for transfer and signature guaranteed as described in the
Columbus, OH section entitled "What Kind Of Paperwork Is Involved In
43219-3035 Selling Shares?") to the address on the left.
--------------------------------------------------------------------------------------
By Wire As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate
form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
-32-
<PAGE> 161
<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service $50,000 per transaction) by telephone after appropriate
permitting information regarding your bank account has been
transfers of money established on your Fund account. This information may be
to your checking, provided on the Account Application or in a signature
NOW or bank money guaranteed letter of instruction to the Transfer Agent.
market account) Signature guarantee requirements are discussed in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you
indicate on the Account Application or in a subsequent
written notice to the Transfer Agent that you do not wish
to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
AUTOMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO
THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Transfer Agent at
its Columbus office. Although the Fund itself imposes no charge when A shares
are redeemed (except pursuant to the Large Purchase Exemption discussed
above), if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in
connection with investments in Fund shares.
When you redeem your B shares within 6 years of purchase (or longer if
your shares have been exchanged for Pacific Horizon shares of the Pacific
Horizon Prime Fund), you may be subject to a contingent deferred sales charge
as described above.
The Fund imposes no charge when K shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k),
IRA and non-working spousal IRA accounts) involuntarily if, after sixty days'
written notice, the account's net asset value remains below a $500 minimum
balance. The contingent deferred sales charge will not be imposed upon such
involuntary redemptions.
-33-
<PAGE> 162
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming
A, B or K shares. If you own both A or K and B shares of the Fund, A
or K shares will be redeemed first unless you request otherwise. Certain
types of redemption requests as well as all endorsed share certificates will
need to include a signature guarantee. Signature guarantees must
accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere
other than the address of record on the Company's books, or (iii) an
amount of $50,000 or less if the address of record has not been on the
Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member
of the FDIC; (ii) a trust company; (iii) a member firm of a national
securities exchange; or (iv) another eligible guarantor institution.
Guarantees must be signed by an authorized signatory of the
guarantor institution and be accompanied by the words "Signature
Guaranteed." The Transfer Agent will not accept guarantees from notaries
public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer
Agent receives a request in proper form, except as provided by the rules
of the Securities and Exchange Commission. If the shares to be redeemed have
been purchased by check or by TeleTrade, the Company will, upon the
clearance of the purchase check or TeleTrade payment, mail the redemption
proceeds within seven business days. This does not apply to situations where
the Fund receives payment in cash or immediately available funds for the
purchase of shares. The Company may suspend the right of redemption or
postpone the date of payment upon redemption (as well as suspend the
recordation of the transfer of shares) for such periods as are permitted
under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with
redemption proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of
the Fund, in shares of the same class of the Fund out of which you
redeemed, in like shares of another Fund in the Pacific Horizon Family of
Funds or in like shares of any investment portfolio of Time Horizon
Funds, within 90 days of your redemption trade date without paying a sales
load. Upon such a reinvestment, the Fund's distributor will credit to your
account any contingent deferred sales charge imposed on any redeemed B
shares or any Pacific Horizon shares of the Pacific Horizon Prime Fund.
Shares so reinvested will be purchased at a price equal to the net
-34-
<PAGE> 163
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 is declared and paid as a dividend on a quarterly basis and
net realized capital gains (if any) are distributed not more than twice each
year. Dividends are paid within five business days after the quarter end.
You will automatically receive dividends and capital gain distributions
in additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must
do so in writing to the Transfer Agent, at P.O. Box 80221, Los Angeles,
California 90080-9909. The election or revocation will become effective
with respect to dividends paid after it is received by the Transfer Agent.
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<PAGE> 164
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 B shares 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
consult their tax advisers.
Additionally, K shares are available to business and other organizations
that participate in the 401(k) Daily Advantage(R) Retirement Plan Program
sponsored by Bank of America.
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. Specifically, A shares may be exchanged for other A shares,
B shares may be exchanged for other B shares and K shares may be exchanged
for other K shares. No additional sales load will be incurred when
exchanging A shares purchased with a sales load for A shares of another load
fund of the Company or Time Horizon Funds. A and B shares may be exchanged
for other A and B shares, respectively, or for Pacific Horizon shares of the
Pacific Horizon Prime Fund without the
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PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE TIME THE EXCHANGE IS
MADE. IN ADDITION, PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND
THAT WERE ACQUIRED THROUGH AN EXCHANGE OF B SHARES, MAY BE EXCHANGED FOR B
SHARES WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE TIME
THE EXCHANGE IS MADE. IN DETERMINING THE HOLDING PERIOD FOR CALCULATING THE
CONTINGENT DEFERRED SALES CHARGE PAYABLE UPON REDEMPTION OF B SHARES, THE
HOLDING PERIOD OF THE SHARES ORIGINALLY HELD WILL BE ADDED TO THE HOLDING
PERIOD OF THE SHARES ACQUIRED THROUGH THE EXCHANGE UNLESS THE SHARES ACQUIRED
THROUGH THE EXCHANGE ARE PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME
FUND. THE TIME PERIOD DURING WHICH PACIFIC HORIZON SHARES OF THE PACIFIC
HORIZON PRIME FUND ACQUIRED THROUGH AN EXCHANGE ARE HELD IS NOT INCLUDED WHEN
THE AMOUNT OF THE CONTINGENT DEFERRED SALES CHARGE IS CALCULATED.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to
the Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500
and are subject to the minimum initial investment requirements of
the particular fund into which the exchange is being made. You may obtain
prospectuses regarding the funds into which you wish to make an exchange from
your Service Organization or the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below regarding TeleTrade
for a description of the Company's policy regarding responsibility for
telephone instructions.) You may also send exchange instructions in
writing by following directions set forth previously under "How to Sell
Shares."
If you would like more information on making an exchange, please read
the Statement of Additional Information and consult your Service
Organization or the Fund's distributor.
The Fund reserves the right to reject any exchange request and the
Exchange Privilege may be modified or terminated at any time. At least 60
days' notice of any material modification to or termination of the
Exchange Privilege will be given to shareholders except where notice
is not required under the regulations of the Securities and Exchange
Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC
TRANSFERS OF MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED
FUND ACCOUNT. THE SERVICE MAY
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BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN ACCOUNT
AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions
will be transferred between your Fund account and the checking, NOW or bank
money market account designated by you. Only an account maintained at a
domestic financial institution that is an Automated Clearing House member may
be so designated. TeleTrade purchases will be effected at the public offering
price next determined after the Transfer Agent receives payment for the
transaction. Redemption proceeds will be on deposit in your account at
your financial institution generally two business days after the redemption
request is received by the Transfer Agent. You may also request receipt of
your redemption proceeds by check, which will be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company
will use such procedures as are considered reasonable, including
requesting certain personal or account information to confirm the identity
of the shareholder. If you should experience difficulty in contacting the
Transfer Agent to place telephone redemptions (including telephone
wire redemptions), for example because of unusual market activity, you are
urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a
service fee upon notice to shareholders. No such fee currently is
contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY
DEBITING YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option,
your checking, NOW or bank money market account designated by you will be
debited in the specified amount, and Fund shares will be purchased, once a
month, on either the first or fifteenth day, or twice a month, on both
days. Only accounts maintained at a domestic financial institution
which permits automatic withdrawals and is an Automated Clearing House
member are eligible. The Automatic Investment Program is one means by which
you may use Dollar Cost Averaging in making investments.
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WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS
WITH LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS
HIGHER, YOUR AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement
Dollar Cost Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on
a sustained, consistent basis. You should be aware, however, that shares
bought using Dollar Cost Averaging are made without regard to their price on
the day of investment or to market trends. In addition, while you may
find Dollar Cost Averaging to be beneficial, it will not prevent a loss if
you ultimately redeem your shares at a price that is lower than their purchase
price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written
request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time
by mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt.
The Fund may modify or terminate this Privilege at any time or charge a
service fee, although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE,
YOU MAY WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A
MONTHLY, QUARTERLY, SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC
WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals
will be made on either the first or fifteenth day of the particular month
selected. To participate in this Plan, check the appropriate box and supply
the necessary information on the Account Application or in a subsequent
signature guaranteed written request to the Transfer Agent. Purchases of
additional shares concurrently with withdrawals are ordinarily not
advantageous because of the Fund's sales load. Use of this Plan may also be
disadvantageous for B shares due to the potential need to pay a contingent
deferred sales charge.
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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.
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THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under
the general supervision of its Board of Directors. Information about
the Directors and Officers of the Company and about the Trustees and Officers
of the Master Trust is included in the Statement of Additional Information
under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Master Portfolio.
Bank of America is a subsidiary of BankAmerica Corporation, a registered
bank holding company. Its principal offices are located at 555
California Street, San Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities 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.
The Asset Allocation Committee of Bank of America's Global Investment
Management Division establishes general parameters for the selection of
securities for the Master Portfolio. Robert Pyles, Director of Research
and Senior Portfolio Manager of BofA Capital Management, Inc.
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(a wholly-owned subsidiary of Bank of America), and Steven L. Vielhaber
are primarily responsible for the selection of particular securities
for the equity and fixed-income portions, respectively, of the Master
Portfolio. Mr. Pyles has been the Fund's manager since November 1994 and
has been associated with Seattle-First National Bank, a wholly-owned
subsidiary of Seafirst Corporation, which is controlled by
BankAmerica Corporation (both of which are bank holding companies), since
1976. Mr. Pyles currently manages various common trust, employee benefit and
individual accounts for Bank of America. Mr. Vielhaber has been the
Fund's manager since April 1994 and has been employed by Bank of America
since 1993. Prior thereto, Mr. Vielhaber had been Director of Fixed
Income Marketing at Dimensional Fund Advisers since 1990, and Vice
President and Manager of Investments at Gibraltar Savings from 1986 to 1990.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.55%
of the Master Portfolio's average daily net assets. This fee is higher
than that paid by most other investment companies but is comparable to the
fees paid by other investment companies with similar investment objectives
and policies. This amount may be reduced pursuant to undertakings by Bank of
America. (See the information below under "Fee Waivers"). During the
fiscal year ended February 29, 1996, Bank of America waived a portion of its
fee as investment adviser. In addition, Bank of America and its affiliates
may be entitled to fees under the Shareholder Service Plan,
Distribution and Services Plan, Distribution Plan and Administrative
and Shareholder Services Plan as described under "Plan Payments" below,
and may receive fees charged directly to their accounts in connection with
investments in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the
Fund and the Master Portfolio. Concord is an indirect, wholly-owned
subsidiary of The BISYS Group, Inc. Its offices are located at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
Under its administration agreements with the Company and the Master
Portfolio, Concord has agreed to: pay the costs of maintaining the
offices of the Company and the Master Portfolio; provide a facility to
receive purchase and redemption orders; provide statistical and research
data, data processing services and clerical services; coordinate the
preparation of reports to shareholders of the Fund, interestholders of the
Master Portfolio and the Securities and Exchange Commission; prepare tax
returns; maintain the registration or qualification of the Fund's shares for
sale under state securities laws; maintain books and records of the Fund and
the Master Portfolio; calculate the net asset value of the Fund and the
Master Portfolio 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.
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For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Master
Portfolio at the annual rate of 0.05% of the Master Portfolio's average
daily net assets. These amounts may be reduced pursuant to undertakings by
Concord. (See the information below under "Fee Waivers"). During the
fiscal year ended February 29, 1996, Concord waived a portion of its fee as
administrator for both the Fund and the Master Portfolio.
Pursuant to the authority granted in its administration agreements,
Concord has entered into an agreement with PFPC, Inc. ("PFPC") under which
PFPC, and an off-shore affiliate of PFPC, perform certain of the services
listed above, e.g., calculating the net asset value of the Fund and the
Master Portfolio, calculating dividends and capital gains distributions
to shareholders, and maintaining the books and records of the Fund and the
Master Portfolio. The Fund and the Master Portfolio bear all fees and expenses
charged by PFPC for these services.
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DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial
Group, Inc. (the "Distributor"). The Distributor is an indirect wholly-owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
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, OH 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 choose not to
receive fee payments and/or may assume certain Fund or Master Portfolio
expenses as a result of competitive pressures and in order to preserve and
protect the business and reputation of Concord and Bank of America. However,
the service providers retain the ability to discontinue such fee waivers and/or
expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU
SHOULD SAVE YOUR ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION
YOU WILL NEED TO CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR
ULTIMATE SALE OR EXCHANGE OF SHARES IN THE FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year, the Fund qualified as a "regulated
investment company" under the Internal Revenue Code, as amended, (the
"Code"). As a result of this qualification, the
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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. The dividends
received deduction allowed to corporations will apply to such dividends to
the extent of the total qualifying dividends received by the Fund from
domestic corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be
taxed as a long-term capital gain no matter how long you have held Fund
shares. Such dividends are not eligible for the dividends received
deduction allowed to corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend 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 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.
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STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax
consequences which may differ from the federal tax consequences as
described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL
TOTAL RETURN, AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE
INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE
RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30 day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and
yield may be quoted in advertisements or in communications to shareholders.
Both methods of calculating total return assume dividends and capital
gains distributions made by the Fund during the period are reinvested in Fund
shares, and include the maximum front-end sales charge for A shares and the
applicable contingent deferred sales charge for B shares.
The Fund may also advertise total return data without reflecting the sales
load imposed on the purchase of Fund shares in accordance with the
rules of the Securities and Exchange Commission. Quotations that do not
reflect the sales load will, of course, be higher than quotations that do
reflect sales loads.
The Fund calculates its yield by dividing its net income per share
(which may differ from the net income per share used for accounting purposes)
during a 30 day (or one month) period by the maximum offering price per share
on the last day of the measuring period, and then annualizing the result on a
semi-annual basis. The 30 day or one month measuring period will be identified
along with any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual
funds with similar investment objectives and to bond and other relevant
indices or to rankings prepared by independent services or other financial
or industry publications that monitor mutual fund performance.
For example, the Fund's total return may be compared to the Consumer
Price Index or to data prepared by: Lipper Analytical Services,
Inc.; Donoghue's Money Fund Report; Mutual Fund
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Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies
Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as
Money, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
local or regional publications, may also be used in comparing Fund
performance. The Fund's total return also may be compared to indices such
as: the Dow Jones Industrial Average; the Standard & Poor's 500 Stock
Index; the Shearson Lehman Bond Indexes; the Wilshire 5000 Equity Indexes;
or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared
with bank deposits, savings accounts and similar investments that often
provide an agreed or guaranteed fixed yield for a stated period of time.
Performance is generally a function of the kind and quality of the
instruments in a portfolio, portfolio maturity, operating expenses and
market conditions. Not included in the Fund's calculations of total return
and yield are fees charged by Bank of America and Service Organizations
directly to their customer accounts in connection with investments in the
Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER
27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE
PER SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES
INTO ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 40 million shares of
Class O Common Stock, 60 million shares of Class O -- Special Series 3 Common
Stock and 50 million shares of Class O -- Special Series 5 Common Stock,
representing interests in the Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class O
Common Stock are the "A" shares; Class O -- Special Series 3 are the "B"
shares and Class O Common Stock -- Special Series 5 are the "K" shares. The
Board of Directors may similarly classify or reclassify any class of
shares (including unissued Class O Common Stock, Class O -- Special Series 3
Common Stock or Class O -- Special Series 5 Common Stock) into one or more
series. For more information about the Company's other portfolios, contact
the Company at the telephone number listed on the inside cover page.
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Shares representing interests in the Fund are entitled to participate
in the dividends and distributions declared by the Board of Directors and
in the net distributable assets of the Fund on liquidation. Fund shares
have no preemptive rights and only such conversion and exchange rights as the
Board may grant in its discretion. When issued for payment as described in
this Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Fund shares have
cumulative voting rights to the extent that may be required by applicable
law. Additionally, shareholders will vote in the aggregate and not by class
or series, except as required by law (or when permitted by the Board of
Directors). Only A shares will vote on matters relating solely to A Shares,
B shares will vote on matters relating solely to B shares and K shares will
vote on matters (such as the distribution and services plan described
below) relating solely to K shares. The Fund does not presently intend to
hold annual meetings of shareholders to elect directors or for other business
unless and until such time as less than a majority of the directors holding
office has been elected by the shareholders. At that time, the directors then
in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of
the Company's outstanding shares of common stock. The Fund will assist
in shareholder communications in such matters to the extent required by law
and the Company's undertaking with the Securities and Exchange Commission.
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PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR
A SHARES, A DISTRIBUTION AND SERVICES PLAN FOR B AND A DISTRIBUTION
PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K SHARES.
The Company has adopted a Shareholder Service Plan for A shares, under which
the A shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has also
adopted a Distribution and Services Plan pursuant to Rule 12b-1 under the 1940
Act, under which the B shares of the Fund reimburse the Distributor for
services rendered and costs incurred in connection with distribution of the
B shares and for shareholder servicing fees the Distributor pays to Service
Organizations. The Company has adopted a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act under which the K shares of the Fund reimburse the
Distributor for services rendered and costs incurred in connection with
distribution of the K shares. The Company has also adopted an Administrative
and Shareholder Services Plan for K Shares, under which K shares of the Fund
reimburse the Distributor for administrative and shareholder servicing fees the
Distributor pays to Service Organizations.
SHAREHOLDER 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. During
the fiscal year end February 29, 1996, the Distributor waived all payments
under the Plan.
If in any month the Distributor is due more monies than are immediately
payable because of the percentage limitation described above, the
unpaid amount is "carried forward" from month to month while the Plan is
in effect until such time when it may be paid. However, any "carried forward"
amounts will not be payable beyond the fiscal year during which the amounts
are accrued. No interest, carrying or other finance charge is borne by the
Fund with respect to the amount "carried forward."
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.
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If a bank were prohibited from acting as a Service Organization, its
shareholder clients would be permitted to remain Company shareholders
and alternative means for continuing the servicing of such shareholders would
be sought. In such event, changes in the operation of the Company might
occur and a shareholder serviced by such bank might no longer be able to
avail itself of the automatic investment or other services then being provided
by the bank. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these occurrences.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND
ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, the Fund
pays the Distributor for distribution expenses primarily intended to result in
the sale of the Fund's B and K shares and with respect to B shares, for
shareholder servicing expenses. Such distribution expenses include
expenses incurred in connection with advertising and marketing the Fund's
B and K shares; payments to Service Organizations for assistance in
connection with the distribution of B and K shares; and expenses incurred in
connection with preparing, printing and distributing prospectuses for the
Fund (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution
to existing B and K shareholders of the Fund) and in implementing and
operating the Distribution and Services Plan and Distribution Plan.
Shareholder servicing expenses under the Distribution and Services Plan and
Administrative and Shareholder Services Plan include, but are not limited to,
expenses incurred in connection with shareholder services provided by the
Distributor and payments to Service Organizations for the provision of
support services with respect to the beneficial owners of B and K shares, such
as assisting clients in processing exchange and redemption requests and in
changing dividend options and account descriptions and responding to client
inquiries concerning their investments. Administrative servicing expenses
under the Administrative Services Plan include expenses incurred in
connection with administrative services provided by the Distributor and
payments to Service Organizations for the provision of administrative services
to beneficial owners of K shares such as establishing and maintaining accounts
and records relating to their clients who invest in K shares, providing
information to the Fund necessary for accounting or sub- accounting; and
providing statements periodically to clients showing their position in K
shares.
Under the Distribution and Services Plan and Distribution Plan, payments by
the Fund for distribution expenses may not exceed 0.75% (annualized), of the
average daily net assets of the Fund's B and K shares. Under the Distribution
and Services Plan and Administrative and Shareholder Services Plan, payments
for servicing expenses may not exceed 0.25% (annualized), of the average daily
net assets of the Fund's K shares. Under the Administrative and Shareholder
Services Plan, payments for administrative servicing expenses may not
exceed 0.75% (annualized) of the average daily net assets of the Fund's K
shares. The total of all 12b-1 fees, administrative services fees and
shareholder service fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of the Fund's K shares.
-50-
<PAGE> 179
These amounts may be reduced pursuant to undertakings by the Distributor.
Payments for distribution expenses under the Distribution and Services
Plan and Distribution Plan are subject to Rule 12b-1 under the
1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
____________________________________________________
-51-
<PAGE> 180
PACIFIC HORIZON FUNDS, INC.
National Municipal Bond Fund
and
California Tax-Exempt Bond Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Measuring Performance
4. General Description of Registrant . . . Description of Shares; Cover
Page; Fund Investments;
Types of Investments;
Fundamental Limitations;
Other Investment Practices
and Considerations
5. Management of the Fund . . . . . . . . . The Business of the Funds
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . How to Buy Shares;
Shareholder Services; The
Business of the Funds; Plan
Payments; Measuring Performance
8. Redemption or Repurchase . . . . . . . . How to Sell Shares;
Shareholder Services;
Plan Payments
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 181
PROSPECTUS
________________, 1996
PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
Investment Portfolios Offered by Pacific Horizon Funds, Inc.
The PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND (the "National Municipal Bond
Fund") is a diversified mutual fund whose investment objective is to provide
investors with as high a level of current interest income free of regular
Federal income tax as is consistent with prudent investment management and
preservation of capital. The National Municipal Bond Fund seeks to achieve its
objective through investment primarily in a diversified portfolio of investment
grade municipal debt securities.
The PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND (the "California Tax-Exempt
Bond Fund" and, collectively with the National Municipal Bond Fund, the
"Funds") is a diversified mutual fund whose investment objective is to provide
its shareholders with as high a level of current interest income free of
Federal income tax and California state personal income tax as is consistent
with prudent investment management and preservation of capital. In seeking its
investment objective, the California Tax-Exempt Bond Fund invests primarily in
municipal obligations issued by the state of California and other governmental
entities. The California Tax-Exempt Bond Fund may be suited for investors who
seek monthly income exempt from Federal and California income taxes and who are
willing to accept some price and yield variation while still maintaining
relative stability of principal.
This Prospectus describes three classes of shares from which investors may
choose. A shares are sold with a front-end sales charge. B shares are sold
with a deferred sales charge. K shares are not subject to either a front-end
sales charge or a contingent deferred sales charge. The Funds are offered by
Pacific Horizon Funds, Inc. (the "Company"), an open-end, series management
investment company.
Bank of America National Trust & Savings Association ("Bank of America" or the
"investment adviser") serves as the Funds' investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $___
billion under management, including over $___ billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
1
<PAGE> 182
More information about the Funds is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated ______________, 1996 and is
incorporated by reference into this Prospectus.
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. Investment in the Funds involves
investment risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is part of a Registration Statement that has been filed with
the Securities and Exchange Commission in Washington, D.C. under the Securities
Act of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Funds' shares, other than
as contained in this Prospectus and the Funds' official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Funds. 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.
2
<PAGE> 183
CONTENTS
EXPENSE SUMMARY
FINANCIAL HIGHLIGHTS
FUND INVESTMENTS
INVESTMENT OBJECTIVE
TYPES OF INVESTMENTS
FUNDAMENTAL LIMITATIONS
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE
HOW TO BUY SHARES
What Is My Minimum Investment In The Funds?
What Alternative Sales Arrangements Are Available?
How Are Shares Priced?
How Do I Decide Whether To Buy A, B or K Shares?
How Can I Buy Shares?
What Price Will I Receive When I Buy Shares?
What Else Should I Know To Make A Purchase?
HOW TO SELL SHARES
How Do I Redeem My Shares?
What NAV Will I Receive For Shares I Want To Sell?
What Kind of Paperwork Is Involved In Selling Shares?
How Quickly Can I Receive My Redemption Proceeds?
Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
WHAT IS TELETRADE?
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR
BASIS?
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
CAN I ARRANGE PERIODIC WITHDRAWALS?
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND
FUND MANAGEMENT
Service Providers
TAX INFORMATION
MEASURING PERFORMANCE
DESCRIPTION OF SHARES
PLAN PAYMENTS
3
<PAGE> 184
<TABLE>
<CAPTION>
DISTRIBUTOR: INVESTMENT ADVISER:
<S> <C>
Concord Financial Group, Inc. Bank of America National Trust
3435 Stelzer Road and Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
</TABLE>
4
<PAGE> 185
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer three classes of shares. A shares are
offered at net asset value plus a front-end sales charge (see page ___ of the
Prospectus for an explanation of net asset value per share) and are subject to
a shareholder servicing fee. B shares are offered at net asset value without a
sales charge but are subject to a contingent deferred sales charge plus
distribution and shareholder servicing fees. K shares are offered at net asset
value with neither a sales charge nor a contingent deferred sales charge, but
are subject to distribution, administrative servicing and shareholder servicing
fees. B shares of a Fund held for 8 years will convert to A shares of a Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of B and K shares only), shareholder servicing,
accounting and other services.
Below is a summary of the shareholder transaction expenses imposed for A, B and
K shares by the National Municipal Bond Fund and its operating expenses
expected to be incurred during the current fiscal year, as well as a summary of
the shareholder transaction expenses imposed for A, B and K shares by the
California Tax-Exempt Bond Fund and its operating expenses incurred during its
last fiscal year. The information for the National Municipal Bond Fund has
been restated to assume that current fees had been in effect during the
previous fiscal year. Actual expenses may vary. A hypothetical example based
on the summary is also shown.
<TABLE>
<CAPTION>
National Municipal Bond Fund A SHARES B SHARES K SHARES
- ---------------------------- -------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds, whichever
is lower) None(1) 5.00% None
Redemption Fees None None None
Exchange Fee None None None
</TABLE>
5
<PAGE> 186
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C> <C> <C>
Management Fees (After Fee Waivers)+ % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses (After Expense
Reimbursements)+ % % %
Total Operating Expenses (After Fee
Waivers and Expense Reimbursements)+ % % %
------ ------- -------
</TABLE>
__________________________
(1) There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption"). A
shares purchased under the Large Purchase Exemption are subject to a
contingent deferred sales charge of 1.00% and 0.50%, respectively, on
redemptions within one and two years after purchase. The contingent
deferred sales charge is paid to Concord Financial Group, Inc. ("the
Distributor"). A Shares cannot be purchased under the Large Purchase
Exemption if there is another no-load exemption available.
Accordingly, A Shares purchased under another no-load exemption are
not subject to a contingent deferred sales charge. Although no
front-end sales load will be paid on shares purchased under the Large
Purchase Exemption, the Distributor will compensate brokers whose
customers purchase such shares at the following rates: 1.00% of the
amount under $3 million, 0.50% of the next $47 million and 0.25%
thereafter.
+ Management intends to waive fees and reimburse certain "Other
Expenses" on behalf of the National Municipal Bond Fund so that "Total
Operating Expenses" for the National Municipal Bond Fund (other than
interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses) will not
exceed ____%, ____% and ____% of the average net assets of the
National Municipal Bond Fund's A, B and K shares, respectively, on an
annual basis. Absent expense reimbursement, management fees would be
____% of the average net assets and actual "Other Fee Waivers and/or
Expenses" for the National Municipal Bond Fund's A, B and K shares
would be ____%, ____% and ____%, respectively, of average net assets
(annualized). Actual "Total Operating Expenses" for the National
Municipal Bond Fund's A, B and K shares would be ____%, ____% and
____% of average net assets (annualized), respectively.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average daily net assets of the National
Municipal Bond Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder service fees paid by the Fund as
shown in the above table, long-term B and K shareholders may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. For
a further description of shareholder transaction expenses and the
National Municipal Bond Fund's operating expenses, see the sections
entitled " Shareholder Guide," "The Business of the Funds" and "Plan
Payments" below.
EXAMPLE: Assume the annual return is 5% and operating expenses are
the same as those stated above. For every $1,000 you invest, here's
how much you would have paid in total expenses if you closed your
account after the number of years indicated:
6
<PAGE> 187
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares1 $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $ (3)
Assuming no redemption $ $ $ $ (3)
K shares $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2. Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
<TABLE>
<CAPTION>
California Tax-Exempt Bond Fund A SHARES B SHARES K SHARES
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None
Sales Load Imposed on Reinvested Dividends None(1) None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds, whichever
is lower) None 5.00% None
Redemption Fees None None None
Exchange Fee None None None
</TABLE>
7
<PAGE> 188
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C> <C> <C>
Management Fees (After Fee Waivers)+ % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee .25% .25% .25%
Other Expenses % % %
Total Operating Expenses
(After Fee Waivers)+ % % %
---- ---- ----
</TABLE>
(1) There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption"). A
shares purchased under the Large Purchase Exemption are subject to a
contingent deferred sales charge of 1.00% and 0.50%, respectively, on
redemptions within one and two years after purchase. The contingent
deferred sales charge is paid to Concord Financial Group, Inc. ("the
Distributor"). A Shares cannot be purchased under the Large Purchase
Exemption if there is another no-load exemption available.
Accordingly, A Shares purchased under another no-load exemption are
not subject to a contingent deferred sales charge. Although no
front-end sales load will be paid on shares purchased under the Large
Purchase Exemption, the Distributor will compensate brokers whose
customers purchase such shares at the following rates: 1.00% of the
amount under $3 million, 0.50% of the next $47 million and 0.25%
thereafter.
+ Absent fee waivers, management fees would be ____% of the average net
assets. Actual "Total Operating Expenses" for the California
Tax-Exempt Bond Fund's A, B and K shares would be ____%, ____% and
____% of average net assets (annualized), respectively.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average daily net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder service
fees paid by the California Tax-Exempt Bond Fund as shown in the above
table, long-term B and K shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. For a further
description of shareholder transaction expenses and the California
Tax-Exempt Bond Fund's operating expenses, see the sections entitled "
Shareholder Guide," "The Business of the Funds" and "Plan Payments"
below.
8
<PAGE> 189
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here's how much you would
have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $ (3)
Assuming no redemption $ $ $ $ (3)
K shares $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2. Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
___________________________________________
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as
with annual operating expenses) as a shareholder of the Funds.
Management fees consist of:
- an investment advisory fee payable at the annual rate of 0.35%
and 0.40% of the National Municipal Bond Fund's and the
California Tax-Exempt Bond Fund's respective average daily net
assets; and
- an administration fee payable at the annual rate of 0.15% of
the National Municipal Bond Fund's average daily net assets
and 0.30% of the National Municipal Bond Fund's average daily
net assets.
Currently, the most restrictive expense limitation limits a Fund's aggregate
annual expenses (including management fees) to 2.5% of the first $30 million of
a Fund's average daily net assets, 2% of the next $70 million and 1.5% of a
Fund's remaining average net assets.
9
<PAGE> 190
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge, with respect to A shares or to
have the entire initial purchase price invested in the Funds with the
investment thereafter being subject to an annual distribution and services plan
charge and a contingent deferred sales charge upon redemption within the first
six years of investment, with respect to B shares. K shares are neither
subject to an initial sales charge nor a contingent deferred sales charge, but
do incur fees under a Distribution Plan and an Administrative and Shareholder
Services Plan. See the section entitled "How to Buy Shares" below. K shares,
however, are only available for investment by individuals that are investing
proceeds from a redemption of shares from another open-end investment company
on which such individual paid a front-end sales load if (i) such redemption
occurred within 30 days prior to the purchase order and (ii) such other
open-end investment company was not distributed and advised by Concord
Financial Group, Inc. and Bank of America, respectively, or their affiliates.
10
<PAGE> 191
FINANCIAL HIGHLIGHTS
The California Tax-Exempt Bond Fund commenced operations on March 30, 1984 as a
separate Maryland corporation called Pacific Horizon Tax-Exempt Fund, Inc. (the
"Predecessor Fund"). The Predecessor Fund subsequently changed its name to
Pacific Horizon California Tax-Exempt Bond Portfolio, Inc. On January 19, 1990
the Predecessor Fund was reorganized as a separate portfolio of the Company.
Prior to _____, 1996 the National Municipal Bond Fund operated as part of a
master feeder structure and invested all of its assets in a master portfolio
("Master Portfolio") which had identical investment objectives. On ____, 1996,
the National Municipal Fund withdrew from the Master Portfolio and began
investing its assets directly in investment securities.
The table below shows certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's
investment results for the fiscal years ended on or prior to February 28, 1989,
the combined investment results of both the Predecessor Fund and the California
Tax-Exempt Bond Fund for the fiscal year ended February 28, 1990 and the
California Tax-Exempt Bond Fund's investment results for the six years in the
six year period ended February 29, 1996). During the periods shown the Funds
(and the Predecessor Fund, in the case of the California Tax-Exempt Bond Fund)
did not offer B or K shares. Actual investment results of the B and K Shares
may be different. The information for each of the last five fiscal years ended
February 29, 1996 has been audited by ___________________________, independent
accountants, whose unqualified report on the financial statements containing
such information is incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Funds is
available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
11
<PAGE> 192
National Municipal Bond Fund
----------------------------
Selected data for an A Share of Common Stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
For the period
January 28, 1994
(commencement of
For the year ended For the year ended operations) through
February 29, 1996 February 28, 1995 February 28, 1994
------------------ ------------------ -------------------
<S> <C> <C>
Net asset value per share, beginning of
period $ 9.89 $10.00
----- ------
Income from Investment Operations:
Net investment income 0.50 0.01
Net realized and unrealized loss on
securities (0.25) (0.11)
------ ------
Total gain (loss) from investment
operations 0.25 (0.10)
Less dividends from net investment income (0.50) (0.01)
------ ------
Net change in net asset value (0.25) (0.11)
------ ------
Net asset value per share, end of period $ 9.64 $9.89
===== =====
Total Return++ 2.78% (1.00)%
Ratios/Supplemental Data:
Net assets, end of period (000) $2,520 $ 733
Ratio of expenses to average net
assets* 0.00% 0.00%+
Ratio of net investment income to
average net assets* 5.30% 1.15%+
- -------------------------------------------------------
</TABLE>
* Reflects the National Municipal Bond Fund's proportionate share of the
Master Portfolio's expenses and fee waivers, and expense
reimbursements by the Master Portfolio's investment adviser and
administrator and the National Municipal Bond Fund's administrator and
distributor. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by
______%, 17.46% and 170.99% (annualized) for the years ended February
29, 1996, February 28, 1995 and the period ended February 28, 1994,
respectively.
+ Annualized.
++ The total return listed does not include the effect of the maximum
4.50% sales charge on A shares and for the period ended February 28,
1994, is not annualized.
12
<PAGE> 193
California Tax-Exempt Bond Fund
-------------------------------
Selected data for an A Share of Common Stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1996 1995 1994 1993+ 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset value per
share, beginning of
period . . . . . . . . . . $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6.84 $ 6.72 $ 6.87 $ 7.38 $7.07
Income from Investment
Operations:
Net investment
income . . . . . . . . . 0.38 0.38 0.43 0.43 0.45 0.47 0.47 0.47 0.48
Net realized and
unrealized (loss)
gain on securities . . . (0.37) 0.04 0.52 0.22 0.06 0.12 (0.15) (0.51) 0.31
Total income from
investment
operations . . . . . . . 0.01 0.42 0.95 0.65 .51 .59 0.32 (0.04) 0.79
Less Dividends and
Distributions:
Dividends from net
investment income . . . (0.38) (0.38) (0.43) (0.43) (0.45) (0.47) (0.47) (0.47) (0.48)
Distributions from
net realized gains
on securities . . . . . -- (0.06) (0.08) (0.05) -- -- -- -- --
Total dividends and
distributions . . . . . (0.38) (0.44) (0.51) (0.48) (0.45) (0.47) (0.47) (0.47) (0.48)
Net change in net asset
value per share . . . . . . (0.37) (0.02) 0.44 0.17 0.06 0.12 (0.15) (0.51) 0.31
Net asset value per
share, end of period . . . . $ 7.12 $ 7.49 $7.51 $ 7.07 $ 6.90 $6.84 $6.72 $6.87 $7.38
===== ===== ===== ===== ===== ===== ===== ===== =====
Total Return . . . . . . . . 0.36% 5.65% 14.01% 9.63% 7.72% 8.94% 4.90%+++ (0.23%)+++ 11.58%+++
Ratios/Supplemental Data:
Net assets, end of
period (000) . . . . . . . $194,601 $245,040 $ 189,419 $149,020 $107,815 $101,583 $88,678 $ 90,142 $109,055
Ratio of expenses to
average net assets . . . . 0.95%++ 0.96%++ 0.62%++ 1.01%++ 0.98%++ 0.95%++ 1.03% 1.10% 1.13%
Ratio of net investment
income to average net
assets . . . . . . . . . . . 5.43%++ 4.96%++ 5.95%++ 6.05%++ 6.57%++ 6.81%++ 6.93% 6.90% 6.76%
Portfolio turnover . . . . . 20% 15% 32% 24% 33% 58% 54% 30% 24%
- -----------------------------
</TABLE>
+ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings
Association served as investment adviser commencing April 22, 1992.
++ Net of fee waivers which had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of net
investment income to average net assets by ____%, 0.20%, 0.15%, 0.52%,
0.15%, 0.22% and 0.17% for the years ended February 29, 1996, February
28, 1995, February 28, 1994, February 28, 1993, February 29, 1992,
February 28, 1991 and February 28, 1990, respectively.
+++ Unaudited.
Note: The total return figures presented do not include the effect of the
maximum 4.50% sales charge on A Shares.
13
<PAGE> 194
FUND INVESTMENTS
The Funds seek as high a level of current interest income free from Federal
income tax (and California state personal income tax in the case of the
California Tax-Exempt Bond Fund) as is consistent with prudent investment
management and preservation of capital. WHILE THE FUNDS STRIVE TO ATTAIN THEIR
INVESTMENT OBJECTIVES, THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO
SO.
NATIONAL MUNICIPAL BOND FUND
- ----------------------------
The National Municipal Bond Fund seeks to achieve its investment objective
through investment primarily in a diversified portfolio of investment grade
municipal debt securities. Investment grade debt securities ordinarily carry
lower rates of interest income than lower quality debt securities with similar
maturities. The National Municipal Bond Fund may be appropriate for investors
who want a high level of current interest income free from Federal income tax.
CALIFORNIA TAX-EXEMPT BOND FUND
- -------------------------------
The California Tax-Exempt Bond Fund seeks to achieve its objective through
investment primarily in a diversified portfolio comprised primarily of
municipal obligations. The California Tax-Exempt Bond Fund may be appropriate
for California residents and other investors who want monthly income sheltered
from both Federal and California income taxes, greater diversification and
liquidity than could be achieved by an individual purchasing municipal bonds
directly, and relative stability of principal.
TYPES OF INVESTMENTS
GENERAL INVESTMENTS
- -------------------
NATIONAL MUNICIPAL BOND FUND. The National Municipal Bond Fund's assets will
be primarily invested in debt obligations (at least 80% of the total assets
under normal market conditions) issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia and their
respective authorities, agencies, instrumentalities and political
sub-divisions, the interest on which, in the opinion of bond counsel to the
issuer, is exempt from regular Federal income tax ("Municipal Securities").
Under normal market conditions, it is expected that at least 75% of the
National Municipal Bond Fund's total assets will consist of issues rated
investment grade or better by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Rating Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch") at the
time of purchase (that is, rated in one of the four highest rating categories)
or, if unrated, will be deemed by the National Municipal Bond Fund's investment
adviser to be of comparable quality. While securities rated in the fourth
highest rating category (i.e., rated
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Baa or BBB) are regarded as having an adequate capacity to pay principal and
interest, such securities lack outstanding investment characteristics and in
fact have speculative characteristics as well. The National Municipal Bond
Fund's assets may be invested in lower quality, higher yielding Municipal
Securities which are rated below investment grade. Such securities carry a
higher degree of risk and are considered to be speculative by the major credit
rating agencies. Lower quality, higher yielding securities are commonly
referred to as "junk bonds." See "High Yield, High Risk Securities" below and
"Description of Municipal Securities Ratings" in the Appendix to this
Prospectus. The National Municipal Bond Fund has no restrictions on the
maturity of Municipal Securities in which it may invest. Accordingly, the
National Municipal Bond Fund seeks to invest in Municipal Securities of such
maturities which, in the judgment of the investment adviser, will provide a
high level of current income consistent with prudent investment management,
with consideration given to market conditions. The National Municipal Bond
Fund's average weighted maturity will vary in response to variations in
comparative yields of differing maturities of instruments, in accordance with
the National Municipal Bond Fund's investment objective.
The National Municipal Bond Fund may hold uninvested cash reserves pending
investment, during temporary defensive periods, or if, in the opinion of the
National Municipal Bond Fund's investment adviser, suitable tax-exempt
obligations are unavailable. In accordance with the National Municipal Bond
Fund's investment objective, investments may be made in taxable obligations if,
for example, suitable tax-exempt obligations are unavailable or if acquisition
of U.S. Government or other taxable securities is deemed appropriate for
temporary defensive purposes. Such taxable obligations may include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(some of which may be subject to repurchase agreements), certificates of
deposit and bankers' acceptances of selected banks, and commercial paper rated
within the two highest ratings assigned by a nationally recognized statistical
rating organization. These obligations are described further in the Statement
of Additional Information. To the extent that the National Municipal Bond Fund
invests in such instruments, it will not be invested in accordance with the
investment policies designed for it to realize its investment objective. Income
earned from these instruments is taxable and therefore is not included in the
dividends free from federal income tax which the National Municipal Bond Fund
will pay.
The National Municipal Bond Fund may also make other investments as described
more fully below under "Other Investment Practices and Considerations."
CALIFORNIA TAX-EXEMPT BOND FUND. The California Tax-Exempt Bond Fund invests
primarily in Municipal Securities (at least 65% of its total assets under
normal circumstances) issued by California and other states, territories and
possessions of the U.S. and the District of Columbia, and their agencies,
authorities, instrumentalities and political sub-divisions, as long as these
instruments are free of Federal income tax.
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The California Tax-Exempt Bond Fund will invest in Municipal Securities
consisting mainly of issues rated investment grade or above at the time of
purchase by a nationally recognized statistical rating organization including
S&P, Moody's, Duff & Phelps or Fitch (or securities that are unrated but
determined to be of comparable quality by Bank of America). Up to 25% of the
California Tax-Exempt Bond Fund's total assets may be invested in Municipal
Securities with lower ratings (i.e., rated Ba through C by Moody's, BB through
D by S&P, BB through D by Fitch or BB through DD by Duff & Phelps), or in
unrated securities determined to be of comparable quality. However, it is
currently expected that no more than 5% of the California Tax-Exempt Bond
Fund's net assets will be invested in such lower rated securities over the next
twelve months. Such securities carry a higher degree of risk and are
considered to be speculative by the major credit rating agencies. Lower
quality, higher yielding securities are commonly referred to as "junk bonds."
See "High Yield, High Risk Securities" below and "Description of Municipal
Securities Ratings" in the Appendix to this Prospectus.
As a fundamental policy, under normal circumstances at least 80% of the
California Tax-Exempt Bond Fund's assets will be invested in Municipal
Securities free from tax under the laws or Constitution of California
("California Municipal Securities"). In any event, in an effort to keep the
California Tax-Exempt Bond Fund's dividends free from California state personal
income tax, the California Tax-Exempt Bond Fund will endeavor to invest at
least 50% of its total assets in obligations the interest on which (if held by
an individual) is exempt from taxation by California ("California Exempt
Securities," which generally are limited to California Municipal Securities and
certain U.S. Government and U.S. Possession obligations) as of the end of each
fiscal quarter. If the California Tax-Exempt Bond Fund is able to do so, and
assuming the California Tax-Exempt Bond Fund otherwise qualifies, the dividends
that investors receive from the interest on those California Exempt Securities
will not be subject to that tax. However, if the California Tax-Exempt Bond
Fund is not able to achieve the 50% goal, no part of the California Tax-Exempt
Bond Fund's dividends will be exempt from California state personal income tax.
Dividends derived from Municipal Securities that are not California Municipal
Securities will be subject to California's state personal income tax.
Subject to the fundamental policy above, the California Tax-Exempt Bond Fund
may also make limited investments in taxable obligations. These taxable
obligations, which may have maturities of up to thirteen months, may include
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (and repurchase agreements related to such obligations), CDs
and bankers' acceptances of select banks and commercial paper rated within the
two highest rating categories by any major rating service.
The California Tax-Exempt Bond Fund might purchase such taxable obligations if,
for example, suitable tax-exempt obligations cannot be found or if deemed
appropriate for temporary defensive purposes. Under normal conditions, it is
expected that no more than 5% of the California Tax-Exempt Bond Fund's net
assets will be invested in any particular type of taxable security. The
California Tax-Exempt Bond Fund may also hold cash for
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temporary defensive purposes, prior to making investments or if Bank of America
believes suitable tax-exempt investment opportunities are not available.
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds may not be changed without a vote by the
holders of a majority of the outstanding shares of the particular Fund.
Policies requiring such a vote to effect a change are known as "fundamental."
A number of the other fundamental investment limitations are summarized below.
The National Municipal Bond Fund may not:
1. Purchase securities of any one issue (except securities issued
by the U.S. Government, its agencies or instrumentalities) if,
immediately after and as a result, more than 5% of its total
assets will be invested in the securities of such issuer,
except that up to 25% of its total assets may be invested
without regard to this 5% limitation and that all of the
assets of the National Municipal Bond Fund may be invested in
another investment company.
2. Make loans except that the National Municipal Bond Fund may
purchase or hold debt instruments and enter into repurchase
agreements pursuant to its investment objective and policies.
3. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs. However, the
National Municipal Bond Fund may, to the extent appropriate to
its investment objective, purchase publicly traded securities
of companies engaging in whole or in part in such activities,
but may enter into futures contracts and options thereon in
accordance with its Prospectus.
The California Tax-Exempt Bond Fund:
1. Under normal circumstances, will invest at least 80% of its assets in
California Municipal Securities.
2. May not invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same industry,
although this limitation does not apply to Municipal Securities and
certain other exceptions also apply.
3. May not invest more than 10% of its total assets in certain
instruments that are illiquid.
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A list of additional fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
MORE ON MUNICIPAL SECURITIES. The two main types of Municipal Securities are
"general obligation" securities (which are secured by the issuer's full faith,
credit and taxing power) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or other specific
revenue source). A third type of Municipal Security, normally issued by
special purpose public authorities, is known as a "moral obligation" security
because if the issuer cannot meet its repayment obligations it then draws on a
reserve fund, the restoration of which is a moral, but not a legal requirement.
Private activity bonds which the Funds may hold are usually revenue securities
that are not payable from the unrestricted revenues of the issuer. The quality
of these bonds therefore is often directly related to the credit of the
corporate user of the facility being financed.
Municipal Securities purchased by the Funds may include both rated and unrated
variable and floating rate instruments. Although particular variable or
floating rate obligations often do not have an active secondary market, the
periodic readjustment of interest rates that these instruments undergo tends to
assure that their value to the Fund approximates their actual par value.
Opinions with respect to Municipal Securities regarding their validity and
exemption from Federal income tax (and California personal income tax where
applicable) are given by the issuer. The Funds and Bank of America will rely
on these opinions and do not intend to review the basis for them.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities acquired by the
Funds may be in the form of custodial receipts evidencing rights to receive a
specific future interest payment, principal payment or both on certain
Municipal Securities. Such obligations are held in custody by a bank on behalf
of holders of the receipts. These custodial receipts are known by various
names, including "Municipal Receipts," "Municipal Certificates of Accrual on
Tax-Exempt Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The
Funds may also purchase from time to time participation interests in debt
securities held by trusts or financial institutions. A participation interest
gives the Funds an undivided interest in the security or securities involved.
Participation interests may have fixed, floating or variable rates of interest
(although the securities held by the issuer may have longer maturities). If a
participation interest is unrated, the investment adviser will have determined
that the interest is of comparable quality to those instruments in which the
Funds may invest pursuant to guidelines approved by the Funds' Board of
Directors. For certain participation interests, the Funds will have the right
to demand payment, for all or any part of the Funds' participation interest,
plus accrued interest. As to these instruments, each Fund intends to exercise
its right to demand payment as needed to provide liquidity, to
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<PAGE> 199
maintain or improve the quality of its investment portfolio or upon a default
(if permitted under the terms of the instrument).
WHEN-ISSUED, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds may
purchase Municipal Securities on a "when issued" basis and may purchase or sell
Municipal Securities on a "forward commitment" basis. The Funds may also
purchase or sell Municipal Securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Funds to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Funds to lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in interest rates. Delayed settlement describes
settlement of a securities transaction in the secondary market which will occur
sometime in the future. When-issued, forward commitment and delayed settlement
transactions involve the risk, however, that the yield or price obtained in a
transaction may be less favorable than the yield or price available in the
market when the securities delivery takes place. The Funds will set aside in a
segregated account cash or liquid securities equal to the amount of any
when-issued, forward commitment or delayed settlement transactions. Each
Fund's forward commitments, when-issued purchases and delayed settlements are
not expected to exceed 25% of the value of its total assets absent unusual
market conditions. In the event its forward commitments, when-issued purchases
and delayed settlements ever exceeded 25% of the value of its assets, a Fund's
liquidity and the ability of the investment adviser to manage the Fund might be
adversely affected. Each Fund does not intend to engage in these transactions
for speculative purposes but only in furtherance of its investment objective.
The market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of each Fund starting on the day the Fund agrees to purchase the
securities. A Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.
STAND-BY COMMITMENTS. In addition, the Funds may acquire "stand-by
commitments" with respect to Municipal Securities held in their respective
portfolios. Under a stand-by commitment, a dealer agrees to purchase at a
Fund's option specified Municipal Securities at a specified price. The Funds
will acquire stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their respective rights thereunder for trading
purposes. The Funds expect that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Funds may pay for a "stand-by
commitment" either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities).
CALLABLE SECURITIES. The Funds may invest in callable municipal bonds.
Callable municipal bonds are municipal bonds which contain a provision in the
indenture permitting the issuer to redeem the bonds prior to their maturity
dates at a specified price which
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typically reflects a premium over the bonds' original issue price. These bonds
generally have call-protection (that is, a period of time during which the
bonds may not be called) which usually lasts for 7 to 10 years, after which
time such bonds may be called away. An issuer may generally be expected to
call its bonds, or a portion of them, during periods of relatively declining
interest rates, when borrowings may be replaced at lower rates than those
obtained in prior years. If the proceeds of a bond called under such
circumstances are reinvested, the result may be a lower overall yield due to
lower current interest rates. If bonds are purchased at a premium, some or all
of that premium may not be recovered by bondholders, such as the Funds, upon
redemption, depending on the redemption price.
ZERO COUPON SECURITIES. The Funds may invest in zero coupon securities. Zero
coupon securities are debt obligations which do not entitle the holder to any
periodic payments of interest prior to maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and
therefore are issued and traded at a discount from their face amounts or par
value. Such bonds carry an additional risk in that, unlike bonds which pay
interest throughout the period to maturity, a Fund will realize no cash until
the cash payment date and, if the issuer defaults, the Fund may obtain no
return at all on its respective investments. The Funds will be required to
include in income (or, with respect to Municipal Securities, in exempt-interest
income) daily portions of original issue discount accrued which will cause the
Funds to be required to make distributions of such amounts to shareholders
annually, even if no payment is received before the distribution date.
REPURCHASE AGREEMENTS. The Funds may agree to purchase securities from
financial institutions, such as banks and broker-dealers that are deemed
creditworthy by the investment adviser under guidelines approved by the Funds'
Board of Directors, subject to the seller's agreement to repurchase them at an
agreed upon time and price ("repurchase agreements"). Repurchase agreements
maturing in more than seven days will not exceed 15% of the value of the total
assets of the particular Fund under normal market conditions. Securities
subject to repurchase agreements are held either by a custodian, or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement in an amount that exceeds the repurchase price, and such value
will be continuously monitored by the investment adviser on an ongoing basis.
Default by the seller would, however, expose the particular Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations. Repurchase agreements are considered
to be loans under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements. At the time a Fund enters into a reverse repurchase agreement (an
agreement under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a
segregated custodial account, liquid assets, such as U.S. Government securities
or other liquid high grade debt securities having a value equal to or greater
than the repurchase price (including accrued interest), and will subsequently
continuously monitor the account to ensure that such value is maintained.
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Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase. Reverse repurchase agreements are considered
to be borrowings by the Fund under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of the Fund's outstanding shares.
FUTURES AND RELATED OPTIONS. The Funds may invest in futures contracts and
related options relating to indices on municipal bonds as a hedge against
changes in its other assets' market values ("Municipal Bond Index Futures" or
"Futures").
If the investment adviser expects interest rates to rise, a Fund may sell a
futures contract or may sell a call option or purchase a put option on such
futures contract, as a hedge against a decrease in the value of the Fund. If
the investment adviser expects interest rates to decline, a Fund may purchase a
futures contract, or may purchase a call option or sell a put option on such
futures contract, to protect against an increase in the price of securities
which the Fund intends to purchase.
Each Fund will limit its hedging transactions in futures contracts and related
options so that, immediately after any such transaction, the aggregate initial
margin that is required to be posted by the Fund under the rules of the
exchange on which the futures contract (or futures option) is traded, plus any
premiums paid by the Fund on its open futures options positions, does not
exceed 5% of the Fund's total assets, after taking into account any unrealized
profits and losses on the Fund's open futures contracts and excluding the
amount that a futures option is "in-the-money" at the time of purchase. (An
option to buy a futures contract is "in-the-money" if the then current purchase
price of the underlying futures contract exceeds the exercise or strike price;
an option to sell a futures contract is "in-the-money" if the exercise or
strike price exceeds the then current purchase price of the contract that is
the subject of the option.) For a more detailed discussion of futures
contracts and options and the cost and risks related to such instruments, see
Appendix B to the Statement of Additional Information.
ILLIQUID SECURITIES. The National Municipal Bond Fund will not knowingly
invest more than 15% of the value of its net assets in securities that are
illiquid, including illiquid variable and floating rate instruments that are
not payable upon 7 days' notice and do not have an active trading market.
DIVERSIFICATION. In compliance with current Securities and Exchange Commission
rules, the California Tax-Exempt Bond Fund intends to limit its investments in
the securities of any single issuer to no more than 5% of its total assets
(measured at the time of purchase), although up to 25% of its total assets may
be invested without regard to this limitation.
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RISK FACTORS AND SPECIAL CONSIDERATIONS. In seeking to achieve its investment
objective the National Municipal Bond Fund may invest, without limitation, in
industrial development bonds, which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. In pursuing its investment objective, the California
Tax-Exempt Bond Fund may invest under normal market conditions up to 20% of its
total assets in taxable instruments, including private activity bonds.
Interest on Municipal Securities that are private activity bonds, although
exempt from regular Federal income tax, may constitute an item of
tax-preference for purposes of the Federal alternative minimum tax. See "Tax
Information." In addition, although the Funds do not presently intend to do so
on a regular basis, each may invest more than 25% of its assets in Municipal
Securities the interest on which comes solely from revenues of similar
projects. When a Fund's assets are concentrated in obligations payable from
revenues of similar projects, the Fund will be subject to the particular risks
(including economic, business and political risks) related to such projects to
a greater extent than if its assets were not so concentrated. The value of a
Fund's securities will generally vary inversely with changes in prevailing
interest rates. Such values will also change in response to changes in the
interest rates payable on new issues of Municipal Securities. Should such
interest rates rise, the values of outstanding bonds, including those held by a
Fund will decline. If interest rates fall, the values of outstanding bonds
will generally increase. Changes in the value of a Fund's securities arising
from these or other factors will cause changes in the net asset value per share
of the Fund.
HIGH YIELD, HIGH RISK SECURITIES. Up to 25% of each Fund's total assets may be
invested in Municipal Securities rated below investment grade ("high yield,
high risk securities"), or in the case of the California Tax-Exempt Bond Fund,
in unrated securities determined to be of comparable quality. However, it is
currently contemplated that no more than 5% of the California Tax-Exempt Bond
Fund's net assets will be invested in high yield, high risk securities over the
next twelve months. A Fund's investments in high yield, high risk Municipal
Securities have different risks than investments in securities that are rated
investment grade. The ratings of Moody's, S&P, D&P and Fitch evaluate the
safety of principal and interest payments, not market value risk, of debt
securities. Since credit rating agencies may fail to change the credit ratings
to reflect subsequent events on a timely basis, Bank of America will
continuously monitor the issuers of these securities held by a Fund to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. The National Municipal Bond Fund
will not invest in any security that has lower than a C rating. The California
Tax-Exempt Bond Fund may invest in Municipal Securities rated C by Moody's, D
by Standard & Poor's, D by Fitch or DD by Duff & Phelps, or in unrated
securities determined to be of comparable quality. The National Municipal Bond
Fund may retain a portfolio security whose rating has been changed if Bank of
America deems that retention of such security is warranted. In general, lower
rated debt securities are subject to risks of market fluctuation or default
(due to changes in the credit rating or financial condition of the issuer) that
are significantly greater than for securities in the higher rating categories
of S&P's, Moody's, Duff & Phelps or Fitch. Please refer to the description of
municipal bond ratings in the Appendix to the Prospectus.
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Particular risks associated with high yield, high-risk securities are (a) the
relative youth and growth of the market for such securities, (b) the
sensitivity of such securities to interest rate and economic changes, (c) the
lower degree of protection of principal and interest payments, (d) the
relatively low trading market liquidity for the securities, (e) the impact that
legislation may have on the high yield, high risk securities market (and, in
turn, the Funds' net asset value and investment practices), and (f) the
creditworthiness of the issuers of such securities. During an economic
downturn or substantial period of rising interest rates, highly leveraged
issuers may experience financial stress which would adversely affect their
ability to service their principal and interest payment obligations, to meet
projected goals, and to obtain additional financing. An economic downturn
could also disrupt the market for high yield, high risk securities and
adversely affect the value of outstanding securities and the ability of the
issuers to repay principal and interest. If the issuer of a high yield, high
risk security held by a Fund defaulted, the Fund could incur additional
expenses to seek recovery. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may also decrease the values and
liquidity of these securities held by a Fund, especially in a thinly traded
market.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the same securities as a Fund. When a purchase
or sale of the same security is made at substantially the same time on behalf
of a Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position
obtained or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to the particular Fund are not less favorable
than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. Portfolio turnover will not be a limiting factor in making
portfolio decisions. Portfolio turnover may impose transaction costs on a Fund
and may increase the proportion of the income received by the Fund which
constitutes taxable capital gains. To the extent capital gains are realized,
distributions by the particular Fund of its allocated share of such gains may be
income for ordinary Federal tax purposes. See "Tax Information." Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs then would otherwise be the case. For further information concerning
portfolio turnover, see the Statement of Additional Information.
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CALIFORNIA TAX-EXEMPT BOND FUND CONSIDERATIONS. The California Tax-Exempt Bond
Fund's concentration in California Municipal Securities raises additional
considerations. Payment of the interest and principal of these obligations
depends on the continuing ability of their issuers to meet their obligations
thereunder. Investors should consider the greater risk inherent in the
California Tax-Exempt Bond Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio,
and should compare the yield available on a portfolio of California issues with
the yield of a more diversified portfolio including non-California issues
before making an investment decision.
Many of the California Tax-Exempt Bond Fund's Municipal Securities are likely
to be obligations of California governmental issuers that rely to one extent or
another on real property taxes as a source of revenue. "Proposition Thirteen"
and similar California constitutional and statutory amendments and initiatives
in recent years have restricted the ability of California taxing entities to
increase real property tax revenues. Other initiatives approved by California
voters in recent years, through limiting various other taxes, have resulted in
a substantial reduction in state revenues. Decreased state revenues may result
in reductions in allocations of state revenues to local governments.
Because of the complex nature of the various initiatives mentioned above and
certain possible ambiguities and inconsistencies in their terms and the scope
of various exemptions and exceptions, as well as the impossibility of
predicting the level of future appropriations for state and local governmental
entities, the impact of these initiatives and related measures on the ability
of California governmental issuers to pay interest or repay principal on their
obligations is difficult to determine. There have, however, been certain
adverse developments with respect to Municipal Securities of California
governmental issuers over the past several years.
In addition to the various initiatives noted above, economic factors such as
the reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the California economy. In recent
years, these economic factors reduced revenues to the state government at a
time when expenses of state government such as education costs, various welfare
costs and other expenses were rising. Such economic factors adversely impacted
the ability of state and local California governmental entities to repay debt
and these factors, and others that cannot be predicted, may have an adverse
impact in the future.
A more detailed description of the special factors affecting investments in
California Municipal Securities is set forth in the Statement of Additional
Information.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING EACH FUND'S SHARES AND
REGARDING EACH FUND'S DIVIDENDS
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL INVESTMENT SUBSEQUENT INVESTMENT
------------------ ---------------------
<S> <C> <C>
REGULAR ACCOUNT $500* $50
AUTOMATIC INVESTMENT PLAN $ 50 $50
</TABLE>
* The minimum investment is $100 for purchases made through Bank of
America's trust and agency accounts or a Service Organization (defined below)
whose clients have made aggregate minimum purchases of $1,000,000. The
minimum investment is $200 for Bank Americard holders with an appropriate
award certificate from BankAmeriChoice Program.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue three classes of shares. A shares are sold to investors
choosing the initial sales charge alternative, B shares are sold to investors
choosing the deferred sales charge alternative. K shares are neither subject
to a front-end sales charge nor a contingent deferred sales charge. K shares,
however, are sold to individuals investing proceeds from a redemption of shares
from another open-end investment company on which such an individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates. The three classes of shares in each Fund
represent interests in the same portfolio of investments of the particular
Fund, have the same rights and are
25
<PAGE> 206
identical in all respects, except that A shares bear the expenses of the
Shareholder Service Plan. B shares bear the expenses of a Distribution and
Services Plan and have exclusive voting rights with respect to the Distribution
and Services Plan. K shares bear the expenses of a Distribution Plan and
Administrative and Shareholder Services Plan and have exclusive voting rights
with respect to such Plans. The three classes also have different exchange
privileges, as described below. B shares also bear the expenses of the
deferred sales charge arrangements and any expenses resulting from such
arrangements. The net income attributable to A, B and K shares and the
dividends payable on A, B and K shares will be reduced by the amount of the (a)
Shareholder Services Plan fees attributable to A Shares, (b) Distribution and
Services Plan fees attributable to B shares, (c) Distribution Plan fees and
Administrative and Shareholder Services Plan fees attributable to K Shares,
respectively and (d) the incremental expenses associated with such plans.
Lastly, B shares of a Fund held for 8 years will automatically convert into A
shares of a Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on the A shares.
Each class calculates its net asset value ("NAV") as follows:
NAV = (Value of Assets Attributable to the Class) - (Liabilities
attributable to the Class)
----------------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on
days the Exchange is open.
The Funds' investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Funds, pursuant to procedures adopted by the Board of Directors. Short-term
debt securities are valued at amortized cost, which approximates market value.
For further information about valuing securities, see the Statement of
Additional Information. For price and yield information call (800) 346-2087.
The per share net asset values of A, B and K shares of the Funds will diverge
due to the different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load, "sales
load," "front-end sales charge" or "sales charge") for the A shares of the
Funds begin at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
26
<PAGE> 207
<TABLE>
<CAPTION>
Amount of Transaction Dealer's
As a % of As a % of Reallowance
offering net asset as a % of
price value offering price*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00** 0.00** 0.00**
</TABLE>
*Dealer's reallowance may be changed periodically.
**See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
LARGE PURCHASE EXEMPTION. To the extent that no other A share no-load
exemption is available, the foregoing schedule of sales loads does not apply to
purchases of A shares of $1,000,000 or more. If a customer purchases
$1,000,000 or more of A shares and redeems such shares, a contingent deferred
sales load will be imposed as follows:
<TABLE>
<CAPTION>
Number of Years Applicable Contingent
Elapsed Since Purchase Deferred Sales Load
---------------------- --------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a
contingent deferred sales charge is applicable to a redemption of such shares,
the calculation will be made in a manner that results in the lowest possible
rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value of
your holdings of shares above the total amount of payments for
27
<PAGE> 208
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. Although no front end sales load
will be paid on Large Purchase Exemptions, the Distributor will compensate
brokers whose customers purchase shares at the following rates: 1.00% of the
amount under $3 million, 0.50% of the next $47 million and 0.25% thereafter.
B SHARES DEFERRED SALES CHARGE. B shares may be purchased at net asset value
per share without the imposition of a sales charge at the time of purchase.
The Funds' distributor compensates broker-dealers that have entered into a
selling agreement with the distributor from its own funds at the time the
shares are purchased. The proceeds of the contingent deferred sales charges
and the ongoing distribution and services plan fees described below are used to
reimburse the Funds' distributor for its expenses, including the compensation
of broker-dealers.
B shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no charge will
be assessed on shares derived from reinvestment of dividends or capital gains
distributions. B shares will convert to A shares on the first business day of
the month following the eighth anniversary of the date of the purchase unless
the B shares have been exchanged for Pacific Horizon shares of the Pacific
Horizon Prime Fund.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge (as a
Number of Years percentage of dollar amount
Elapsed Since Purchase * subject to the charge)
- ---------------------- ------------------------------
<S> <C>
Less than one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0%
More than one, but less
than two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0%
More than two, but less
than three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than three, but less
than four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than four, but less
than five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
More than five, but less
than six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
After six years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
* The time period during which Pacific Horizon shares of the Pacific Horizon
Prime Fund acquired through an exchange are held is not included when the
amount of the contingent deferred sales charge is calculated.
28
<PAGE> 209
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B shares above the total amount of payments for
the purchase of B shares during the preceding 6 years; then of amounts
representing the cost of B shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the B shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund, that in the third year after purchase the net asset
value per share is $12, and that during the three-year period you had acquired
10 additional shares through dividend reinvestment. If at such time you make
your first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the
applicable rate in the third year after purchase).
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on
the following types of transactions:
- - reinvestment of dividends or distributions;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for its
own account or for an account for which it is authorized to make investment
decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open on
the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of a
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;
29
<PAGE> 210
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors;
- - U.S. - based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but worked abroad)
of Bank of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - 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
a 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; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a sales load will apply to
subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to B shares is not charged on (1) exchanges described under
"Shareholder Services - Can I Exchange My Investment From One Fund to
Another?"; (2) redemptions in connection with minimum required distributions
from IRA accounts due to shareholders reaching age 70-1/2, (3) redemptions in
connection with a shareholder's death or disability (as defined in the Internal
Revenue Code); and (4) involuntary redemptions as a result of an account's net
asset value remaining below $500 after sixty days' written notice. In
addition, no contingent deferred sales charge is charged on shares acquired
through the reinvestment of dividends or distributions.
RIGHTS OF ACCUMULATION. When buying A shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along
30
<PAGE> 211
with the shares that you beneficially own in any Pacific Horizon Fund on which
you paid a front-end sales load (including shares that carry no sales load but
were obtained through an exchange and can be traced back to shares that were
acquired with a sales load). Shares of any investment portfolio of Time
Horizon Funds (a "Time Horizon Fund"), an open-end investment company managed
by Bank of America generally will not be included when determining reduced
sales loads under the rights of accumulation program, except that you may
aggregate your investment in Pacific Horizon Funds, and Time Horizon Funds in
order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A shares carrying a sales load of the
Funds, the Pacific Horizon U.S. Government Securities Fund, the Pacific Horizon
Capital Income Fund and shares of the Company's money market funds that can be
traced back to the purchase of shares carrying a sales load (or any combination
thereof) with an aggregate current value of $90,000. If you subsequently
purchase additional A shares carrying a sales load of a Fund with a current
value of $10,000, the load applicable to the subsequent purchase would be
reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A shares by
means of a written Letter of Intent, which expresses your non- binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon Fund within a period of 13 months, beginning up to 90 days prior to the
date of the Letter's execution. A shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
Shares of Time Horizon Funds will generally not be included when determining
reduced sales loads under the letter of intent program.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then
31
<PAGE> 212
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.
32
<PAGE> 213
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Funds permit you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular
circumstances it is more advantageous to invest in A Shares and incur a
front-end sales charge and an ongoing shareholder service plan fee; to invest
in B Shares and have the entire initial purchase price invested in a Fund with
the investment thereafter being subject to a contingent deferred sales charge
and ongoing distribution and services plan fees; or to invest in K shares and
incur neither a front-end sales charge nor a contingent deferred sales charge.
K shares, however, do incur fees under a Distribution Plan and an
Administrative and Shareholder Services Plan. K shares, however, are available
to individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end sales
load if (i) such redemption occurred within 30 days prior to the purchase order
and (ii) such other open-end investment company was not distributed and advised
by Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the front-end sales charge alternative (A
shares) because similar sales charge reductions are not available for purchases
under the contingent deferred sales charge alternative (B shares). Moreover, A
shares would not be subject to ongoing distribution and services plan fees, as
described below. However, because front-end sales charges are deducted at the
time of purchase, such investors who pay a front-end sales charge would not
have all their funds invested initially. The Company will not accept any order
for B shares from an investor who is eligible to purchase A shares without a
sales load or from an investor eligible to purchase K shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in a Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing distribution and services plan fees related to B shares may exceed
the front-end sales charge and ongoing shareholder service fees related to A
shares. However, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
distribution and services plan fees may be offset to the extent any return is
realized on the additional funds initially invested under the contingent
deferred sales charge alternative.
Certain other investors might determine it to be more advantageous to have all
their funds invested initially in B shares, although subject to continuing
distribution and services plan fees, and to a contingent deferred sales charge
for a 6 year period of time.
33
<PAGE> 214
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Fund's transfer agent)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete Account Application and Mail all subsequent investments to:
mail it with a check (payable to Pacific Horizon Funds, Inc.
the appropriate Fund) to the
address on the Account File No. 54634
Application. Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------------------
IN PERSON Deliver Account Application and Deliver your payment directly to the
your payment directly to the address on the left.
BISYS Fund Services, Inc. address on the left.
3435 Stelzer Road
Columbus, OH 43219-3035
- --------------------------------------------------------------------------------------------------------------------
BY WIRE Initial purchases of shares into Contact the Funds' transfer agent at
a new account may not be made by 800-346-2087 for complete wiring
wire. instructions.
Instruct your bank to transmit
immediately available funds for
purchase of shares of a particular
Fund in your name.
Be sure to include your name and
your Fund account number.
Consult your bank for information on remitting funds by wire and any
associated bank charges.
</TABLE>
34
<PAGE> 215
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not be Purchases may be made in the minimum
(a service permitting transfers of used to make an initial purchase. amount of $500 and the maximum
money from your checking, NOW or bank amount of $50,000 per transaction as
money market account) soon as 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.
</TABLE>
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at
its Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order
and required funds to the Transfer Agent on a timely basis in accordance with
the procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day. Except as
provided in the following two sentences, if the order is not received in proper
form by a Service Organization by 4:00 p.m. Eastern time or not received by the
Transfer Agent by the close of its business day, the order will be based upon
the next determined purchase price. The
35
<PAGE> 216
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a
business day will be effected as of 4:00 p.m. Eastern time that day if the
order is actually received by the Transfer Agent not later than the next
business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or K
shares. Certificates for shares will no longer be issued.
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients related to their investment in Fund shares. These fees could
constitute a substantial portion of smaller accounts and may not be in an
investor's best interest. Bank of America and Service Organizations may also
impose minimum customer account and other requirements in addition to those
imposed by a Fund. If you purchase or redeem shares directly from a Fund, you
may do so without incurring any charges other than those described in this
Prospectus.
36
<PAGE> 217
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem" shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also
the shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
<TABLE>
<CAPTION>
TO SELL SHARES
------------------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
------------------------------------------------------------------------------------------------------------------
Through the Distributor
(if you are a shareholder of record on the Company's books)
------------------------------------------------------------------------------------------------------------------
<S> <C>
BY MAIL Send a signed, written request (each owner, including each joint owner,
must sign) to the Transfer Agent.
Pacific Horizon National Municipal
Bond Fund or California Tax-Exempt Bond If you hold stock certificates for the shares being redeemed, make sure
Fund to endorse them for transfer, have your signature on them guaranteed by
c/o Pacific Horizon Funds, Inc. your bank or another guarantor institution (as described under "What Kind
P.O. Box 80221 Of Paperwork Is Involved In Selling Shares?") and include them with your
Los Angeles, CA 90080-9909 request.
------------------------------------------------------------------------------------------------------------------
IN PERSON Deliver your signed, written request (each owner, including each joint
owner, must sign) and any certificates (endorsed for transfer and
BISYS Fund Services, Inc. signature guaranteed as described under "What Kind Of Paperwork Is
3435 Stelzer Road Involved In Selling Shares?") to the address on the left.
Columbus, OH 43219-3035
</TABLE>
37
<PAGE> 218
<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 under
"What Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day after your
request and any other necessary documents have been received by the
Transfer Agent.
Wire Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent that
you do not wish to have them.
Requests must be for at least $1,000 and may be subject to limits on
frequency and amount.
Wire Privileges may be modified or suspended at any time, and are not
available for shares issued in certificate form.
Contact your bank for information on any charges imposed by the bank in
connection with receipt of redemptions by wire.
------------------------------------------------------------------------------------------------------------------
BY CHECK You may write Redemption Checks ("Checks") payable to any person out of
your Fund account in the amount of $500 or more. The Transfer Agent (as
your agent) will redeem the necessary number of shares to cover the Check
when it is presented for payment.
You will continue earning dividends on shares redeemed in this manner
until the Check actually clears the Transfer Agent.
You may request this Privilege on an Account Application that has been
signed by the registered owner(s) and a set of Checks will then be sent
to the registered owner(s) at the address of record.
There is no charge for the use of Checks, although the Transfer Agent
will charge for any "stop payment" requests made by you, or if a Check
cannot be honored due to insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by Check.
</TABLE>
38
<PAGE> 219
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of $50,000 per
(a service permitting transfers of transaction) by telephone after appropriate information regarding your
money to your checking, NOW or bank bank account has been established on your Fund account. This information
money market account) may be provided on the Account Application or in a signature guaranteed
letter of instruction to the Transfer Agent. Signature guarantee
requirements are discussed under "What Kind Of Paperwork Is Involved In
Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate on the
Account Application or in a subsequent written notice to the Transfer
Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for additional
important information about the TeleTrade Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE
ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A shares are redeemed (except
pursuant to the Large Purchase Exemption described above), if you purchase
shares through Bank of America or a Service Organization, they may charge a fee
for providing certain services in connection with investments in Fund shares.
When you redeem your B shares within 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund), you may be subject to a contingent deferred sales charge as
described above.
The Fund imposes no charge when K shares are redeemed.
The Company reserves the right to redeem accounts involuntarily if, after sixty
days' written notice, the account's net asset value remains below a $500
minimum balance. The contingent deferred sales charge will not be imposed upon
such involuntary redemptions.
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WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming
A, B or K shares. If you own both A or K and B shares of a Fund, A or K shares
will be redeemed first unless you request otherwise. Certain types of
redemption requests as well as all endorsed share certificates will need to
include a signature guarantee. Signature guarantees must accompany redemption
requests for (i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of record
on the Company's books, or (iii) an amount of $50,000 or less if the address of
record has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment,
the Funds' distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B shares or any Pacific Horizon shares of
the Pacific Horizon Prime Fund. Shares so reinvested will be purchased at a
price equal to the net asset value next determined after the Transfer Agent
receives a reinstatement request and payment in proper form.
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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
Fund shares begin earning dividends the day after payment in federal funds is
received for such shares through the business day such shares are redeemed.
Dividends from each Fund's net investment income are declared daily and paid no
later than the fifth business day of the month next following the month in
which it is declared. Each Fund's net realized gains (after reduction for
capital loss carryforwards, if any) are distributed at least annually.
Dividends from net investment income payable to shareholders who redeem all
their shares of a Fund will be paid in cash within five business days after
such shares are redeemed. Distributions from net realized capital gains
payable to shareholders who redeem all their shares of a Fund will be paid in
cash within ten days after the close of the period for which the dividend is
declared.
You will automatically receive dividends and capital gain distributions in
additional shares of the month next following the month in which it is declared
without a sales load unless you: (i) elect in writing to receive payment in
cash; or (ii) elect to participate in the Directed Distribution Plan described
below under "Can My Dividends From A Fund Be Invested In Other Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, c/o Pacific Horizon Funds, Inc., P.O. Box
80221, Los Angeles, California 90080-9909. The election or revocation will
become effective with respect to dividends paid after it is received by the
Transfer Agent.
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING
YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others
described in this Prospectus may not be available for, or may have different
conditions imposed on them than as described in this Prospectus with respect
to, certain clients of Bank of America and particular Service Organizations.
Consult these entities for more information.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon
Fund, provided that such other shares may be legally sold in your state of
residence. Specifically, A shares may be exchanged for other A shares and B
shares may be exchanged for other B shares and K shares may be exchanged for
other K shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING A
SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD FUND OF THE
COMPANY OR TIME HORIZON FUNDS. A AND B SHARES MAY BE EXCHANGED FOR OTHER A AND
B SHARES, RESPECTIVELY, OR FOR PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON
PRIME FUND WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE
TIME THE EXCHANGE IS MADE. IN ADDITION, PACIFIC HORIZON SHARES OF THE PACIFIC
HORIZON PRIME FUND THAT WERE ACQUIRED THROUGH AN EXCHANGE OF B SHARES MAY BE
EXCHANGED FOR B SHARES WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES
CHARGE AT THE TIME THE EXCHANGE IS MADE. IN DETERMINING THE HOLDING PERIOD FOR
CALCULATING THE CONTINGENT DEFERRED SALES CHARGE PAYABLE UPON REDEMPTION OF B
SHARES, THE HOLDING PERIOD OF THE SHARES ORIGINALLY HELD WILL BE ADDED TO THE
HOLDING PERIOD OF THE SHARES ACQUIRED THROUGH THE EXCHANGE UNLESS THE SHARES
ACQUIRED THROUGH THE EXCHANGE ARE PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON
PRIME FUND. THE TIME PERIOD DURING WHICH PACIFIC HORIZON SHARES OF THE PACIFIC
HORIZON PRIME FUND ACQUIRED THROUGH AN EXCHANGE ARE HELD IS NOT INCLUDED WHEN
THE AMOUNT OF THE CONTINGENT DEFERRED SALES CHARGE IS CALCULATED.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above.
An investment in a Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
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Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding
the funds into which you wish to make an exchange from your Service
Organization or the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below entitled "What is TeleTrade" for
a description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or
the Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice
of any material modification to or termination of the Exchange Privilege will
be given to shareholders except where notice is not required under the
regulations of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will 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 redemptions) 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. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for
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example because of unusual market activity, you are urged to consider redeeming
your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The
Funds may modify or terminate this Privilege at any time or charge a service
fee, although no such fee currently is contemplated.
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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 each
Fund's sales load. Use of this Plan may also be disadvantageous for B shares
due to the potential need to pay a contingent deferred sales charge.
CAN MY DIVIDENDS FROM A
FUND BE INVESTED IN OTHER FUNDS?
YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, OR BOTH
("DISTRIBUTION PROCEEDS") RECEIVED FROM A NON-RETIREMENT FUND ACCOUNT
AUTOMATICALLY INVESTED IN SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE
COMPANY, OR IN 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.
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Note: Death or legal incapacity will terminate participation in the Program.
You may also choose at any time to terminate your participation by notifying
the appropriate federal agency in writing. Further, the Fund may terminate
your participation after 30 days' notice.
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of 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 is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser for the Funds. Bank of America is
a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Funds'
investments and to be responsible for, place orders for, and make decisions
with respect to, all purchases and sales of the Funds' securities.
Kim Michalski is the person primarily responsible for the day-to-day investment
management of the California Tax-Exempt Bond Fund. Ms. Michalski has been the
Fund's manager since September of 1989. Ms. Michalski has been associated with
Bank of America (and Security Pacific National Bank before its merger with Bank
of America) since 1983. Her primary emphasis is in tax-exempt securities, and
she manages two mutual funds and two common trust funds.
Effective September 29, 1995, Stephen P. Scharre is the person primarily
responsible for the day-to-day investment management of the National Municipal
Bond Fund. Mr. Scharre has been associated with Bank of America (and Security
Pacific National Bank before its merger with
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Bank of America) since 1984. Mr. Scharre is a Chartered Financial Analyst and
member of the Los Angeles Society of Financial Analysts. Mr. Scharre manages
tax-exempt and tax-advantaged portfolios, including common trust funds and
several large institutional and high net worth accounts.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.35% and
0.40% of the National Municipal Bond Funds' and California Tax-Exempt Bond
Fund's average daily net assets, respectively. These amounts may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers"). During the fiscal year ended February 29, 1996, Bank of
America waived a portion of its fee as investment adviser to the Master
Portfolio in which the National Municipal Bond Fund previously invested it
assets. For the same period, the California Tax-Exempt Bond Fund paid Bank of
America advisory fees at an effective annual rate of ___% of such Fund's net
assets and Bank of America waived advisory fees at an effective annual rate of
___% of such Fund's net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution and Services Plan, Distribution
Plan and Administrative and Shareholder Services Plan as described under "Plan
Payments," and may receive fees charged directly to their accounts in
connection with investments in shares of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds.
Concord is an indirect, wholly-owned subsidiary of The BISYS Group, Inc. Its
offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Under its administration agreement with the Company, Concord has agreed to:
pay the costs of maintaining the offices of the Company; provide a facility to
receive purchase and redemption orders; provide statistical and research data,
data processing services and clerical services; coordinate the preparation of
reports to shareholders of the Funds and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds; calculate the net asset value of the Funds and dividends
and capital gains distributions to shareholders; and generally assist in all
aspects of the operations of the Funds.
For its services as administrator, Concord is entitled to receive an
administration fee from the National Municipal Bond Fund at the annual rate of
0.15% of such Fund's average daily net assets, and an administration fee from
the California Tax-Exempt Bond Fund at the annual rate of 0.30% of such Fund's
average net assets. These amounts may be reduced pursuant to undertakings by
Concord. (See the information below under "Fee Waivers"). During the fiscal
year ended February 29, 1996, Concord waived a portion of its fee as
administrator for the master portfolio in which the National Municipal Bond
Fund previously invested its assets. For the same period, the California
Tax-Exempt Bond Fund paid Concord administration fees at an effective annual
rate of ___% of such Fund's
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average net assets and Concord waived administration fees at an effective
annual rate of ___% of such Fund's average net assets.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") and The Bank of New York
("BONY"), under which PFPC and BONY perform certain of the services listed
above e.g., calculating the net asset value of the Funds, calculating dividends
and capital gains distributions to shareholders and maintaining the books and
records of the Funds. In connection with the provision of these services, the
National Municipal Bond Fund and the California Tax-Exempt Bond Fund bear all
fees and expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect wholly- owned
subsidiary of Concord and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286, serves as
the Custodian of the National Municipal Bond Fund and California Tax-Exempt
Bond Fund. BISYS Fund Services, Inc. is the transfer and dividend disbursing
agent of the Funds and is located at 3435 Stelzer Road, Columbus, Ohio 43219.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses
in connection with the performance of their services and the Funds bear the
expenses incurred in their operations. Expenses can be reduced by voluntary
fee waivers and expense reimbursements by Bank of America and other service
providers as well as by certain expense limitations imposed by state securities
regulators. Periodically, during the course of each Fund's fiscal year, Bank
of America, Concord and/or the Distributor may prospectively choose not to
receive fee payments and/or may assume certain expenses of the Funds as a
result of competitive pressures and in order to preserve and protect the
business and reputation of Concord and Bank of America. However, the service
providers retain the ability to discontinue such fee waivers and/or expense
reimbursements at any time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR
ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO
CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE
OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and Management intends that each Fund will so qualify in
future years as long as such qualification is in the best interest of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code.
Dividends derived from interest on Municipal Securities ("exempt-interest
dividends") typically will not be subject to regular federal income tax. To
the extent, if any, that dividends paid to you are derived from taxable
interest, futures transactions, gain attributable to market discount or the
excess of net short-term capital gain over net long-term capital gain, such
dividends will be subject to regular federal income tax and California state
personal income tax, whether or not the dividends are reinvested. Any
distributions you receive comprised of the excess of net long-term capital gain
over net short-term capital loss ("capital gain dividend") will be taxable to
you as a long-term capital gain no matter how long you have held Fund shares.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the California Tax-Exempt Bond Fund's total assets consists of California
Exempt Securities, the California Tax-Exempt Bond Fund will be qualified to pay
dividends exempt from California state personal income tax to its shareholders.
The dividends exempt from that tax will be those that come from interest
attributable to California Municipal Securities and certain specified federal
obligations. (Such exemption may not apply, however, to investors who are
"substantial users" or "related persons" with respect to facilities financed by
portfolio securities held by the California Tax-Exempt Bond Fund. Additional
tax information regarding "substantial users" and "related persons" can be
found in the Statement of Additional Information). If you are subject to
California state franchise tax or California state corporate income tax, your
dividends may still be taxed as ordinary or capital gain dividends, despite the
personal income tax exemption.
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Distributions of net investment income from the California Tax-Exempt Bond Fund
may be subject to state or local taxes other than the California state personal
income tax under state or local law, even though all or a part of those
distributions may come from interest on tax-exempt obligations that, if you had
received them directly, would be exempt from such taxes. Consult your tax
adviser with special reference to your own tax situation.
The portion of dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included by you as an item of tax
preference for purposes of determining liability (if any) for the federal
alternative minimum tax applicable to individuals and corporations and the
environmental tax applicable to corporations. Corporate shareholders must also
take exempt-interest dividends into account in determining certain adjustments
for federal alternative minimum and environmental tax purposes. Shareholders
receiving Social Security benefits should note that all exempt-interest
dividends will be taken into account in determining the taxability of such
benefits.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold shares for six months or less
and during that time receive an exempt-interest dividend attributable to those
shares, any loss realized on the sale or exchange of those shares will be
disallowed to the extent of the exempt-interest dividend. If you hold shares
for six months or less and during that time receive a capital gain dividend on
those shares, any loss realized on the sale or exchange of those shares will be
treated as long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain or loss on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares. It may be included in the tax basis of the new shares.
Interest on indebtedness incurred by you to purchase or carry Fund shares,
generally is not deductible for federal income tax purposes.
A dividend paid to you by a Fund in January of a particular year will be deemed
for tax purposes to have been received by you on December 31 of the preceding
year, if the dividend is declared and payable to shareholders of record on a
specified date in October, November or December of that preceding year.
If you are considering buying shares of a Fund on or just before the record
date of a capital gain dividend, you should be aware that the amount of the
forthcoming dividend, although in effect a return of capital, will be taxable
to you.
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MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL
RETURN, AGGREGATE TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD.
PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT INTENDED TO
INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of a Fund over a
specified 30 day period. Tax-equivalent yield demonstrates the level of
taxable yield that would be necessary to produce an after-tax equivalent to a
tax-free yield.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), yield and
tax-equivalent yield may be quoted in advertisements or in communications to
shareholders. Both methods of calculating total return assume dividends and
capital gains distributions made by such Fund during the period are reinvested
in Fund shares, and include the maximum front-end sales charge for A shares and
the applicable contingent deferred sales charge for B shares. Each Fund may
also advertise total return data without reflecting the sales load imposed on
the purchase of Fund shares in accordance with the rules of the Securities and
Exchange Commission. Quotations that do not reflect the sales load will, of
course, be higher than quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund calculates its "tax equivalent yield" by increasing its yield
(calculated as described above) by the amount necessary to reflect the payment
of federal income taxes at a stated rate. The tax-equivalent yield will always
be higher than a Fund's yield.
An investor in a Fund may find it particularly useful to compare a Fund's
tax-exempt yield and the equivalent yield from taxable investments. For an
investor in a low tax bracket, it may not be beneficial to invest in a
tax-exempt investment if a higher yield after taxes could be received from
taxable investment.
THE FOLLOWING TABLE ILLUSTRATES FOR THE CALIFORNIA TAX-EXEMPT BOND FUND THE
DIFFERENCES BETWEEN HYPOTHETICAL TAX-FREE YIELDS AND TAX-EQUIVALENT YIELDS FOR
DIFFERENT TAX BRACKETS. YOU SHOULD BE AWARE, HOWEVER, THAT TAX BRACKETS CAN
CHANGE OVER TIME AND THAT YOUR TAX ADVISER SHOULD BE CONSULTED FOR SPECIFIC
YIELD CALCULATIONS. (THE FEDERAL TAX RATES USED BELOW ARE THOSE CURRENTLY
AVAILABLE FOR 1996, WHILE THE CALIFORNIA TAX RATES USED
51
<PAGE> 232
BELOW ARE THOSE APPLICABLE FOR 1996.) THESE YIELDS ARE FOR ILLUSTRATIVE
PURPOSES ONLY. THE FEDERAL TAX BRACKETS USED UNDER "COMBINED CALIFORNIA &
FEDERAL TAX BRACKET" TAKE INTO EFFECT THE FULL DEDUCTION OF CALIFORNIA STATE
TAXES FOR THE CALIFORNIA TAX-EXEMPT BOND FUND BUT DO NOT TAKE INTO ACCOUNT THE
EFFECT OF REDUCING THE DEDUCTIBILITY OF ITEMIZED DEDUCTIONS FOR TAXPAYERS WITH
ADJUSTED GROSS INCOME OVER $114,700 OR THE POSSIBLE EFFECT OF THE FEDERAL
ALTERNATIVE MINIMUM TAX. ADDITIONALLY, EFFECTIVE TAX BRACKETS AND EQUIVALENT
TAXABLE YIELDS MAY BE HIGHER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
MARRIED FILING JOINTLY TAX-FREE YIELD
- ----------------------- --------------------------------------------------------------------------------------
COMBINED
CALIFORNIA
& FEDERAL
TAX
INCOME BRACKET 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5%
------ --------- ---- ---- ---- ---- ---- ---- ----
TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9,333- 22,118 16.70% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00%
$ 22,119- 34,906 18.40% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58% 9.19%
$ 34,907- 36,000 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.78% 9.39%
$ 36,001- 48,456 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34% 11.08%
$ 48,457- 61,240 33.76% 6.79% 7.55% 8.30% 9.08% 9.81% 10.57% 11.32%
$ 61,241- 91,850 34.70% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72% 11.48%
$ 91,851-140,000 37.42% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19% 11.98%
$140,001-212,380 41.95% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06% 12.92%
$212,381-250,000 42.40% 7.81% 8.68% 9.55% 10.42% 11.28% 12.15% 13.02%
$250,001-424,760 45.64% 8.28% 9.20% 10.12% 11.04% 11.98% 12.88% 13.80%
OVER 424,760 46.24% 8.37% 9.30% 10.23% 11.16% 12.09% 13.02% 13.95%
MARRIED FILING JOINTLY TAX-FREE YIELD
- ---------------------- ------------------------
INCOME 8.0%
------ ----
TAXABLE EQUIVALENT YIELD
<S> <C>
$ 9,333- 22,118 9.60%
$ 22,119- 34,906 9.80%
$ 34,907- 36,000 10.01%
$ 36,001- 48,456 11.82%
$ 48,457- 61,240 12.08%
$ 61,241- 91,850 12.25%
$ 91,851-140,000 12.78%
$140,001-212,380 13.78%
$212,381-250,000 13.89%
$250,001-424,760 14.72%
OVER 424,760 14.88%
</TABLE>
PERFORMANCE COMPARISONS
THE FUND MAY COMPARE ITS TOTAL RETURN AND YIELD TO THAT OF OTHER MUTUAL FUNDS
WITH SIMILAR INVESTMENT OBJECTIVES AND TO BOND AND OTHER RELEVANT INDICES OR TO
RANKINGS PREPARED BY INDEPENDENT SERVICES OR OTHER FINANCIAL OR INDUSTRY
PUBLICATIONS THAT MONITOR MUTUAL FUND PERFORMANCE. FOR EXAMPLE, A FUND'S TOTAL
RETURN MAY BE COMPARED TO DATA PREPARED BY: LIPPER ANALYTICAL SERVICES, INC.;
MUTUAL FUND FORECASTER; MORNINGSTAR; MICROPAL; WIESENBERGER INVESTMENT
COMPANIES SERVICES; OR CDA INVESTMENT TECHNOLOGIES, INC.
TOTAL RETURN DATA AS REPORTED IN NATIONAL FINANCIAL PUBLICATIONS SUCH AS MONEY,
FORBES, BARRON'S, THE WALL STREET JOURNAL AND THE NEW YORK TIMES, OR IN LOCAL
OR REGIONAL PUBLICATIONS, MAY ALSO BE USED IN COMPARING FUND PERFORMANCE. EACH
FUND'S TOTAL RETURN ALSO MAY BE COMPARED TO INDICES SUCH AS: THE DOW JONES
INDUSTRIAL AVERAGE; THE STANDARD & POOR'S 500 STOCK INDEX; THE SHEARSON LEHMAN
BOND INDEXES; THE WILSHIRE 5000 EQUITY INDEXES; OR THE CONSUMER PRICE INDEX.
Because a Fund's performance will fluctuate, it should not be compared with
bank deposits, savings accounts and similar investments that often provide an
agreed or guaranteed fixed yield for a stated period of time. Performance is
generally a function of the kind and quality of the instruments in a portfolio,
portfolio maturity, operating expenses and market
52
<PAGE> 233
conditions. Not included in a Fund's calculations of total return and yield
are fees charged by Bank of America and Service Organizations directly to their
customer accounts in connection with investments in a Fund (e.g. account
maintenance fees, compensating balance requirements or fees based upon account
transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON
OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE
PER SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES
INTO ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: one hundred million
shares of Class G Common Stock, 150 million shares of Class G - Special Series 3
Common Stock and 50 million shares of Class G - Special Series 5 Common Stock,
representing interests in the California Tax- Exempt Bond Fund, and 40 million
shares of Class Q Common Stock, 60 million shares of Class Q - Special Series 3
Common Stock and 50 million shares of Class Q - Special Series 5 Common Stock,
representing interests in the National Municipal Bond Fund; and additional
classes of shares representing interests in other investment portfolios of the
Company. Class G and Class Q Common Stock are the "A" shares, Class G - Special
Series 3 Common Stock and Class Q - Special Series 3 Common Stock are the "B"
shares and Class G - Special Series 5 Common Stock and Class Q - Special Series
5 Common Stock are the "K" shares. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class G Common
Stock, Class G - Special Series 3 Common Stock, Class G - Special Series 5
Common Stock, Class Q Common Stock, Class Q - Special Series 3 Common Stock or
Class Q - Special Series 5 Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Funds are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the particular Fund on liquidation. Fund shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by
53
<PAGE> 234
class or series, except as required by law (or when permitted by the Board of
Directors). Only A shares will vote on matters relating solely to A, only B
shares will vote on matters relating solely to B and only K shares will vote on
matters (such as the distribution and services plan described below) relating
solely to K shares. The Funds do not presently intend to hold annual meetings
of shareholders to elect directors or for other business unless and until such
time as less than a majority of the directors holding office has been elected
by the shareholders. At that time, the directors then in office will call a
shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a shareholder
meeting to consider the removal of one or more directors. Such meetings will be
held when requested by the shareholders of 10% or more of the Company's
outstanding shares of common stock. The Funds will assist in shareholder
communications in such matters to the extent required by law and the Company's
undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR A
SHARES, A DISTRIBUTION AND SERVICES PLAN FOR B SHARES, AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
FOR K SHARES.
The Company has adopted a Shareholder Service Plan for A shares, under which
the A shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has also
adopted a Distribution and Services Plan pursuant to Rule 12b-1 under the 1940
Act, under which the B shares of each Fund reimburse the Distributor for
services rendered and costs incurred in connection with distribution of the B
shares and for shareholder servicing fees the Distributor pays to Service
Organizations. The Company has adopted a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act under which the K shares of the Fund reimburse the
Distributor for services rendered and costs incurred in connection with
distribution of the K Shares. The Company has also adopted an Administrative
and Shareholder Services Plan for K Shares, under which K shares of the Fund
reimburse the Distributor for administrative and shareholder servicing fees the
Distributor pays to Service Organizations.
SHAREHOLDER 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 request and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
54
<PAGE> 235
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. During the
fiscal year ended February 29, 1996, the Distributor waived payments under the
Plan with respect to the National Municipal Bond Fund. For the same period,
the California Tax-Exempt Bond Fund made payments under the Plan at the
effective annual rate of ____% of such Fund's average net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a 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.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, each Fund pays
the Distributor for distribution expenses primarily intended to result in the
sale of such Fund's B and K shares and with respect to B shares for shareholder
servicing expenses. Such distribution expenses include expenses incurred in
connection with advertising and marketing each Fund's B and K shares; payments
to Service Organizations for assistance in connection with the distribution of B
and K shares; and expenses incurred in connection with preparing, printing and
distributing prospectuses for the Funds (except those used for regulatory
purposes, for solicitation or distribution to existing or potential A
shareholders or for distribution to existing B and K shareholders of the Funds)
and in implementing and operating the Distribution and Services Plan and
Distribution Plan. Shareholder servicing expenses under the Distribution and
Services Plan and Administrative and Shareholder Services Plan include, but are
not limited to, expenses incurred in connection with shareholder services
provided by the Distributor and payments to Service Organizations for the
provision of support services with respect to the beneficial owners of B and K
shares, such as assisting clients in processing exchange and redemption requests
and in changing dividend options and account descriptions and responding to
client inquiries concerning their investments. Administrative services include,
but are not limited to, expenses incurred in connection with administrative
services provided by the Distributor and payments to Service
55
<PAGE> 236
Organizations for the provision of administrative services to beneficial owners
of Class K shares such as establishing and maintaining accounts and records
relating to their clients who invest in K shares, providing information to the
Funds necessary for accounting or sub-accounting; and providing information
periodically to clients showing their position in K shares.
Under the Distribution and Services Plan and Distribution Plan, payments by a
Fund for distribution expenses may not exceed 0.75% (annualized), of the
average daily net assets of such Fund's B and K shares; under the Distribution
and Services Plan and Administrative and Shareholder Services Plan payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's B or K shares. Under the Administrative and
Shareholder Services Plan, payments for administrative service expenses may not
exceed 0.75% (annualized) of the average daily net assets of a Fund's K shares.
The total of all 12b-1 fees and administrative service fees and shareholder
service fees may not exceed, in the aggregate, the annual rate of 1.00% of the
average daily net assets of a Fund's K shares. These amounts may be reduced
pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution and Services Plan and Distribution Plan are
subject to Rule 12b-1 under the 1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
____________________________________________________
56
<PAGE> 237
APPENDIX A
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Excerpts from Moody's description of its municipal debt ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa--judged to be of high quality by all
standards, A--possess many favorable investment attributes and are considered
as upper medium-grade obligations; Baa--considered medium grade obligations,
i.e. they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C--protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B indicates a general lack of characteristics of
desirable investment, Caa represents bonds which are in poor standing, Ca
represents a high degree of speculation and C represents the lowest rated class
of bonds); Caa, Ca and C bonds may be in default.
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is considered to be extremely strong. Debt
rated "AA" is considered to have a very strong capacity to pay interest and to
repay principal and differs from "AAA" issues only in small degree. Debt rated
"A" is considered to have a strong capacity to pay interest and repay principal
although such issues are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories. Debt
rated "BB," "B," "CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions. Debt
rated "CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in default. The "D" rating is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period. The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories. The rating "r" may be attached to highlight derivative,
hybrid and certain other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
The following summarizes the ratings used by D&P for municipal debt. Debt
rated "AAA" is of the highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt. Debt rated
"AA" is of high credit quality. Protection
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<PAGE> 238
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions. Debt rated "A" has protection factors which
are average but adequate. However, risk factors are more variable and greater
in periods of economic stress. Debt rated "BBB" possess below average
protection factors but such protection factors are still considered sufficient
for prudent investment. Considerable variability in risk is present during
economic cycles. Debt rated below "BBB" is considered to be below investment
grade. Although below investment grade, debt rated "BB" is deemed likely to
meet obligations when due. Debt rated "B" possesses the risk that obligations
will not be met when due. Debt rated "CCC" is well below investment grade and
has considerable uncertainty as to timely payment of principal, interest or
preferred dividends. Debt rated "DD" represents defaulted obligations. To
provide more detailed indications of credit quality, the "AA," "A," "BBB," "BB"
and "B" ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major categories.
The following summarizes the four highest ratings used by Fitch for municipal
debt:
"AAA" -- Debt considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
"AA" -- Debt considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as debt rated
"AAA." Because debt rated in the "AAA" and "AA" categories is not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
"A" -- Debt considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than debt
with higher ratings.
"BBB" -- Debt considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest
and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have an adverse impact on this debt, and therefore, impair timely
payment. The likelihood that the ratings of this debt will fall below
investment grade is higher than for debt with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Debt that
possesses one of these ratings is considered by Fitch to be a
speculative investment. The ratings "BB" to "C" represent Fitch's
assessment of the likelihood of timely payment of principal and
interest in accordance with the terms of obligation for Debt issues
not in default. For defaulted Debt, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or
liquidation.
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<PAGE> 239
To provide more detailed indications of credit quality, the Fitch ratings from
and including "AA" to "C" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's for short-term notes:
MIG-1/VMIG-1 -- deemed to be of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing; MIG-2/VMIG-2 -- judged to be of high
quality, with margins of protection ample although not so large as in the
preceding group; MIG-3/VMIG-3 -- deemed to be of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established; MIG-4/VMIG-4 --
considered to be of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not
distinctly or predominantly speculative. Loans bearing the designation "SG"
are of speculative quality and lack margins of protection.
Standard & Poor's ratings for municipal notes are as follows: SP-1 -- very
strong or strong capacity to pay principal and interest; those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation; SP-2 -- satisfactory capacity to pay principal and interest; and
SP-3 -- speculative capacity to pay principal and interest.
The three highest rating categories of D&P for short-term municipal debt are
"D-1," "D-2" and "D-3." D&P employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. "D-1+" indicates highest certainty
of timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations. "D-1" indicates
very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
"D-1-" indicates high certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors are
very small. "D-2" indicates good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small. "D-3" indicates satisfactory liquidity and other protection
factors qualify issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected. D&P may
also rate short-term municipal debt as "D-4" or "D-5." "D-4" indicates
speculative investment characteristics. "D-5" indicates that the issuer has
failed to meet scheduled principal and/or interest payments.
The following summarizes the rating categories used by Fitch for short-term
municipal obligations:
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<PAGE> 240
"F-1+" securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated "F-1+."
"F-2" securities possess good credit quality. Issues carrying
this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and
"F-1" categories.
"F-3" securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse
changes could cause these securities to be rated below investment
grade.
"F-S" securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
Issues assigned a "D" rating are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit
issued by a commercial bank.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess
extremely strong safety characteristics are denoted "A-1+." Capacity for
timely payment of issues with the "A-2" designation is considered to be
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1." Issues rated "A-3" have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designation.
Issues rated "B" are regarded as having only speculative capacity for timely
payment. The rating of "C" is assigned to short-term debt obligations with a
doubtful capacity for payment. Issues rated "D" are in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The ratings "Prime-1" and "Prime-2" are the two highest
commercial paper ratings assigned by Moody's. Issuers or related supporting
institutions rated "Prime-1" are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers or related supporting
institutions rated "Prime-2" are considered to have a strong capacity for
repayment of short-term promissory obligations. Issuers or related supporting
institutions rated "Prime-3"
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<PAGE> 241
have an acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained. Issues
rated "Not Prime" do not fall within any of the Prime rating categories. D&P
and Fitch each use the short-term municipal debt ratings described above for
commercial paper.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
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<PAGE> 242
PACIFIC HORIZON FUNDS, INC.
Asset Allocation Fund
and
Capital Income Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Measuring Performance
4. General Description of Registrant . . . Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund . . . . . . . . . The Business of the Funds
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . How to Buy Shares;
Shareholder Services; The
Business of the Funds; Plan
Payments; Measuring Performance
8. Redemption or Repurchase . . . . . . . . How to Sell Shares;
Shareholder Services;
Plan Payments
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 243
PROSPECTUS
________________, 1996
PACIFIC HORIZON ASSET ALLOCATION FUND
PACIFIC HORIZON CAPITAL INCOME FUND
Investment Portfolios offered by Pacific Horizon Funds, Inc.
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Asset Allocation Fund") is a
diversified mutual fund whose investment objective is to obtain long-term
growth from capital appreciation and dividend and interest income. The Asset
Allocation Fund seeks to achieve its objective by actively allocating
investments among the three major asset categories: bonds, equity securities
and cash equivalents.
The PACIFIC HORIZON CAPITAL INCOME FUND (the "Capital Income Fund" and,
collectively with the Asset Allocation Fund, the "Funds") is a diversified
mutual fund whose investment objective is to provide investors with a total
investment return, comprised of current income and capital appreciation,
consistent with prudent investment risk. In seeking its investment objective,
the Capital Income Fund invests in a diversified portfolio consisting
principally of convertible bonds and convertible preferred stocks of domestic
issuers.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE ASSET ALLOCATION FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE
BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY (THE "MASTER PORTFOLIO" AND COLLECTIVELY WITH THE PACIFIC
HORIZON CAPITAL INCOME FUND, THE "PORTFOLIOS") HAVING THE SAME INVESTMENT
OBJECTIVE AS THAT OF THE ASSET ALLOCATION FUND. THE ASSET ALLOCATION FUND WILL
PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE. THE NET ASSET
VALUE OF THE ASSET ALLOCATION FUND WILL RESPOND TO INCREASES AND DECREASES IN
THE VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON PAGE __ FOR ADDITIONAL
INFORMATION REGARDING THIS STRUCTURE.
This Prospectus describes three classes from which investors may choose. A
shares are sold with a front-end sales charge. B shares are sold with a
deferred sales charge. K shares are not subject to either a front-end sales
charge or a contingent deferred sales charge. The Funds are offered by Pacific
Horizon Funds, Inc. (the "Company"), an open-end, series management investment
company. Bank of America National Trust and Savings Association ("Bank of
America" or the "investment adviser") serves as the Portfolios' investment
adviser. Based in San Francisco, California, Bank of America and its
affiliates have over $__ billion under management, including over $__ billion
in mutual funds.
-1-
<PAGE> 244
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Funds is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional
Information, as it may be revised from time to time, is dated ________ and is
incorporated by reference into this Prospectus.
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. Investment in the Funds involves
investment risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is part of a Registration Statement that has been filed with
the Securities and Exchange Commission in Washington, D.C. under the Securities
Act of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Funds' shares, other than
as contained in this Prospectus and the Funds' official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Funds. 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.
-2-
<PAGE> 245
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
EXPENSE SUMMARY
FINANCIAL HIGHLIGHTS
FUND INVESTMENTS
INVESTMENT OBJECTIVES
TYPES OF INVESTMENTS
FUNDAMENTAL LIMITATIONS
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE
HOW TO BUY SHARES
What Is My Minimum Investment In The Funds?
What Alternative Sales Arrangements Are Available?
How Are Shares Priced?
How Do I Decide Whether to Buy A, B or K Shares?
How Can I Buy Shares?
What Price Will I Receive When I Buy Shares?
What Else Should I Know To Make A Purchase?
HOW TO SELL SHARES
How Do I Redeem My Shares?
What NAV Will I Receive For Shares I Want To Sell?
What Kind of Paperwork Is Involved In Selling Shares?
How Quickly Can I Receive My Redemption Proceeds?
Do I Have Any Reinstatement Privileges After I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
WHAT IS TELETRADE?
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
CAN I ARRANGE PERIODIC WITHDRAWALS?
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND
FUND MANAGEMENT
Expenses
Service Providers
TAX INFORMATION
</TABLE>
-3-
<PAGE> 246
MEASURING PERFORMANCE
DESCRIPTION OF SHARES
PLAN PAYMENTS
APPENDIX A
<TABLE>
<S> <C>
Distributor: Investment Adviser:
Concord Financial Group, Inc. Bank of America National Trust and
3435 Stelzer Road Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
</TABLE>
-4-
<PAGE> 247
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer three classes of shares. A shares are
offered at net asset value plus a front-end sales charge (see page ___ of the
Prospectus for an explanation of net asset value per share) and are subject to
a shareholder servicing fee. B shares are offered at net asset value without a
front-end sales charge but are subject to a contingent deferred sales charge
plus distribution and shareholder servicing fees. K shares are offered at net
asset value with neither a front-end sales charge nor a contingent deferred
sales charge, but are subject to distribution, administrative servicing and
shareholder servicing fees. B shares of a Fund held for 8 years will convert
to A shares of a Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by
the Master Portfolio which are allocable to the Asset Allocation Fund.
Operating expenses include fees for portfolio management, maintenance of
shareholder accounts, general administration, distribution, (in the case of B
and K shares) shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed for A, B and
K shares by the Asset Allocation Fund and its operating expenses (including the
operating expenses of the Master Portfolio which are allocable to the Asset
Allocation Fund) expected to be incurred during the current fiscal year, as
well as a summary of the shareholder transaction expenses imposed for A, B and
K shares by the Capital Income Fund and its operating expenses expected to be
incurred during the current fiscal year. This information has been restated to
assume that current fees had been in effect during the previous fiscal year,
and reflects the fact that management is not waiving or reimbursing fees with
respect to the Capital Income Fund. Actual expenses may vary. A hypothetical
example based on the summary is also shown.
-5-
<PAGE> 248
<TABLE>
<CAPTION>
Asset Allocation Fund
- ---------------------
A Shares B Shares K Shares
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower) None(1) 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers+ % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee 0.25% 0.25% 0.25%
Other Expenses (After Expense
Reimbursements)+ % % %
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements)+ % % %
----- ----- -----
</TABLE>
______________________________
1 There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption").
Unless you are a participant in Bank of America's 401(k) Daily
Advantage(R) Retirement Plan Program, A shares purchased under the
Large Purchase Exemption are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and
two years after purchase. The contingent deferred sales charge is
paid to Concord Financial Group, Inc. ("the Distributor"). A Shares
cannot be purchased under the Large Purchase Exemption if there is
another no-load exemption available. Accordingly, A Shares purchased
under another no-load exemption are not subject to a contingent
deferred sales charge. Although no front-end sales load will be paid
on shares purchased under the Large Purchase Exemption, the
Distributor will compensate brokers whose customers purchase such
shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
2 Bank of America will compensate Seafirst Investment Services, Inc.
("SISI") and BA Investment Services, Inc. ("BAIS") (BAIS and SISI are
collectively referred to herein as "Affiliated Brokers") for its
customers who have invested in the Fund and are participants in the
401(k) Daily Advantage(R) Retirement Plan Program. The Affiliated
Brokers will be compensated by Bank of America at the rate of 1.00% of
the first $1 million of combined Pacific Horizon Funds' and Time
Horizon Funds' K shares in each 401(k) Daily Advantage(R) Retirement
Plan Program.
+ Management intends to waive fees and reimburse certain "Other
Expenses" on behalf of the Asset Allocation Fund so that "Total
Operating Expenses" for the Asset Allocation Fund (other than
interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses) will not
exceed __%, __% and __% of the average net assets of the Asset
Allocation Fund's A, B and K shares, respectively. Absent expense
reimbursement, management fees would be __% of the average net assets,
"Other Expenses" for the Asset Allocation Fund's A, B and K shares
would be __%, __% and __%, respectively, of average net assets
(annualized); and "Total Operating Expenses" for the Asset Allocation
Fund's A, B and K shares would be __%, _% and __% of average net
assets (annualized), respectively.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average daily net assets of the Fund's K shares.
Because of the Rule 12b-1, administrative and/or shareholder service
fees paid by the Asset Allocation Fund as shown in the above table,
long term B and K shareholders may pay more than the
-6-
<PAGE> 249
economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers Inc. For further
description of shareholder transaction expenses and the Asset
Allocation Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments"
below.
EXAMPLE: Assume the annual return is 5% and operating expenses
are the same as those stated above. For every $1,000 you
invest, here's how much you would have paid in total expenses
if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
After 1 Year After 3 Years After 5 Years After 10 Years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $(3)
Assuming no redemption $ $ $ $(3)
K shares $ $ $ $
</TABLE>
1 Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2 Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3 Assumes conversion of B shares to A shares after 8 years.
-7-
<PAGE> 250
<TABLE>
<CAPTION>
Capital Income Fund
- -------------------
A Shares B Shares K Shares
-------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load None(1) 5.00% None
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower)
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee 0.25% 0.25% 0.25%
Other Expenses % % %
Total Operating Expenses % % %
---- ---- -----
</TABLE>
1 There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption").
Unless you are a participant in Bank of America's 401(k) Daily
Advantage(R) Retirement Plan Program, A shares purchased under the
Large Purchase Exemption are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and
two years after purchase. The contingent deferred sales charge is
paid to Concord Financial Group, Inc. ("the Distributor"). A Shares
cannot be purchased under the Large Purchase Exemption if there is
another no-load exemption available. Accordingly, A Shares purchased
under another no-load exemption are not subject to a contingent
deferred sales charge. Although no front-end sales load will be paid
on shares purchased under the Large Purchase Exemption, the
Distributor will compensate brokers whose customers purchase such
shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
2 Bank of America will compensate Affiliated Brokers for its customers
who have invested in the Fund and are participants in the 401(k) Daily
Advantage(R) Retirement Plan Program. The Affiliated Brokers will be
compensated by Bank of America at the rate of 1.00% of the first $1
million of combined Pacific Horizon Funds' and Time Horizon Funds' K
shares in each 401(k) Daily Advantage(R) Retirement Plan Program.
* The total of all 12b-1 fees, administrative service fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average daily net assets of the Fund's K shares.
Because of the Rule 12b-1, administrative and/or shareholder service
fees paid by the Capital Income Fund as shown in the above table, long
term B and K shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the National
Association of Securities Dealers Inc. For further description of
shareholder transaction expenses and the Capital Income Fund's
operating expenses, see the sections entitled "Shareholder Guide,"
"The Business of the Funds" and "Plan Payments" below.
-8-
<PAGE> 251
EXAMPLE: Assume the annual return is 5% and operating expenses are
the same as those stated above. For every $1,000 you invest, here's
how much you would have paid in total expenses if you closed your
account after the number of years indicated:
<TABLE>
<CAPTION>
After 1 Year After 3 Years After 5 Years After 10 Years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $(3)
Assuming no redemption $ $ $ $(3)
K Shares $ $ $ $
</TABLE>
1 Assumes deduction at time of purchase of maximum applicable
front-end sales charge.
2 Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3 Assumes conversion of B shares to A shares
after 8 years.
_______________________________________
Note: The preceding operating expenses and example should not be
considered a representation of future investment returns and
operating expenses. Actual investment returns and operating
expenses may be more or less than those shown.
___________________________________________
This expense information is provided to help you understand the
expenses you would bear either directly (as with transaction
expenses) or indirectly (as with annual operating expenses) as a
shareholder of the Funds.
Management fees consist of:
- an investment advisory fee payable at the annual rate
of 0.55% and 0.45% of the Master Portfolio's and the
Capital Income Fund's respective average daily net
assets; and
- an administration fee payable at the annual rate of
0.15% and 0.05% of the Asset Allocation Fund's and the
Master Portfolio's respective average daily net assets
and 0.20% of the Capital Income Fund's average daily
net assets.
Currently, the most restrictive expense limitation limits a
Fund's aggregate annual expenses (including management fees and
a 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.
-9-
<PAGE> 252
The Board of Directors of the Company believes that the aggregate per share
expenses of the Asset Allocation Fund and the Master Portfolio in which the
Asset Allocation Fund's assets are invested will be less than or approximately
equal to the expenses which the Asset Allocation Fund would incur if the
Company retained the services of an investment adviser for the Asset Allocation
Fund and the assets of the Asset Allocation Fund were invested directly in the
type of securities held by the Master Portfolio. Further, the Directors
believe that the shareholders of the Asset Allocation Fund may participate in
the ownership of a larger portfolio of securities than could be achieved
directly by the Asset Allocation Fund. There can be no assurance, however,
that such will be the case or that any economics of scale that might occur if
other investors acquire shares of the Master Portfolio will be realized,
inasmuch as the Company is not aware of any other potential investor in the
Master Portfolio.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge, with respect to A shares or to
have the entire initial purchase price invested in the Funds with the
investment thereafter being subject to an annual Distribution and Services plan
charge and a contingent deferred sales charge upon redemption within the first
six years of investment, with respect to B shares. K shares are not subject to
either a front-end sales charge or a contingent deferred sales charge, but do
incur fees under a Distribution Plan and an Administrative and Shareholder
Services Plan. K shares, however, are available for investment by: (a)
businesses or other organizations that participate in the 401(k) Daily
Advantage(R) Retirement Plan Program sponsored by Bank of America and, (b)
individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end sales
load if (i) such redemption occurred within 30 days prior to the purchase order
and (ii) such other open-end investment company was not distributed and advised
by Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates. See the section entitled "How to Buy Shares" below.
-10-
<PAGE> 253
FINANCIAL HIGHLIGHTS
The Capital Income Fund commenced operations on September 25, 1987 as the Total
Return Fund (the "Predecessor Fund"), a separate portfolio of a Massachusetts
business trust called The Horizon Capital Funds. On January 1, 1989, the
Predecessor Fund changed its name to The Pacific Horizon Convertible Securities
Fund and on January 9, 1990 was reorganized as a portfolio of the Company. On
September 16, 1991, the Capital Income Fund changed its name to the Pacific
Horizon Capital Income Fund.
The tables below show certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's
investment results for the periods ending on or prior to August 31, 1989, the
combined investment results of the Capital Income Fund and the Predecessor Fund
for the period from September 1, 1989 through February 29, 1996 and the Capital
Income Fund's investment results for the six years in the period ended February
28, 1995). During the periods shown, the Funds (and the Predecessor Fund, in
the case of the Capital Income Fund) did not offer B or K shares. Actual
investment results of the B and K shares may be different. The information for
each of the last five fiscal periods ended February 29, 1996 has been audited
by _________________, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference
in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Funds is
available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
-11-
<PAGE> 254
Asset Allocation Fund
---------------------
Selected data for an A share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
For the period
For the year For the year January 18, 1994
ended ended (commencement of operations)
February 29, 1996 February 28, 1995 through February 28, 1994
----------------- ----------------- -------------------------
<S> <C> <C> <C>
Net asset value per share, beginning of period $ $14.84 $ 15.00
------ ------ -------
Income from Investment Operations:
Net investment income 0.48 0.03
------ ------
Net realized and unrealized gain (loss)
on securities $ 0.24 (0.19)
------ ------ ------
Total gain (loss) from investment
operations $ 0.72 (0.16)
------ ------ ------
Less Dividends:
Dividends from net investment income (0.41) - -
------ ------ ------
Net change in net asset value $ 0.31 (0.16)
------ ------ ------
Net asset value per share, end of period $ $15.15 $ 14.84
------ ------ ------
Total Return++ % 5.03% (1.07)%
------ ------ ------
Ratios/supplemental data:
Net assets, end of period (000) $ $5,694 $ 666
------ ------ ------
Ratio of expenses to average net assets* % 0.00% 0.00%+
------ ------ ------
Ratio of net investment income to average
net assets* % 4.25% 4.20%+
------ ------ ------
</TABLE>
- -------------------------------------------------------
* Reflects the Asset Allocation Fund's proportionate share of the fee
waivers and expense reimbursements by the Master Portfolio's
Investment Adviser and Administrator and the Asset Allocation Fund's
Administrator and Distributor. Such fee waivers and expense
reimbursements had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income
to average net assets by ____%, 7.89% and 83.95% (annualized) for the
periods ended, February 29, 1996, February 28, 1995 and February 28,
1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum 4.50%
sales charge on A shares.
-12-
<PAGE> 255
Capital Income Fund
-------------------
Selected data for an A share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------- Ended
February February February February February February
29, 28, 28, 28, 29, 28,
1996 1995 1994 1993++ 1992 1991
-------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value per share, beginning of period $15.42 $13.32 $12.01 $10.23 9.83
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income 0.57 0.50 0.56 0.53 0.59
Net realized and unrealized gain
(loss) on securities (1.43) 2.36 1.79 2.06 0.35
------ ------ ------ ------ ------
Total income (loss) from
investment operations (0.86) 2.86 2.35 2.59 0.94
------ ------ ------ ------ ------
Less Dividends:
Dividends from net investment
income (0.54) (0.48) (0.60) (0.55) (0.54)
Distributions from net realized
gains on securities (0.37) (0.28) (0.44) (0.26) --
------ ------ ------ ------ ------
Total dividends and distributions (0.91) (0.76) (1.04) (0.81) (0.54)
------ ------ ------ ------ ------
Net change in net asset value per share (1.77) 2.10 1.31 1.78 0.40
------ ------ ------ ------ ------
Net asset value per share, end of period $13.65 $15.42 $13.32 $12.01 $10.23
====== ====== ====== ====== ======
Total return+++ (5.61)% 21.85% 20.62% 26.21% 10.17%
Ratios/Supplemental Data:
Net assets, end of period (000) $198,251 $191,491 $19,613 $6,032 $1,186
Ratio of expenses to average
net assets** 0.97% 0.46% 0.07% -- --
Ratio of net investment income to
average net assets ** 4.48% 4.19% 5.00% 5.63% 6.32%
Portfolio turnover ratio 94% 103% 216% 278% 236%
</TABLE>
<TABLE>
<CAPTION>
Period Period
Ended Year Ended
-------- Ended ------
February August August
28, 31, 31,
1990*** 1989 1988*
-------- ------- ------
<S> <C> <C> <C>
Net asset value per share, beginning of period $10.88 $8.99 $9.55
------ ----- -----
Income from Investment Operations:
Net investment income 0.28 0.55 0.50
Net realized and unrealized gain
(loss) on securities (0.12) 1.96 (0.74)
----- ------ -----
Total income (loss) from
investment operations 0.16 2.51 (0.24)
----- ------ -----
Less Dividends:
Dividends from net investment
income (0.31) (0.62) (0.32)
Distributions from net realized
gains on securities (0.90) -- --
----- ------ -----
Total dividends and distributions (1.21) (0.62) (0.32)
----- ------ -----
Net change in net asset value per share (1.05) 1.89 (0.56)
----- ------ -----
Net asset value per share, end of period $9.83 $10.88 $8.99
===== ====== =====
Total return+++ 1.46%++++ 29.34% (2.26%)++++
Ratios/Supplemental Data:
Net assets, end of period (000) $ 962 $ 688 $ 255
Ratio of expenses to average
net assets** -- -- 0.35%+
Ratio of net investment income to
average net assets ** 5.87%+ 6.26% 7.14%+
Portfolio turnover ratio 153% 253% 211%
<FN>
___________________
* For the period September 25, 1987 (commencement of operations) through
August 31, 1988.
** Net of fee waivers and expenses reimbursed which had the effect of
decreasing the ratio of expenses to average net assets __%, 0.17%, 0.74%,
3.27%, 6.23%, 14.64%, 27.82% (annualized), 35.19% and 61.95%
(annualized), respectively.
*** For the period September 1, 1989 through February 28, 1990.
+ Annualized.
++ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
+++ The total return figures listed do not include the effect of the maximum
4.50% sales charge on A shares.
++++ Unannualized.
</TABLE>
-13-
<PAGE> 256
FUND INVESTMENTS
INVESTMENT OBJECTIVES
- ---------------------
ASSET ALLOCATION FUND
- ---------------------
The Asset Allocation Fund seeks to achieve long-term growth from capital
appreciation and dividend and interest income through a balanced approach to
investment using bonds, equity securities and cash equivalents. The Asset
Allocation Fund seeks to achieve its investment objective by investing all of
its investable assets in the Master Portfolio. The Master Portfolio has the
same investment objective as the Asset Allocation Fund.
The Asset Allocation Fund may be appropriate for investors who want long-term
capital appreciation and current dividend and interest income.
CAPITAL INCOME FUND
- -------------------
The Capital Income Fund seeks to provide investors with a total investment
return, comprised of current income and capital appreciation, consistent with
prudent investment risk by investing in a diversified portfolio consisting
principally of convertible bonds and convertible preferred stocks of domestic
issuers.
The Capital Income Fund may be appropriate for investors who are seeking a
highly competitive return over the long term comprised of current income and
capital appreciation and who are also willing to accept the relative risks
described in this Prospectus associated with seeking such returns.
WHILE THE FUNDS AND THE MASTER PORTFOLIO STRIVE TO ATTAIN THEIR INVESTMENT
OBJECTIVES, THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
BECAUSE THE INVESTMENT CHARACTERISTICS OF THE ASSET ALLOCATION FUND WILL
CORRESPOND TO THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF
THE VARIOUS INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO AND
THE CAPITAL INCOME FUND.
TYPES OF INVESTMENTS
MASTER PORTFOLIO - GENERAL INVESTMENTS.
---------------------------------------
The Master Portfolio is a diversified portfolio which will invest substantially
all of its assets through a balanced approach using bonds, equity securities
and cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index.
Bonds acquired by the Master Portfolio will be investment grade at the time of
purchase, and may include corporate
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and government obligations, mortgage-backed securities and municipal
securities. Investment grade bonds are bonds that are rated in one of the four
highest rating categories by a nationally recognized statistical rating
organization, i.e., BBB or better by Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Duff & Phelps Credit Co. ("D&P") or Fitch Investors
Service, Inc. ("Fitch") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). While bonds with such ratings are regarded as having adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay interest and
repay principal. Bonds with the lowest investment grade rating (i.e., BBB or
Baa) do not have outstanding investment characteristics and may have
speculative characteristics as well. Unrated securities will be purchased only
if Bank of America determines that they are of comparable quality to the rated
securities in which the Master Portfolio may invest. Under normal market
conditions at least 25% of the Portfolio's total assets will be invested in
fixed income senior securities.
Mortgage-backed securities, such as GNMA, FNMA and FHLMC securities, will be
guaranteed as to principal and interest, but not market value, by the U.S.
Government or one of its agencies or instrumentalities. The Master Portfolio
will not invest more than 35% of its net assets in mortgage-backed securities.
There is the risk that corporate bonds might be called by the issuer if the
bond interest rate is higher than currently prevailing interest rates.
Similarly, a risk associated with mortgage-backed securities is early paydown
resulting from refinancing of the underlying mortgages. The rate of such
prepayments, and hence the life of the security, will primarily be a function
of current market rates. In periods of falling interest rates, the rate of
prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds will generally be at lower rates than the rates on the
prepaid obligations.
The Master Portfolio may also invest, from time to time, in obligations issued
by state and local governmental issuers ("Municipal Securities"). The purchase
of Municipal Securities may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such
securities, on a pre-tax basis, is comparable to that of corporate or U.S.
Government obligations. Dividends received by shareholders which are
attributable to interest income received from Municipal Securities generally
will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Master Portfolio are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of
the facility being financed. Private activity bonds held by the Master
Portfolio are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of such
private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved.
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The Master Portfolio may also include "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The value of securities held by the Master Portfolio will vary with changes in
interest rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest- bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P.
The Master Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
CAPITAL INCOME FUND - GENERAL INVESTMENTS.
-----------------------------------------
The convertible bonds and preferred stock ("Convertible Securities") held in
the Capital Income Fund's portfolio will, for the most part, be securities
issued by U.S. issuers. The Capital Income Fund has a fundamental policy that
under normal circumstances at least 65% of its total assets will be invested in
Convertible Securities. Up to 15% of its assets also may be held in Eurodollar
Convertible Securities.
The Company's Board of Directors will evaluate whether a satisfactory total
return has been achieved by comparing the Capital Income Fund's return against
a number of indices such as:
- - the Standard & Poor's 500 Stock Index;
- - the Shearson Lehman Long-Term Government/Bond Index; and
- - the Lipper Convertible Bond Market Index.
Similar to straight debt obligations, convertible securities pay a fixed rate
of interest and return principal at maturity; unlike straight debt, they may be
converted into a set amount of corporate common stock. Investors should note
that the Capital Income Fund may convert its Convertible Securities when
conditions are not necessarily favorable for their disposition or because of
developments with respect to the issuers or trading markets of such Convertible
Securities. More information regarding Convertible Securities can be found
below.
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In addition to Convertible Securities, and subject to the fundamental
investment policy above, the Capital Income Fund also may invest in:
- - securities issued or guaranteed by the U.S. Government (and its agencies
and instrumentalities);
- - nonconvertible bonds and dividend-paying equity securities that are
consistent with the Fund's investment objective;
- - options and futures; and
- - money market securities.
Notwithstanding the fundamental investment policy above, however, for temporary
defensive purposes at times when Bank of America believes such a position is
warranted by uncertain or unusual market conditions, the Capital Income Fund
may invest without limit in securities issued or guaranteed by the U.S.
Government (and its agencies and instrumentalities), money market securities
and investment grade debt securities, or may hold its assets in cash.
CONVERTIBLE SECURITIES. The Convertible Securities in which the
Capital Income Fund invests (including bonds, notes and preferred stock) are
convertible into common stock at a stated price within a specified period of
time. When investing in such Convertible Securities the Capital Income Fund is
looking for the opportunity, through the conversion feature, to participate in
the capital appreciation of the common stock into which the Convertible
Securities are convertible, while earning higher current income than is
available from the common stock.
Generally, Convertible Securities are not "investment grade" (that is, not
rated within the four highest rating categories by a nationally recognized
statistical rating organization such as S&P, D&P, Fitch or Moody's).
Convertible Securities acquired by the Capital Income Fund that are rated below
investment grade, or that are not rated, present greater risks as to the timely
payment of principal and interest (or dividends). The Capital Income Fund
intends that the Convertible Securities it purchases will be rated at least "B"
by a nationally recognized statistical rating organization, or that if the
investment is unrated it will be deemed of comparable quality by Bank of
America.
For your information, set forth below is the average distribution of ratings at
value for the Capital Income Fund's portfolio securities (including commercial
paper and nonconvertible bonds) for its last fiscal year:
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<TABLE>
<CAPTION>
MOODY'S INVESTORS PERCENTAGE
SERVICE, INC. OF VALUE
- ----------------- ----------
<S> <C> <C>
Aaa %
Aa %
A %
Baa %
Ba or lower %
Not Rated %
Comparable to A %
Comparable to Baa %
Comparable to Ba or lower %
------
100.00%
======
</TABLE>
<TABLE>
<CAPTION>
STANDARD & POOR'S PERCENTAGE
CORPORATION OF VALUE
- ----------------- ----------
<S> <C> <C>
AAA %
AA %
A %
BBB %
BB or lower %
Not Rated %
Comparable to A %
Comparable to BBB %
Comparable to BBB or lower %
------
100.00%
======
</TABLE>
These ratings are described in the Appendix to this Prospectus.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries
some risk, some of the risks associated with lower-rated Convertible Securities
are different from the risks associated with investment grade securities. The
risk of loss through default is greater because lower-rated securities are
usually unsecured and are often subordinate to an issuer's other obligations.
Additionally, the issuers of these securities frequently have high debt levels
and are thus more sensitive to difficult economic conditions, individual
corporate developments and rising interest rates. Consequently, the market
price of these securities, and the net asset value of the Capital Income Fund's
shares, may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market
for lower-rated securities, at least in its present size and form, is
relatively new, there remains some uncertainty about its performance level
under adverse market and economic environments. An economic downturn or
increase in interest rates could have a negative impact on both the
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market for lower-rated securities (resulting in a greater number of bond
defaults) and the value of lower-rated securities held in the Capital Income
Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates can affect lower-rated securities differently than other
securities. For example, the prices of lower-rated securities are more
sensitive to adverse economic changes or individual corporate developments than
are the prices of higher-rated investments.
Also, during an economic downturn or a period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If the issuer of a security defaults, the Capital Income Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices
of lower-rated securities as well as the Capital Income Fund's net asset value.
In general, both the prices and yields of lower-rated securities will
fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult
to determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, the
Capital Income Fund's valuation of a security and the price it is actually able
to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by the Capital Income Fund, especially in a thinly traded market. Illiquid or
restricted securities held by the Capital Income Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals,
may have a material impact on the market for lower-rated securities.
CREDIT RATINGS. S&P, Moody's and other nationally recognized
statistical rating organizations evaluate the safety of a lower-rated
security's principal and interest payments, but do not address market value
risk. Because the ratings of the rating agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, Bank of America performs its own analysis of the issuers
whose lower-rated securities the Capital Income Fund purchases. Because of
this, the Capital Income Fund's performance may depend more on the investment
adviser's own credit analysis than is the case for mutual funds investing in
higher rated securities.
In selecting Convertible Securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the Convertible Securities,
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the protections afforded the Convertible Securities and the diversity of the
Capital Income Fund's portfolio. Bank of America continuously monitors the
issuers of lower-rated securities held in the Capital Income Fund's portfolio
for their ability to make required principal and interest payments, as well as
in an effort to control the liquidity of the Capital Income Fund's portfolio so
that it can meet redemption requests.
If a portfolio security undergoes a rating revision, the Capital Income Fund
may continue to hold the security if Bank of America determines such retention
is warranted.
CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible Securities
have unique investment characteristics because they:
- - generally have higher yields than common stocks;
- - generally are less subject to a decline in value than their underlying
common stocks because of their fixed income characteristics; and
- - generally provide for the potential of capital appreciation if the
market value of their underlying common stock increases.
An issuer of a Convertible Security may have the option to redeem it at a price
established in the Convertible Security's governing instruments. If a
Convertible Security is called for redemption, the Capital Income Fund will
have to either permit the redemption, convert the Convertible Security into the
underlying common stock or sell the Convertible Security to a third party. Any
of these actions could adversely affect the Capital Income Fund's ability to
attain its objective.
The Capital Income Fund would convert a Convertible Security either to permit
the orderly disposition of the investment or when it has reached maturity or
been called for redemption. The Capital Income Fund might also convert a
Convertible Security if the underlying common stock's dividend rate increased
above the yield on the Convertible Security.
EURODOLLAR CONVERTIBLE SECURITIES. Eurodollar Convertibles, in which
the Capital Income Fund may invest up to 15% of its total assets, are fixed
income securities of a U.S. or foreign issuer that are issued in U.S. dollars
outside of the U.S. and are convertible into or exchangeable for specified
equity securities. Eurodollar Convertibles in which the Capital Income Fund
invests will be convertible into or exchangeable for foreign equity securities.
Investments in foreign issuers may be affected by changes in currency rates and
exchange control regulations. There is typically less publicly available
information about a foreign company than about a U.S. company, and foreign
brokerage commissions and custody fees are generally higher than in the U.S.
In addition, foreign companies may be subject to less stringent reserve,
auditing and reporting requirements than their U.S. counterparts, and their
securities may be less liquid and more volatile than those of U.S. issuers.
Investments in
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foreign securities are also subject to local political and economic
developments, expropriation or nationalization of assets and the imposition of
withholding taxes.
When not invested in Convertible Securities, the Capital Income Fund can invest
in other types of obligations subject to the limitations described previously.
The Capital Income Fund may purchase bank obligations including CDs and
bankers' acceptances issued by domestic branches of U.S. banks that have total
assets of more than $2.5 billion. The Capital Income Fund may also make
interest-bearing savings deposits in commercial banks in amounts not exceeding
5% of its total assets.
Commercial paper rated in the top rating category by S&P, Moody's or other
rating agencies, and unrated commercial paper determined to be of comparable
quality by Bank of America, may also be purchased. In addition, the Capital
Income Fund may invest in debt securities rated BBB or higher by S&P or other
rating agencies or Baa or higher by Moody's. See "Convertible Securities" for
the rating requirements for convertible securities.
As noted above, the Capital Income Fund can purchase obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of some of these agencies and instrumentalities, such as the Small
Business Administration or the Maritime Administration, are backed by the full
faith and credit of the U.S.; others, like the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government
to purchase the agency's obligations; and still others, including the Student
Loan Marketing Association, are backed solely by the issuer's credit. There is
no assurance that the U.S. Government would support a U.S. Government-
sponsored entity if it were not required to do so by law.
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds and the Master Portfolio may not be
changed without a vote by the holders of a majority of the outstanding shares
of the particular Fund or of the outstanding interests of the Master Portfolio.
Policies requiring such a vote to effect a change are known as "fundamental."
A number of the other fundamental investment limitations are summarized below.
Neither the Asset Allocation Fund nor the Master Portfolio may:
1. Purchase securities (except securities issued by the
U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of its total assets will be invested in the securities of
any one issuer or it would own more than 10% of the voting securities
of such issuer, except that up to 25% of its total assets may be
invested without regard to these limitations; and provided that all of
its assets may be invested in a diversified, open-end management
investment company, or a series
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thereof, with substantially the same investment objectives, policies
and restrictions without regard to the limitations set forth in this
paragraph;
2. Make loans to other persons except that it may make
time or demand deposits with banks, provided that time deposits shall
not have an aggregate value in excess of 10% of its net assets, and
may purchase bonds, debentures or similar obligations that are
publicly distributed, may loan portfolio securities not in excess of
10% of the value of its total assets, and may enter into repurchase
agreements as long as repurchase agreements maturing in more than
seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that
it may purchase or sell futures contracts on financial instruments,
such as bank certificates of deposit and U.S. Government securities,
foreign currencies and stock indexes and options on any such futures
if such options are written by other persons and if (i) the futures or
options are listed on a national securities or commodities exchange,
(ii) the aggregate premiums paid on all such options that are held at
any time do not exceed 20% of its total net assets, and (iii) the
aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
The Capital Income Fund:
1. Under normal circumstances, will invest at least 65%
of its total assets in Convertible Securities (including, for a period
of two months following their conversion, securities acquired upon
conversion of Convertible Securities).
2. May not make loans, although it may invest in debt
securities, enter into repurchase agreements and lend its portfolio
securities as discussed herein.
3. May not invest more than 10% of its total assets in
certain illiquid investments. Investors should note, however, that
certain securities that might otherwise be considered illiquid,
particularly securities that are not registered under the federal
securities laws but for which the Board of Directors or Bank of
America (pursuant to guidelines adopted by the Board) has determined a
liquid trading market exists, are not subject to this 10% limitation.
4. Purchase or sell commodities or commodity contracts,
or invest in oil, gas or mineral exploration or development programs,
except that: (a) the Fund may, to the extent appropriate to its
investment objective, invest in securities issued by companies which
purchase or sell commodities or commodity contracts or which invest in
such programs; and (b) the Fund may purchase and sell futures
contracts and options on futures contracts.
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<PAGE> 265
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies
stated above, the Master Portfolio may invest in securities of foreign issuers
that may or may not be publicly traded in the United States, including Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Eurobonds (bonds issued in a country and sometimes a currency other than
the country of the issuer). It is currently the intention of the Master
Portfolio to invest no more than 25% of its net assets (at the time of
purchase) in foreign securities. The Master Portfolio may be subjected to
additional risks associated with the holding of property abroad such as future
political and economic developments, currency fluctuations, possible
withholding of tax payments, possible seizure or nationalization of foreign
assets, possible establishment of currency exchange control regulations or the
adoption of other foreign government restrictions that might adversely affect
the payment of principal or interest on foreign securities in the Master
Portfolio. In addition, securities of some foreign companies are less liquid,
and their prices more volatile than domestic companies, have less publicly
available information about foreign companies, and the fact that foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies.
VARIABLE RATE INSTRUMENTS. The Master Portfolio may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Master Portfolio, master demand notes may not be
marketable. Consequently, the ability to redeem such notes may depend on the
borrower's ability to pay which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime- 2 by Moody's or A-2 by S&P or the
equivalent by another nationally recognized statistical rating organization
("NRSRO"), (c) are backed by a bank letter of credit or (d) are determined by
Bank of America to be of a quality comparable to securities described in either
clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Master Portfolio may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share (i.e., "money market funds"). 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
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more than 5% invested in the securities of any one investment company. As a
shareholder of another investment company, the Master Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees.
ASSET-BACKED SECURITIES. The Master Portfolio may purchase asset-backed
securities. Asset-backed securities consist of undivided fractional interests
in pools of consumer loans (unrelated to mortgage loans) or receivables held in
a trust. Examples include certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on the
loans or receivables are passed through to certificate holders. Asset-backed
securities may be issued by either governmental or non-governmental entities.
Payment on asset- backed securities of private issuers is typically supported
by some form of credit enhancement, such as a letter of credit, surety bond,
limited guaranty, or subordination. The extent of credit enhancement varies,
but usually amounts to only a fraction of the asset-backed security's par value
until exhausted. Ultimately, asset-backed securities are dependent upon
payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse to the entity that originated the
loans or receivables.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Master Portfolio must be reinvested in
securities whose yields reflect interest rates prevailing at the time. Thus,
the Master Portfolio's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
reinvestments are in lower yielding securities. The actual maturity and
realized yield will therefore vary based upon the prepayment experience of the
underlying asset pool and prevailing interest rates at the time of prepayment.
Asset-backed securities may be subject to greater risk of default during
periods of economic downturn than other instruments. Also, while the secondary
market for asset-backed securities is ordinarily quite liquid, in times of
financial stress, the secondary market may not be as liquid as the market for
other types of securities, which could result in the Master Portfolio's
experiencing difficulty in valuing or liquidating such securities.
OPTIONS. The Master Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Master Portfolio (this restriction
does not apply to options on futures contracts). Put options may be purchased
in order to protect the Master Portfolio's securities in expectation of a
declining market and call options may be purchased to benefit from anticipated
price increases in the underlying securities or index. The Master Portfolio
may not write put options but may write fully covered call options as long as
the Master Portfolio remains fully covered throughout the life of the option,
either by owning the optioned securities or possessing a call issued by another
writer that is identical in all respects to the call written by the Master
Portfolio.
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The Capital Income Fund may sell, or "write," covered call options on
securities it owns in order to obtain the premium for doing so, and may
purchase put options on securities it owns (or which it may acquire through
conversion or exchange of other securities it owns) as a hedging technique.
The aggregate value of the Capital Income Fund's assets subject to options
written may not exceed 25% of its total assets (taken at market value on the
date written) and the aggregate premiums on options purchased by the Capital
Income Fund will not exceed 5% of its total assets.
Closing purchase transactions on previously written options may be entered into
by the Portfolios to realize a profit and/or to permit the Portfolios to write
another option on the underlying security. A Portfolio might write another
option on the underlying security in order to provide for a different exercise
price or expiration date. A profit or loss will be realized when an option is
closed to the extent the cost of the closing transaction is less or more,
respectively, than the premium received for writing the option.
When an option written by a Portfolio is exercised, the Portfolio will receive
the exercise price for the security as provided for in the option, but it loses
the opportunity to receive the price which it could have obtained for the
security in the open market, which will likely be higher than the exercise
price of the option.
Put options purchased by a Portfolio give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. A Portfolio may sell a put option prior to the
time the securities underlying the option are actually sold, which will result
in a gain or loss to the Portfolio depending on whether the amount received
from the sale is more or less than the premium and other transaction costs
associated with the option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. The Portfolios will only
write options where Bank of America believes a liquid secondary market will
exist on a national securities exchange for options of the same series, which
would permit a Portfolio to close out its option positions. There are no
assurances that a liquid secondary market will exist on an exchange for a
particular option or at any particular time. In fact, for some options no
secondary market on an exchange may exist at all. If a Portfolio cannot close
out an option, it will not be able to sell the securities underlying the option
until the option expires or is exercised.
Furthermore, a Portfolio's ability to engage in transactions in options may be
limited by IRS requirements that a Portfolio receive less than 30% of its gross
income from certain securities, including options and futures contracts, held
by the Portfolio for less than three months. Bank of America does not believe
that transactions in options will significantly affect the Fund's ability to
meet IRS requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could
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occur in the markets for the underlying securities that would not be reflected
in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Master Portfolio may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options). The
Capital Income Fund may enter into financial futures contracts (as well as
purchase or sell related options). The Portfolios may enter into transactions
in futures and related options in order to hedge against anticipated
fluctuations or changes resulting from relevant market conditions in the values
of the securities held by the particular Portfolio or that the Portfolio
intends to purchase or sell, and where the transactions are economically
appropriate for the reduction of risks inherent in the ongoing management of
the particular Portfolio. Neither Portfolio may purchase or sell a futures
contract or a related option unless immediately after any such transaction the
sum of the aggregate amount of margin deposits on its existing futures
positions and the amount of premiums paid for related options does not exceed
5% of a Portfolio's total assets (after taking into account certain technical
adjustments). For a more detailed description of futures contracts and options
and the costs and risks related to such instruments, see the Statement of
Additional Information.
REPURCHASE AGREEMENTS. The Portfolios may buy securities subject to the
seller's agreement to repurchase them within a specified time at a fixed price
(equal to the purchase price plus interest). These transactions are known as
repurchase agreements. Under these agreements, the Master Portfolio will
acquire securities from either a bank (which has a commercial paper rating of
A-2 or better by S&P or Prime-2 or better by Moody's, or the equivalent from
another NRSRO) or a registered broker-dealer. The Capital Income Fund will
enter into repurchase agreements only with financial institutions (such as
banks and broker-dealers) deemed creditworthy by Bank of America, under
guidelines approved by the Company's Board of Directors. The Capital Income
Fund intends that such agreements will not have maturities longer than 60 days.
Repurchase agreements maturing in more than seven days will not exceed 10% of
the value of the total assets of a Portfolio. Repurchase agreements will be
entered into only for debt obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of deposit,
bankers' acceptances or commercial paper, and either the particular Portfolio's
custodian or its agent will have physical possession of the securities or the
securities will be transferred to such Portfolio's custodian, by appropriate
entry in the Federal Reserve Bank's records and, in either case, will be
maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, a
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Portfolio might incur a loss if the value of the securities securing the
repurchase agreement declines, and might incur disposition costs in connection
with liquidating the securities. In addition, if bankruptcy proceedings are
commenced with respect to the seller, realization of the securities by a
Portfolio may be delayed or denied. Repurchase agreements are considered to be
loans under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these arrangements, the Portfolios will sell portfolio securities to
either a bank (which, with respect to the Master Portfolio, has a commercial
paper rating of A-2 or better by S&P or Prime-2 or better by Moody's) or a
registered broker-dealer, with an agreement to repurchase the security on an
agreed date, price and interest payment. Reverse repurchase agreements involve
the possible risk that the value of portfolio securities a Portfolio
relinquishes may decline below the price a Portfolio must pay when the
transaction closes. Borrowings may magnify the potential for gain or loss on
amounts invested resulting in an increase in the speculative character of a
Portfolio's outstanding shares.
When a Portfolio enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price.
The account is then continuously monitored by Bank of America to make sure that
an appropriate value is maintained. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. The Capital Income Fund will
only enter into reverse repurchase agreements to avoid the need to sell
portfolio securities to meet redemption requests during unfavorable market
conditions.
SECURITIES LENDING. In order to earn additional income, each Portfolio may
lend its portfolio securities to entities (broker-dealers, for the Master
Portfolio, and financial institutions, such as banks and brokers, for the
Capital Income Fund) (and the Capital Income Fund may lend its portfolio
securities to financial institutions, such as banks and brokers) that Bank of
America considers to be of good standing. With respect to the Master
Portfolio, borrowers of portfolio securities may not be affiliated directly or
indirectly with the Company or the Master Portfolio. If the broker-dealer
should become bankrupt, however, a Portfolio could experience delays in
recovering its securities. A securities loan will only be made when, in Bank
of America's judgment, the possible reward from the loan justifies the possible
risks. In addition, such loans will not be made if, as a result, the value of
securities loaned by the Master Portfolio and the Capital Income Fund exceeds
10% and 30% of their respective total assets. Securities loans will be fully
collateralized.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Portfolios may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. Additionally, the Capital
Income Fund may purchase or sell securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
a Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months
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later), permit a Portfolio to lock-in a price or yield on a security,
regardless of future changes in interest rates. Delayed settlement describes a
securities transaction in the secondary market for which settlement will occur
sometime in the future. These transactions involve the risk that the price or
yield obtained may be less favorable than the price or yield available when the
delivery takes place. The Portfolio will set aside in a segregated account
cash or liquid securities equal to the amount of any when-issued or forward
commitment transactions. These transactions are not to exceed 25% of the value
of each Portfolio's total assets absent unusual market conditions, and will not
be entered into for speculative purposes, but only in furtherance of each
Portfolio's investment objective.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the same securities as a Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Portfolio and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure
may adversely affect the price paid or received by a Portfolio or the size of
the position obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of shares of the Funds by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds'
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to the particular Portfolio are not less
favorable than what they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Master Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios, and the
Capital Income Fund's investment practices may result in portfolio turnover
that is substantially greater than that of other mutual fund portfolios.
Although no commissions are paid on bond transactions, purchases and sales are
at net prices which reflect dealers' mark-ups and mark-downs, and a higher
portfolio turnover rate for bond investments will result in the payment of more
dealer mark-ups and mark-downs than would otherwise be the case. Higher rates
of turnover may require payment of brokerage commissions, impose other
transaction costs and could increase substantially the amount of income
received by a Portfolio that constitutes taxable capital gains. To the extent
capital gains are realized, distributions from those gains may be ordinary
income for federal tax purposes (see "Tax Information"). Portfolio turnover
will not be a limiting factor in making investment decisions for the
Portfolios.
MASTER-FEEDER STRUCTURE. The Asset Allocation Fund is an open-end investment
portfolio that seeks to achieve its investment objective by investing all of
its investable assets in the Master Portfolio, which has the same investment
objective. The Asset Allocation Fund may withdraw its investment in the Master
Portfolio at any time if the Board of Directors of the
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Company determines that it is in the best interest of the Asset Allocation Fund
to do so. Upon any such withdrawal, the Board of Directors would consider what
action might be taken, including the investment of all of the assets of the
Asset Allocation Fund in another pooled investment entity having the same
investment objective as the Asset Allocation Fund or the hiring of an
investment adviser to manage the Asset Allocation Fund's assets in accordance
with the investment policies described above with respect to the Master
Portfolio. See "Expense Summary," "Fund Investments" and "Fund Management" for
a description of this investment objective and the investment policies,
restrictions, management and expenses of the Asset Allocation Fund and the
Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Asset Allocation Fund and other entities that may invest in the
Master Portfolio from time to time (e.g., other investment companies and
commingled trust funds) will each be liable for all obligations of the Master
Portfolio. However, the risk of the Asset Allocation Fund's incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance exists and the Master Portfolio itself is
unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Asset Allocation Fund nor its shareholders will be
adversely affected by reason of the Asset Allocation Fund's investing in the
Master Portfolio. As stated above, the investment objective of the Asset
Allocation Fund and the Master Portfolio is a fundamental policy and may not be
changed, in the case of the Asset Allocation Fund, without the vote of its
shareholders or, in the case of the Master Portfolio, without the vote of its
interestholders. Whenever the Asset Allocation Fund is requested to vote on
matters pertaining to the investment objective or a fundamental policy of the
Master Portfolio, the Asset Allocation Fund will hold a meeting of its
shareholders and will cast its vote in the same proportion as the votes cast by
the Asset Allocation Fund's shareholders. The Asset Allocation Fund will vote
any shares for which it receives no voting instructions in the same proportion
as the shares for which it does receive voting instructions. As with any
mutual fund, other investors in the Master Portfolio could control the results
of voting at the Master Portfolio level in certain instances (e.g. a change in
fundamental policies by the Master Portfolio which was not approved by the
Asset Allocation Fund's shareholders). This could result in the Asset
Allocation Fund's withdrawal of its investment in the Master Portfolio, and in
increased costs and expenses for the Asset Allocation Fund. Further, the
withdrawal of other entities that may from time to time invest in the Master
Portfolio could have an adverse effect on the performance of the Master
Portfolio and the Asset Allocation Fund, such as decreased economies of scale
and increased per share operating expenses. In addition, the total withdrawal
by another investment company as an investor in the Master Portfolio will cause
the Master Portfolio to terminate automatically in 120 days unless the Asset
Allocation Fund and any other investors in the Master Portfolio unanimously
agree to continue the business of the Master Portfolio.
As the Asset Allocation Fund is required to submit such matters to a vote of
its shareholders, it will be required to incur the expenses of shareholder
meetings in connection with such withdrawals. If unanimous agreement is not
reached to continue the Master Portfolio, the
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Board of Directors of the Company would need to consider alternative
arrangements for the Asset Allocation Fund, such as those described above. The
policy of the Asset Allocation Fund, and other similar investment companies, to
invest their investable assets in trusts such as the Master Portfolio is a
relatively recent development in the mutual fund industry and, consequently,
there is a lack of substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest in
the Master Portfolio which may have higher or lower fees and expenses than
those of the Asset Allocation Fund and which may therefore have different
performance results than the Asset Allocation Fund. Information concerning
whether an investment in the Master Portfolio may be available through another
entity investing in the Master Portfolio may be obtained by calling
800-332-3863.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUNDS' SHARES AND
REGARDING THE FUNDS' DIVIDENDS
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL INVESTMENT SUBSEQUENT 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
401(k) ACCOUNT $
------ -----------
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
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WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue three classes of shares. A shares are sold to investors
choosing the initial sales charge alternative and B shares are sold to
investors choosing the deferred sales charge alternative. K shares are neither
subject to a front-end sales charge nor a contingent deferred sales charge. K
shares, however, are sold only to: (a) businesses and other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America; and (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates. The three classes of shares each represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects, except that A shares bear the
expenses of a Shareholder Service Plan. B shares bear the expenses of a
Distribution and Services Plan and have exclusive voting rights with respect to
the Distribution and Services Plan. K shares bear the expenses of a
Distribution Plan and Administrative and Shareholder Services Plan and have
exclusive voting rights with respect to such Plans. B shares also bear the
expenses of the deferred sales charge arrangements and any expense resulting
from such arrangements. The three classes also have different exchange
privileges, as described below. The net income attributable to A, B and K
shares and the dividends payable on A, B and K shares will be reduced by the
amount of (a) the Shareholder Service Fees attributable to A shares; (b) the
Distribution and Services Plan fees attributable to B shares and the
Distribution Plan fees and Administrative and Shareholder Services Plan fees
attributable to K shares, respectively and K shares and (d) the incremental
expenses associated with such plans. Lastly, B shares of the Funds held for 8
years will automatically convert into A shares of the Funds.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A shares. Each
class calculates its net asset value ("NAV") as follows:
NAV = (Value of Assets Attributable to the Class) - (Liabilities
Attributable to the Class )
----------------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of trading hours on the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days the
Exchange is open.
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<PAGE> 275
The Master Portfolio's and the Capital Income Fund's investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined in good faith by the Master Portfolio or Capital Income
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolio's
Board of Trustees or the Capital Income Fund's Board of Directors. Short-term
debt securities are valued at amortized cost, which approximates market value.
For further information about valuing securities, see the Statement of
Additional Information. For price and yield information call (800) 346-2087.
The per share net asset values of A, B and K shares will diverge due to
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A shares of Funds
begin at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
<TABLE>
<CAPTION>
Amount of Transaction As a % of As a % of Dealer's
offering net asset Reallowance
price value as a % of
offering price*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
*Dealer's reallowance may be changed periodically.
**See "Large Purchase Exemption" below for a description of contingent
deferred sales charge.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
LARGE PURCHASE EXEMPTION. To the extent that no other A share no-load
exemption is available, the foregoing schedule of sales loads does not apply to
purchases of A shares of $1,000,000 or more. If a customer who is not a
participant in Bank of America's 401(k) Daily Advantage(R) Retirement Plan
Program purchases $1,000,000 or more of A shares and redeems such shares, a
contingent deferred sales load will be imposed as follows:
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<PAGE> 276
<TABLE>
<CAPTION>
Number of Years Applicable Contingent
Elapsed Since Purchase Deferred Sales Load
---------------------- --------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a
contingent deferred sales charge is applicable to a redemption of such shares,
the calculation will be made in a manner that results in the lowest possible
rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value of
your holdings of shares above the total amount of payments for the purchase of
shares during the preceding 2 years; then of amounts representing the cost of
shares held beyond the applicable contingent deferred sales charge period; and
finally, of amounts representing the cost of the shares held for the longest
period of time. Although that no front end sales load will be paid on Large
Purchase Exemptions, the Distributor will compensate brokers whose customers
purchase shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B shares may be purchased at net
asset value per share without the imposition of a sales charge at the time of
purchase. The Funds' distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time
the shares are purchased. The proceeds of the contingent deferred sales
charges and the ongoing distribution and services plan fees described below are
used to reimburse the Funds' distributor for its expenses, including the
compensation of broker-dealers.
B shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no charge will
be assessed on shares derived from reinvestment of dividends or capital gains
distributions. B shares will convert to A shares on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund.
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<PAGE> 277
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge (as a
Number of Years percentage of dollar amount
Elapsed Since Purchase * subject to the charge)
- ---------------------- ---------------------------
<S> <C>
Less than one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0%
More than one, but less
than two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0%
More than two, but less
than three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than three, but less
than four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than four, but less
than five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
More than five, but less
than six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
After six years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
* The time period during which Pacific Horizon shares of the Pacific Horizon
Prime Fund acquired through an exchange are held is not included when the
amount of the contingent deferred sales charge is calculated.
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B shares above the total amount of payments for
the purchase of B shares during the preceding 6 years; then of amounts
representing the cost of B shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the B shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund, that in the third year after purchase the net asset
value per share is $12, and that during the three-year period you had acquired
10 additional shares through dividend reinvestment. If at such time you make
your first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the
applicable rate in the third year after purchase).
K SHARES. Bank of America will compensate Affiliated Brokers for its customers
who invested in a Fund and are participants in the 401(k) Daily Advantage(R)
Retirement Plan Program. The Affiliated Brokers will be compensated by Bank of
America at the rate of 1% of the first $1
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<PAGE> 278
million of combined Pacific Horizon Funds' and Time Horizon Funds' K shares in
each 401(k) Daily Advantage(R) Retirement Plan Program.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on
the following types of transactions:
. reinvestment of dividends or distributions;
. accounts of corporate/business retirement plans (such as 401(k), 403(b)(7),
457 and Keogh accounts) which are sponsored by a Fund's administrator and were
invested in a Fund as of July 1, 1996 so long as the account remains open on
the Company's books;
. accounts of employer-sponsored employee pension or retirement plans (other
than 403(b) plans) which make direct investments in a Fund and were invested in
a Fund as of July 1, 1996 so long as the account remains open on the Company's
books;
. 403(b) plans invested in a Fund as of December 7, 1995;
. any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for its
own account or for an account for which it is authorized to make investment
decisions (i.e., a discretionary account) other than purchases for 403(b)
plans; provided that investment advisers who have invested 403(b) plans in a
Fund on behalf of existing and new clients as of December 7, 1995 may continue
to invest on a no-load basis;
. accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
. any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
. any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open on
the Company's books;
. any purchase of shares, provided you were the beneficial owner of shares of a
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;
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<PAGE> 279
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of 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
a 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; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a sales load will apply to
subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to B shares is not charged on (1) exchanges described under
"Shareholder Services - Can I Exchange My Investment From One Fund to
Another?;" (2) redemptions in connection with minimum required distributions
from IRA accounts due to the shareholders reaching age 70 1/2; (3) redemptions
in connection with a shareholder's death or disability (as defined in the
Internal Revenue Code); and (4) involuntary redemptions as a result of an
account's net asset value remaining below $500 after sixty days' written
notice. In addition, no contingent deferred sales charge is charged on shares
acquired through the reinvestment of dividends or distributions.
RIGHTS OF ACCUMULATION. When buying A shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon 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
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to shares that were acquired with a sales load). Shares of any investment
portfolio of Time Horizon Funds (a "Time Horizon Fund"), an open-end investment
company managed by Bank of America, generally will not be included when
determining reduced sales loads under the rights of accumulation program;
except that you may aggregate your investment in Pacific Horizon Funds and Time
Horizon Funds in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
shares carrying a sales load of a 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 on A shares
carrying a sales load by means of a written Letter of Intent, which expresses
your non-binding commitment to invest in the aggregate $100,000 or more in
shares of any Pacific Horizon Fund within a period of 13 months, beginning up
to 90 days prior to the date of the Letter's execution. A Shares carrying a
sales load purchased during that period count as a credit toward completion of
the Letter of Intent. Any investments you make during the period receive the
discounted sales load based on the full amount of your investment commitment.
When your commitment is fulfilled, an adjustment will be made to reflect any
reduced sales load applicable to shares purchased during the 90-day period
prior to the submission of your Letter of Intent. Shares of Time Horizon Funds
will generally not be included when determining reduced sales loads under the
letter of intent program unless you are a participant in the 401(k) Daily
Advantage(R) Retirement Plan Program.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess
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investment. It will be in the form of additional shares credited to your
account at the then current offering price applicable to a single purchase of
the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent
will redeem an appropriate number of shares held in escrow to realize the
difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A, B, OR K SHARES?
The alternative sales arrangements of the Funds permit you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular
circumstances it is more advantageous to invest in A shares and incur an
initial sales charge and an ongoing shareholder service plan fee; invest in B
shares and to have the entire initial purchase price invested in a Fund with
the investment thereafter being subject to a contingent deferred sales charge
and ongoing distribution and services plan fees; or to invest in K shares and
incur neither a front-end sales charge or a contingent deferred sales charge.
K shares do incur fees under a Distribution Plan and an Administrative and
Shareholder Services Plan. K shares of the Fund, however, are available to:
(a) businesses or other organizations that participate in the 401(k) Daily
Advantage(R) Retirement Plan Program sponsored by Bank of America; and (b)
individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end sales
load if (i) such redemption occurred within 30 days prior to the purchase order
and (ii) such other open-end investment company was not distributed and advised
by Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the front-end sales charge alternative A
shares) because similar sales charge reductions are not available for purchases
under the contingent deferred sales charge alternative B shares). Moreover, A
shares would not be subject to ongoing distribution and services plan fees, as
described below. However, because front-end sales charges are deducted at the
time of purchase, such investors who pay a front-end sales charge would not
have all their funds invested initially. The Company will not accept any order
for B shares from an investor who is eligible to purchase A shares without a
sales load or from an investor eligible to purchase K shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in a Fund for an extended period of time might also
elect the front-end sales charge
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alternative because over time the accumulated continuing distribution and
services plan fees related to B shares may exceed the front-end sales charge
and ongoing shareholder service fees related to A shares. However, such
investors must weigh this consideration against the fact that not all their
funds will be invested initially. Furthermore, the ongoing distribution and
services plan fees may be offset to the extent any return is realized on the
additional funds initially invested under the contingent deferred sales charge
alternative.
Certain investors might determine it to be more advantageous to have all their
funds invested initially in B shares, although subject to continuing
distribution and services plan fees, and to a contingent deferred sales charge
for a 6-year period of time.
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<PAGE> 283
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Fund's transfer agent)
Contact them directly for Contact them directly for
instructions. instructions.
-----------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
-----------------------------------------------------------------------------------------------------------
BY MAIL Complete Account Application Mail all subsequent investments
and mail it with a check to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. File No. 54634
Los Angeles, CA 90074-4634
-----------------------------------------------------------------------------------------------------------
IN PERSON Deliver Account Application Deliver your payment directly to
and your payment directly to the address on the left.
BISYS Fund Services, Inc. the address on the left.
3435 Stelzer Road
Columbus, OH 43219-3035
-----------------------------------------------------------------------------------------------------------
BY WIRE Contact the Funds' transfer agent
at 800-346-2087 for complete
Initial purchases of shares into a new wiring instructions.
account may not be made by wire.
Instruct your bank to transmit
immediately available funds for
purchase of shares of a
particular Fund in your name.
Be sure to include your name and
your Fund account number.
Consult your bank for information on remitting funds by wire and
any associated bank charges.
</TABLE>
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<PAGE> 284
<TABLE>
<CAPTION>
TO BUY SHARES
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 of be used to make an initial minimum amount of $500 and the
money from your checking, NOW or bank purchase. maximum amount of $50,000 per
money market account) transaction as soon as
appropriate information regarding
your bank account has been
established on your Fund account.
This information may be provided
on the Account Application or in
a signature guaranteed letter of
instruction to the Transfer
Agent. Signature guarantees are
discussed under "How to Sell
Shares."
Call 800-346-2087 to make your
purchase.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at
its Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order
and required funds to the Transfer Agent on a timely basis in accordance with
the procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's
business day, the
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<PAGE> 285
order will be based upon the next determined purchase price. The Company may
from time to time in its sole discretion appoint one or more entities as the
Funds' agent to receive irrevocable purchase and redemption orders and to
transmit them on a net basis to the Transfer Agent. In these instances orders
received by the entity by 4:00 p.m. Eastern time on a business day will be
effected as of 4:00 p.m. Eastern time that day if the order is actually
received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or K
shares. Certificates for shares will no longer be issued.
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
America and Service Organizations may also impose minimum customer account and
other requirements in addition to those imposed by a Fund. If you purchase or
redeem shares directly from a Fund, you may do so without incurring any charges
other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
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
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<PAGE> 286
below, you must arrange with Bank of America or your Service Organization for
delivery of the required application(s) to the Transfer Agent.
-44-
<PAGE> 287
<TABLE>
<CAPTION>
TO SELL SHARES
- --------------------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- --------------------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
- --------------------------------------------------------------------------------------------------------------------
BY MAIL
<S> <C>
Pacific Horizon Asset Send a signed, written request (each owner, including each joint owner, must sign)
Allocation Fund or Capital to the Transfer Agent.
Income Fund
c/o Pacific Horizon Funds, If you hold stock certificates for the shares being redeemed, make sure to endorse
Inc. them for transfer, have your signature on them guaranteed by your bank or another
P.O. Box 80221, guarantor institution (as described in the section entitled "What Kind Of Paperwork
Los Angeles, California Is Involved In Selling Shares?") and include them with your request.
90080-9909
- --------------------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver your signed, written request (each owner, including each joint owner, must
3435 Stelzer Road sign) and any certificates (endorsed for transfer and signature guaranteed as
Columbus, OH 43219-3035 described in the section entitled "What Kind Of Paperwork Is Involved In Selling
Shares?") to the address on the left.
- --------------------------------------------------------------------------------------------------------------------
BY WIRE As soon as appropriate information regarding your bank account has been established
on your Fund account, you may write, telephone or telegraph redemption requests to
the Transfer Agent, and redemption proceeds will be wired in federal funds to the
commercial bank you have specified. Information regarding your bank account may be
provided on the Account Application or in a signature guaranteed letter of
instruction to the Transfer Agent. Signature guarantee requirements are discussed
in the section entitled "What Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day after your request and
any other necessary documents have been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on the Account Application
or in a subsequent written notice to the Transfer Agent that you do not wish to have
them.
Requests must be for at least $1,000 and may be subject to limits on frequency and
amount.
Wire Privileges may be modified or suspended at any time, and are not available for
shares issued in certificate form.
Contact your bank for information on any charges imposed by the bank in connection
with receipt of redemptions by wire.
</TABLE>
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<PAGE> 288
<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of $50,000 per transaction)
(a service permitting by telephone after appropriate information regarding your bank account has been
transfers of money to your established on your Fund account. This information may be provided on the Account
checking, NOW or bank money Application or in a signature guaranteed letter of instruction to the Transfer
market account) Agent. Signature guarantee requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent that you do not
wish to have them.
You should refer to the "Shareholder Services" section for additional important
information about the TeleTrade Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
AUTOMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO
THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A shares are redeemed (except
pursuant to the Large Purchase Exemption described above), if you purchase
shares through Bank of America or a Service Organization, they may charge a fee
for providing certain services in connection with investments in Fund shares.
When you redeem your B shares within 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund), you may be subject to a contingent deferred sales charge as
described above.
The Funds impose no charge when K shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
The contingent deferred sales charge will not be imposed upon such involuntary
redemptions.
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<PAGE> 289
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A,
B or K shares. If you own both A or K and B shares of a Fund, A or K shares
will be redeemed first unless you request otherwise. Certain types of
redemption requests as well as all endorsed share certificates will need to
include a signature guarantee. Signature guarantees must accompany redemption
requests for (i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of record
on the Company's books, or (iii) an amount of $50,000 or less if the address of
record has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds, within 90 days of
your redemption trade date without paying a sales load. Upon such a
reinvestment, the Funds' distributor will credit to your account any contingent
deferred sales charge imposed on any redeemed B shares or any Pacific Horizon
shares of the Pacific Horizon Prime Fund. Shares so reinvested will be
purchased at a price equal to the net asset
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<PAGE> 290
value next determined after the Transfer Agent receives a reinstatement request
and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Asset Allocation Fund are entitled to dividends and
distributions arising from the net investment income and net realized gains, if
any, earned on investments in the Master Portfolio which are allocable to that
Fund. Dividends from each Fund's net income are declared and paid as a
dividend on a quarterly basis and net realized capital gains (if any) are
distributed at least annually. Dividends are paid no later than the fifth
business day of the month following the close of the period for which it is
declared. Dividends from net investment income payable to shareholders who
redeem all their shares of a fund will be paid in cash within five business
days after such shares are redeemed. Distributions from net realized capital
gains payable to shareholders who redeemed all their shares of a Fund will be
paid in cash within ten days after the close of the period for which it is
declared.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, at P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
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<PAGE> 291
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING
YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others
described in this Prospectus may not be available for, or may have different
conditions imposed on them than as described in this Prospectus with respect
to, certain clients of Bank of America and particular Service Organizations.
Consult these entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to B shares 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 Funds' distributor at 800-332-3863. Investors should also read the
IRA Disclosure Statement and the Bank Custodial Agreement for further details
on eligibility, service fees and tax implications, and should consult their tax
advisers.
Additionally, K shares are available to businesses and other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America.
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A shares may be exchanged for other A shares, B shares may be
exchanged for other B shares and K shares may be exchanged for other K shares.
NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING A SHARES PURCHASED
WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME
HORIZON FUNDS. A AND B SHARES MAY BE EXCHANGED FOR OTHER A AND B SHARES,
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<PAGE> 292
RESPECTIVELY, OR FOR PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND
WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE TIME THE
EXCHANGE IS MADE. IN ADDITION, PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON
PRIME FUND THAT WERE ACQUIRED THROUGH AN EXCHANGE OF B SHARES MAY BE EXCHANGED
FOR B SHARES WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE
TIME THE EXCHANGE IS MADE. IN DETERMINING THE HOLDING PERIOD FOR CALCULATING
THE CONTINGENT DEFERRED SALES CHARGE PAYABLE UPON REDEMPTION OF B SHARES, THE
HOLDING PERIOD OF THE SHARES ORIGINALLY HELD WILL BE ADDED TO THE HOLDING
PERIOD OF THE SHARES ACQUIRED THROUGH THE EXCHANGE UNLESS THE SHARES ACQUIRED
THROUGH THE EXCHANGE ARE PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME
FUND. THE TIME PERIOD DURING WHICH PACIFIC HORIZON SHARES OF THE PACIFIC
HORIZON PRIME FUND ACQUIRED THROUGH AN EXCHANGE ARE HELD IS NOT INCLUDED WHEN
THE AMOUNT OF THE CONTINGENT DEFERRED SALES CHARGE IS CALCULATED.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the
cost of the shares being redeemed.
An investment in a Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding
the funds into which you wish to make an exchange from your Service
Organization or the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below 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 Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice
of any material modification to or termination of the Exchange Privilege will
be given to shareholders except where notice is not required under the
regulations of the Securities and Exchange Commission.
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<PAGE> 293
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 MAYN BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will only be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemptions) from any person representing
himself or herself to be you and reasonably believed by the Transfer Agent to
be genuine. Neither the Company nor any of its service contractors will be
liable for any loss or expense for acting upon telephone instructions that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Company will use such procedures as are
considered reasonable, including requesting certain personal or account
information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by
mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
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<PAGE> 294
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application, or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
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<PAGE> 295
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load. Use of this Plan may also be disadvantageous for B shares
due to the potential need to pay a contingent deferred sales charge.
CAN MY DIVIDENDS FROM A FUND BE INVESTED
IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request
to the Transfer Agent. Participants in the Directed Distribution Plan are
subject to the minimum initial investment requirements of the particular fund
involved. Investments will be made at a price equal to the net asset value of
the purchased shares next determined after receipt of the distribution proceeds
by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF
YOU RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
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Note: Death or legal incapacity will terminate participation in the Program.
You may also choose at any time to terminate your participation by notifying
the appropriate federal agency in writing. Further, a Fund may terminate your
participation after serving 30 days' notice.
THE BUSINESS OF THE FUNDS
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."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolios. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries.
In its separate advisory agreements with Master Trust and the Company
(collectively, the "Advisory Agreements"), Bank of America has agreed to manage
the Portfolios' investments and to be responsible for, place orders for, and
make decisions with respect to, all purchases and sales of the Portfolios'
securities. The Advisory Agreements also provide that Bank of America may, in
its discretion, provide advisory services to the Portfolios through its own
employees or employees of 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 for the acts and omissions of the sub-adviser.
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The Asset Allocation Committee of Bank of America's Global Investment
Management Division establishes general parameters for the selection of
securities for the Master Portfolio. Robert Pyles, Director of Research and
Senior Portfolio Manager of BofA Capital Management, Inc. (a wholly-owned
subsidiary of Bank of America), and Steven L. Vielhaber are primarily
responsible for the selection of particular securities for the equity and
fixed-income portions, respectively, of the Master Portfolio. Mr. Pyles has
been the Master Portfolio's manager since November 1994 and has been associated
with Seattle-First National Bank, a wholly-owned subsidiary of Seafirst
Corporation, which is controlled by BankAmerica Corporation (both of which are
bank holding companies), since 1976. Mr. Pyles currently manages various
common trust, employee benefit and individual accounts for Bank of America.
Mr. Vielhaber has been the Asset Allocation Fund's manager since April 1994 and
has been employed by Bank of America since 1993. Prior thereto, Mr. Vielhaber
had been Director of Fixed Income Marketing at Dimensional Fund Advisers since
1990, and Vice President and Manager of Investments at Gibraltar Savings from
1986 to 1990.
Ed Cassens, Vice President and Senior Portfolio Manager of BofA Capital
Management, Inc. is primarily responsible for the day-to-day investment
activities of the Capital Income Fund. Mr. Cassens has been the Capital Income
Fund's manager since November 1994 and has been associated with Seattle-First
National Bank since 1966. Mr. Cassens currently manages Bank of America's EBT
Convertible Securities Trust and Convertible Securities Common Trust Fund and
has managed the Seafirst Equity Income Common Trust Fund since 1987.
For the services provided and expenses assumed under the advisory agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.55% and
0.45% of the Master Portfolio's and Capital Income Fund's average daily net
assets, respectively. The fee with respect to the Master Portfolio is higher
than that paid by most other investment companies but is comparable to the fees
paid by other investment companies with similar investment objectives and
policies. These amounts may be reduced pursuant to undertakings by Bank of
America. (See the information below under "Fee Waivers"). During the fiscal
year ended February 29, 1996, Bank of America waived a portion of its fee as
the Master Portfolio's investment adviser. For the same period, the Capital
Income Fund paid Bank of America advisory fees at an effective annual rate of
_____% of the Capital Income Fund's net assets, and Bank of America waived
advisory fees at an effective annual rate of _____% of the Capital Income
Fund's net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution and Services Plan, Distribution
Plan and Administrative and Shareholder Services Plan as described under "Plan
Payments," below and may receive fees charged directly to their accounts in
connection with investments in shares of the Funds.
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ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds
and the Master Portfolio. Concord is an indirect, wholly-owned subsidiary of
The BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master Portfolio; provide a facility to receive purchase and redemption
orders; provide statistical and research data, data processing services and
clerical services; coordinate the preparation of reports to shareholders of the
Funds, interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolio; calculate the net asset value of
the Funds and the Master Portfolio 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
Funds and the Master Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Asset Allocation Fund at the annual rate of 0.15%
of such Fund's average daily net assets, and an administration fee from the
Master Portfolio at the annual rate of 0.05% of such Portfolio's average daily
net assets, and an administration fee from the Capital Income Fund at the
annual rate of .20% of such Fund's average net assets. These amounts may be
reduced pursuant to undertakings by Concord. (See the information below under
"Fee Waivers"). During the fiscal year ended February 29, 1996, Concord waived
a portion of its fee as administrator for both the Asset Allocation Fund and
the Master Portfolio. For the same period, the Capital Income Fund paid
Concord administration fees at an effective annual rate of _____% of such
Fund's net assets.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") under which PFPC, and an
off-shore affiliate of PFPC, (with respect to the Asset Allocation Fund and the
Master Portfolio) and The Bank of New York ("BONY") (with respect to the
Capital Income Fund) perform certain of the services listed above e.g.,
calculating the net asset value of the Funds and the Master Portfolio,
calculating dividends and capital gains distributions to shareholders, and
maintaining the books and records of the Funds and the Master Portfolio. In
connection with the provision of these services, the Asset Allocation Fund and
the Master Portfolio bear all fees and expenses charged by PFPC, and the
Capital Income Fund bears all fees and expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect wholly-owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, Ohio 43219.
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CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Asset Allocation Fund and the Master Portfolio.
BONY, 90 Washington Street, New York, New York 10286, serves as the Custodian
of the Capital Income Fund. BISYS Fund Services, Inc. is the transfer and
dividend disbursing agent for each of the Funds and is located at 3435 Stelzer
Road, Columbus, Ohio 43219- 3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses
in connection with the performance of their services and the Funds and Master
Portfolio bear the expenses incurred in their operations. Expenses can be
reduced by voluntary fee waivers and expense reimbursements by Bank of America
and other service providers, as well as by certain expense limitations imposed
by state securities regulators. Periodically, during the course of each Fund's
fiscal year, Bank of America, Concord and/or the Distributor may prospectively
choose not to receive fee payments and/or may assume certain expenses of the
Funds or the Master Portfolio expenses as a result of competitive pressures and
in order to preserve and protect the business and reputation of Concord and
Bank of America. However, the service providers retain the ability to
discontinue such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR
ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO
CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE
OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code, as amended (the
"Code"), for the current taxable year. As a result of this qualification, each
Fund generally is not required to pay federal income taxes to the extent its
earnings are distributed in accordance with the Code. The Funds intend to
qualify for this special tax treatment as long as it is in the best interest of
their 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
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income tax purposes. As such, the Master Portfolio is not subject to tax and
the Asset Allocation 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 Asset
Allocation Fund's status as a regulated investment company is dependent on,
among other things, the Master Portfolio's continued qualification as a
partnership (or other pass-through entity) for federal income tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. These
distributions are eligible for the dividends received deduction allowed to
corporations to the extent of the total qualifying dividends received by the
Fund from domestic corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be
taxed as a long-term capital gain no matter how long you have held Fund shares.
Such distributions are not eligible for the dividends received deduction
allowed to corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of a Fund on or just before the record
date of a dividend, you should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
you.
You may realize a taxable 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 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.
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STATE AND LOCAL TAXES
A portion of the dividends that you receive may be derived from investments in
U.S. Government obligations. These dividends may not be entitled to the same
exemptions from state and local income taxes that would have been available if
you had purchased U.S. Government obligations directly. Because state and
local taxes may be different than the federal taxes described above, you should
consult your tax adviser regarding these taxes.
MEASURING PERFORMANCE
THE FUNDS' PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL
RETURN, AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE
INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE
FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of a Fund over a
specified 30-day period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield
may be quoted in advertisements or in communications to shareholders. Both
methods of calculating total return assume dividends and capital gain
distributions made by a Fund during the period are reinvested in Fund shares,
and include the maximum front-end sales charge for A shares and the applicable
contingent deferred sales charge for B shares.
The Funds 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 Funds calculate their yield by dividing their net income per share (which
may differ from the net income per share used for accounting purposes) during a
30-day (or one month) period by the maximum offering price per share on the
last day of the measuring period, and then annualizing the result on a
semi-annual basis. The 30-day or one month measuring period will be identified
along with any yield quotation to which it relates.
The Funds may compare their total return and yield to that of other mutual
funds with similar investment objectives and to bond and other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance.
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For example, the Funds' total return may be compared to data prepared by:
Lipper Analytical Services, Inc.; Donoghue's Money Fund Report; Mutual Fund
Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies Services;
or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local
or regional publications, may also be used in comparing Fund performance. A
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price
Index. (A complete listing of the indices, rankings and publications discussed
above is contained in the Statement of Additional Information).
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is
generally a function of the kind and quality of the instruments in a portfolio,
portfolio maturity, operating expenses and market conditions. Not included in
a Fund's calculations of total return are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON
OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE
PER SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES
INTO ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class F Common Stock, 150 million shares of Class F - Special Series 3 Common
Stock and 50 million shares of Class F - Special Series 5 Common Stock,
representing interests in the Capital Income Fund: 40 million shares of Class
O Common Stock, 60 million shares of Class O - Special Series 3 Common Stock
and 50 million shares of Class O - Special Series 5 Common Stock, representing
interests in the Asset Allocation Fund and additional classes of shares
representing interests in other investment portfolios of the Company. Class F
and Class O Common Stock are the "A" shares, Class F - Special Series 3 Common
Stock and Class O - Special Series 3 Common Stock are the "B" shares and Class
F - Special Series 5 Common Stock and Class O - Special Series 5 Common Stock
are the "K" shares. The Board of Directors may similarly
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classify or reclassify any class of shares (including unissued Class O Common
Stock, Class O - Special Series 3 Common Stock, Class O - Special Series 5
Common Stock, Class F Common Stock, Class F - Special Series 3 Common Stock or
Class F - Special Series 5 Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Funds are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the particular Fund on liquidation. Fund shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by
law (or when permitted by the Board of Directors). Only A shares will vote on
matters relating solely to A shares, B shares will vote on matters relating
solely to B shares and K shares will vote on matters (such as the distribution
and services plan described below) relating solely to K shares. The Funds do
not presently intend to hold annual meetings of shareholders to elect directors
or for other business unless and until such time as less than a majority of the
directors holding office has been elected by the shareholders. At that time,
the directors then in office will call a shareholders' meeting for the election
of directors. Under certain circumstances, however, shareholders have the
right to call a shareholder meeting to consider the removal of one or more
directors. Such meetings will be held when requested by the shareholders of 10%
or more of the Company's outstanding shares of common stock. The Funds will
assist in shareholder communications in such matters to the extent required by
law and the Company's undertaking with the Securities and Exchange Commission.
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PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR A
SHARES, A DISTRIBUTION AND SERVICES PLAN FOR B SHARES AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICE PLAN
FOR K SHARES.
The Company has adopted a Shareholder Service Plan for A shares, under which
the A shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has also
adopted a Distribution and Services Plan pursuant to Rule 12b-1 under the 1940
Act, under which the B shares of each Fund reimburse the Distributor for
services rendered and costs incurred in connection with distribution of the B
shares and for shareholder servicing fees the Distributor pays to Service
Organizations. The Company has adopted a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act under which the K shares of a Fund reimburse the
Distributor for services rendered and costs incurred in connection with
distribution of the K shares. The Company has also adopted an Administrative
and Shareholder Services Plan for K Shares, under which K shares of a Fund
reimburse the Distributor for administrative and shareholder servicing fees the
Distributor pays to Service Organizations.
SHAREHOLDER 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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. During the
fiscal year ended February 29, 1996, the Distributor waived all payments under
the Plan with respect to the Asset Allocation Fund. For the same period, the
Capital Income Fund made payments under the Plan at the effective annual rate
of 0.25% of the Capital Income Fund's average net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are
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accrued. No interest, carrying or other finance charge is borne by a 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.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, each Fund pays
the Distributor for distribution expenses primarily intended to result in the
sale of such Fund's B and K shares and with respect to B shares, for
shareholder servicing expenses. Such distribution expenses include expenses
incurred in connection with advertising and marketing each Fund's B and K
shares; payments to Service Organizations for assistance in connection with the
distribution of B and K shares; and expenses incurred in connection with
preparing, printing and distributing prospectuses for the Funds (except those
used for regulatory purposes, for solicitation or distribution to existing or
potential A shareholders, or for distribution to existing B and K shareholders
of the Funds) and in implementing and operating the Distribution and Services
Plan and Distribution Plan.
Shareholder servicing expenses under the Distribution and Services Plan and
Administrative and Shareholder Services Plan include, but are not limited to,
expenses incurred in connection with shareholder services provided by the
Distributor and payments to Service Organizations for the provision of support
services with respect to the beneficial owners of B and K shares, such as
assisting clients in processing exchange and redemption requests and in
changing dividend options and account descriptions and responding to client
inquiries concerning their investments. Administrative services under the
Administrative Services Plan include, but are not limited to, expenses incurred
in connection with administrative services provided by the Distributor and
payments to Service Organizations for the provision of administrative services
to beneficial owners of K shares, such as establishing and maintaining accounts
and records relating to their clients who invest in K shares, providing
information to the Fund necessary for accounting or sub-accounting and
providing information periodically to clients showing their position in K
shares.
Under the Distribution and Services Plan and Distribution Plan, payments by a
Fund for distribution expenses may not exceed 0.75% (annualized), of the
average daily net assets of such Fund's B or K shares. Under the Distribution
and Services Plan and Administrative and
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Shareholder Services Plan, payments for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's B or K
shares. Under the Administrative and Shareholder Services Plan, payments for
administrative servicing expenses may not exceed 0.75% (annualized) of the
average daily net assets of a Fund's K shares. The total of all 12b-1 fees,
shareholder service fees and administrative service fees may not exceed, in the
aggregate, the annual rate of 1.00% of the average daily net assets of a Fund's
K shares. These amounts may be reduced pursuant to undertakings by the
Distributor. Payments for distribution expenses under the Distribution and
Services Plan and Distribution Plan, are subject to Rule 12b-1 under the 1940
Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
____________________________________________________
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APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa - judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa - judged to be of high quality by all
standards; A - deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa - considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C - protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is considered to be extremely strong. Debt
rated "AA" is considered to have a very strong capacity to pay interest and to
repay principal and differs from the highest rated issues only in small degree.
Debt rated "A" is considered to have a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and to repay
principal for debt in this category than in higher rated categories. Debt
rated "BB," "B," "CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions. Debt
rated "CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears. The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation. Moody's commercial paper ratings are opinions of the ability of
issuers to repay
A-1
<PAGE> 308
punctually promissory obligations not having an original maturity in excess of
9 months. The rating "Prime-1" is the highest commercial paper rating assigned
by Moody's. Issuers rated "Prime-1" (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
A-2
<PAGE> 309
PACIFIC HORIZON FUNDS, INC.
Blue Chip Fund
and
Aggressive Growth Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Measuring Performance
4. General Description of Registrant . . . Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund . . . . . . . . . The Business of the Funds
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . How to Buy Shares;
Shareholder Services; The
Business of the Funds; Plan
Payments; Measuring Performance
8. Redemption or Repurchase . . . . . . . . How to Sell Shares;
Shareholder Services;
Plan Payments
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 310
PROSPECTUS
____________, 1996
PACIFIC HORIZON BLUE CHIP FUND
PACIFIC HORIZON AGGRESSIVE GROWTH FUND
Investment Portfolios Offered by Pacific Horizon Funds, Inc.
The PACIFIC HORIZON BLUE CHIP FUND (the "Blue Chip Fund") is a diversified
mutual fund whose investment objective is long-term capital appreciation
through investments in blue chip stocks.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE BLUE CHIP FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY (THE "MASTER PORTFOLIO" AND, COLLECTIVELY WITH THE
AGGRESSIVE GROWTH FUND, THE "PORTFOLIOS") HAVING THE SAME INVESTMENT OBJECTIVE
AS THAT OF THE BLUE CHIP FUND. THE BLUE CHIP FUND WILL PURCHASE SHARES OF THE
MASTER PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE OF THE BLUE CHIP FUND
WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE MASTER PORTFOLIO'S
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. SEE
"OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON
PAGE __ FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
The PACIFIC HORIZON AGGRESSIVE GROWTH FUND (the "Aggressive Growth Fund" and,
collectively with the Blue Chip Fund, the "Funds") is a diversified mutual fund
whose investment objective is to maximize capital appreciation. In seeking its
investment objective, the Aggressive Growth Fund invests primarily in common
stocks and securities convertible into common stocks. Income received is
incidental to the Aggressive Growth Fund's objective of capital appreciation.
The Aggressive Growth Fund may be suited for investors who seek long-term
capital appreciation and can assume above average investment risk.
This Prospectus describes three classes of shares from which investors may
choose. A shares are sold with a front-end sales charge. B shares are sold
with a contingent deferred sales charge. K shares are not subject to either a
front-end sales charge or a contingent deferred sales charge. The Funds are
offered by Pacific Horizon Funds, Inc. (the "Company"), an open-end, series
management investment company. Bank of America National Trust and Savings
Association ("Bank of America" or the "investment adviser") serves as the
Portfolio's investment adviser. Based in San Francisco, California, Bank of
America and its affiliates have over $__ billion under management, including
over $__
1
<PAGE> 311
billion in mutual funds. This Prospectus describes concisely the information
about the Funds and the Company that you should know before investing. Please
read it carefully and retain it for future reference.
More information about the Funds is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated __________, 1996 and is
incorporated by reference into this Prospectus.
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. Investment in the Funds involves
investment risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is part of a Registration Statement that has been filed with
the Securities and Exchange Commission in Washington, D.C. under the Securities
Act of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Funds' shares, other than
as contained in this Prospectus and the Funds' official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Funds. 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.
2
<PAGE> 312
CONTENTS
<TABLE>
<S> <C>
EXPENSE SUMMARY
FINANCIAL HIGHLIGHTS
FUND INVESTMENTS
INVESTMENT OBJECTIVES
TYPES OF INVESTMENTS
FUNDAMENTAL LIMITATIONS
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
HOW ARE SHARES PRICED?
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
HOW CAN I BUY SHARES?
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED
SHARES?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES
CAN I USE THE FUND IN MY RETIREMENT PLAN?
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
WHAT IS TELETRADE?
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
CAN I ARRANGE PERIODIC WITHDRAWALS?
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
SERVICE PROVIDERS
TAX INFORMATION
MEASURING PERFORMANCE
DESCRIPTION OF SHARES
PLAN PAYMENTS
</TABLE>
3
<PAGE> 313
<TABLE>
<S> <C>
Distributor: Investment Adviser:
Concord Financial Group, Inc. Bank of America National Trust
3435 Stelzer Road and Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
</TABLE>
4
<PAGE> 314
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer three classes of shares. A shares are
offered at net asset value plus a front-end sales charge (see page __ of the
Prospectus for an explanation of net asset value per share) and are subject to
a shareholder servicing fee. B shares are offered at net asset value without a
front-end sales charge but are subject to a contingent deferred sales charge
plus distribution and shareholder servicing fees. K shares are offered at net
asset value with neither a front-end sales charge nor a contingent deferred
sales charge, but are subject to distribution, administrative servicing and
shareholder servicing fees. B shares of a Fund held for 8 years will convert
to A shares of a Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by
the Master Portfolio which are allocable to the Blue Chip Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, distribution (in the case of B and K shares
only), shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A, B and K shares and their operating expenses (including the operating
expenses of the Master Portfolio which are allocable to the Blue Chip Fund)
expected to be incurred during the current fiscal year. This information has
been restated to assume that current fees had been in effect during the
previous fiscal year. Actual expenses may vary. A hypothetical example based
on the summary is also shown.
Blue Chip Fund
<TABLE>
<CAPTION>
A Shares B Shares K Shares
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds, whichever
is lower) None(1) 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+ % % %
---- ---- ----
12b-1 Fee* 0% 75% 0%
Administrative Service Fee* 0% 0% .75%
Shareholder Service Fee* 0.25% 0.25% 0.25%
---- ---- ----
All Other Expenses (After Expense
Reimbursements)+ % % %
---- ---- ----
Total Operating Expenses (After Fee Waivers
and Expense Reimbursements)+ % % %
==== ==== ====
</TABLE>
- --------------------------------
(1) There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption").
Unless you are a participant in Bank of America's 401(k) Daily
Advantage(R) Retirement Plan Program, A shares purchased under the
Large Purchase Exemption are subject to a contingent deferred sales
charge
5
<PAGE> 315
of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A shares cannot be
purchased under the Large Purchase Exemption if there is another
no-load exemption available. Accordingly, A shares purchased under
another no-load exemption are not subject to a contingent deferred
sales charge. Although no front-end sales load will be paid on shares
purchased under the Large Purchase Exemption, the Distributor will
compensate brokers whose customers purchase such shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc.
("SISI") and BA Investment Services, Inc. ("BAIS") (BAIS and SISI are
collectively referred to herein as "Affiliated Brokers") for its
customers who have invested in a Fund and are participants in the
401(k) Daily Advantage(R) Retirement Plan Program. The Affiliated
Brokers will be compensated by Bank of America at the rate of 1.00% of
the first $1 million of combined Pacific Horizon Funds' and Time
Horizon Funds' K shares in each 401(k) Daily Advantage (R) Retirement
Plan Program.
+ Management intends to waive fees and reimburse certain "Other
Expenses" on behalf of the Blue Chip Fund so that "Total Operating
Expenses" for the Blue Chip Fund (other than interest, taxes,
brokerage commissions and other portfolio transaction expenses,
capital expenditures and extraordinary expenses) will not ___%, ___%
and ___% of the average net assets of the Blue Chip Fund's A, B and K
shares, respectively. Absent fee waivers and/or expense
reimbursement, management fees would be ___% of the average net
assets, actual "Other Expenses" for the Asset Allocation Fund's A, B
and K shares would be ___%, ___% and ___%, respectively, of average
net assets (annualized); and actual "Total Operating Expenses" for the
Asset Allocation Fund's A, B and K shares would be ___%, ___% and ___%
of average net assets (annualized), respectively.
* The total of all 12b-1 fees, administrative services fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average net assets of K shares. Because of the
Rule 12b-1, administrative and/or shareholder service fees paid by the
Blue Chip Fund as shown in the above table, long-term B and K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities Dealers, Inc. For a further description of shareholder
transaction expenses and the Blue Chip Fund's operating expenses, see
the sections entitled "Shareholder Guide," "The Business of the Funds"
and "Plan Payments" below.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here's how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares(1) $ $ $ $
B shares
Assuming complete
redemption at
end of period(2) $ $ $ $(3)
Assuming no redemption $ $ $ $(3)
K shares $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2. Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
6
<PAGE> 316
Aggressive Growth Fund
<TABLE>
<CAPTION>
A Shares B Shares K Shares
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends None None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase price
or redemption proceeds, whichever is lower) None(1) 5.00% None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees % % %
12b-1 Fee* 0% 0.75% 0%
Administrative Service Fee* 0% 0% 0.75%
Shareholder Service Fee* 0.25% 0.25% 0.25%
---- ---- ----
12b-1 and Shareholder Service Fees* 0.25% 1.00% 0.75%
All Other Expenses % % %
---- ----- -----
Total Operating Expenses % % %
==== ===== =====
</TABLE>
- -----------------------------------------
(1) There is no front-end sales load on combined purchases of A shares of
the Company of $1,000,000 or more ("Large Purchase Exemption").
Unless you are a participant in Bank of America's 401(k) Daily
Advantage(R) Retirement Plan Program, A shares purchased under the
Large Purchase Exemption are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and
two years after purchase. The contingent deferred sales charge is
paid to Concord Financial Group, Inc. (the "Distributor"). A shares
cannot be purchased under the Large Purchase Exemption if there is
another no-load exemption available. Accordingly, A shares purchased
under another no-load exemption are not subject to a contingent
deferred sales charge. Although no front-end sales load will be paid
on shares purchased under the Large Purchase Exemption, the
Distributor will compensate brokers whose customers purchase such
shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Affiliated Brokers for its customers
who have invested in a Fund and are participants in the 401(k) Daily
Advantage(R) Retirement Plan Program. The Affiliated Brokers will be
compensated by Bank of America at the rate of 1.00% of the first $1
million of combined Pacific Horizon Funds' and Time Horizon Funds' K
shares in each 401(k) Daily Advantage(R) Retirement Plan Program.
* The total of all 12b-1 fees, administrative services fees and
shareholder service fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average net assets of K shares. Because of the
Rule 12b-1, administrative and/or shareholder service fees paid by the
Aggressive Growth Fund as shown in the above table, long-term B and K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities Dealers, Inc. For a further description of shareholder
transaction expenses and the Aggressive Growth Fund's operating
expenses, see the sections entitled "Shareholder Guide," "The Business
of the Funds" and "Plan Payments" below.
EXAMPLE: Assume the Aggressive Growth Fund's annual return is 5% and its
operating expenses are the same as those stated above. For every $1,000 you
invest, here's how much you would have paid in total expenses if you closed
your account after the number of years indicated:
7
<PAGE> 317
<TABLE>
<CAPTION>
After 1 year After 3 years After 5 years After 10 years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A shares1 $ $ $ $
B shares
Assuming complete
redemption at
end of period2 $ $ $ $3
Assuming no redemption $ $ $ $3
K shares $ $ $ $
</TABLE>
1. Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2. Assumes deduction at redemption of maximum applicable contingent
deferred sales charge.
3. Assumes conversion of B shares to A shares after 8 years.
___________________________________________
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% and
0.60% of the Master Portfolio's and the Aggressive Growth Fund's
respective average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% and 0.05% of
the Blue Chip Fund's and the Master Portfolio's respective average
daily net assets and 0.30% of the Aggressive Growth Fund's average
daily net assets.
Currently, the most restrictive expense limitation limits each Fund's aggregate
annual expenses (including management fees and the Blue Chip Fund's pro rata
share of such expenses of the Master Portfolio) to 2.5% of the first $30
million of each Fund's average daily net assets, 2% of the next $70 million and
1.5% of each Fund's remaining average net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Blue Chip Fund and the Master Portfolio in which the Blue Chip
Fund's assets are invested will be less than or approximately equal to the
expenses which the Blue Chip Fund would incur if the Company retained the
services of an investment adviser for the Blue Chip Fund and the assets of the
Blue Chip Fund were invested directly in the type of securities held by the
Master Portfolio. Further, the Directors believe that the shareholders of the
Blue Chip Fund may participate in the ownership of a larger portfolio of
securities than could be achieved directly by the Blue Chip Fund. There can be
no assurance, however, that such will be the case or that any economies of
scale that might occur if
8
<PAGE> 318
other investors acquire shares of the Master Portfolio will be realized,
inasmuch as the Company is not aware of any other potential investor in the
Master Portfolio.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge, with respect to A shares, or to
have the entire initial purchase price invested in the Funds with the
investment thereafter being subject to an annual distribution and services plan
charge and a contingent deferred sales charge upon redemption within the first
six years of investment, with respect to B shares. K shares are not subject to
either a front- end sales charge or a contingent deferred sales charge, but do
incur fees under a Distribution and Services Plan. K shares, however, are
available for investment by: (a) businesses or other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America; and (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates. See the section entitled "How to Buy
Shares" below.
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results for
the Funds for the periods indicated. During the periods shown, the Funds did
not offer B or K shares. Actual investment results of the B and K shares may
be different. The information for each of the five fiscal years in the five
year period ended February 29, 1996 has been audited by ____________________,
independent accountants, whose unqualified report on the financial statements
containing such information is incorporated by reference in the Statement of
Additional Information.
The financial statements for the Aggressive Growth Fund for each of the three
years in the period ended February 28, 1989, to which the financial highlights
for those years relates, was audited by other independent accountants whose
report dated April 20, 1989 expressed an unqualified opinion on such financial
statements.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Funds is
available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
9
<PAGE> 319
Blue Chip Fund
Selected Data for an A share of Common Stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
For the year For the year For the period
ended ended January 13, 1994
February 29, February 28, (commencement of operations)
1996 1995 through February 28, 1994
---- ---- -------------------------
<S> <C> <C> <C>
$
Net asset value per share, beginning of
period $14.97 $15.00
------ ------
Income From Investment Operations:
Net investment income 0.31 0.02
Net realized and unrealized gain (loss)
on securities 0.80 (0.05)
----- ------
Total gain (loss) from investment
operations 1.11 (0.03)
Less Dividends:
Dividends from net investment income (0.27) -
------ -----
Net change in net asset value 0.84 (0.03)
----- ------
Net asset value per share, end of period $ $15.81 $14.97
===== ===== ======
Total Return* % 7.60% (0.20)%
Ratios/Supplemental Data: $
Net assets, end of period (000) $6,002 $1,180
Ratio of expenses to average net assets** % 0.00% 0.00%+
Ratio of net investment income to average**
net assets % 2.46% 2.92%+
</TABLE>
_______________________________________________________
* The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum 4.50%
sales charge on A shares.
** Reflects the Blue Chip Fund's proportionate share of the Master
Portfolio's expenses, the Master Portfolio's fee waivers and expense
reimbursements by the Master Portfolio's Investment Adviser and
Administrator and fee waivers and expense reimbursements by the Blue
Chip Fund's Administrator and Distributor. Such fee waivers and
expense reimbursements had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of net
investment income to average net assets by ____%, 6.32% and 55.00%
(annualized) for the periods ended February 29, 1996, February 28,
1995 and February 28, 1994, respectively.
+ Annualized.
10
<PAGE> 320
Aggressive Growth Fund
Selected Data for an A share of Common Stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1996 1995 1994 1993+ 1992 1991 1990 1989 1988 1987+++
-------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17 $ 14.49 $ 13.41 $ 17.67 $12.41
------- ------- ------- ------- ------- ------- ------- ------- ------
Income (loss) from
Investment Operations:
Net investment
income (loss) (0.22) (0.37) (0.26) (0.15) (0.17) (0.17) (0.06) 0.08 0.01
Net realized and
unrealized gain (loss) on
securities (0.95) 3.02 (2.26) 9.21 6.33 2.85 1.14 (3.37) 5.28
------- ------- ------- ------- -------- ------- ------- ------- ------ ------
Total income (loss)
from investment operations (1.17) 2.65 (2.52) 9.06 6.16 2.68 1.08 (3.29) 5.29
------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from net
investment income -- -- -- -- -- -- -- (0.10) (0.03)
Distributions from net
realized gains on
securities (3.92) (1.63) (0.73) (3.64) (0.82) -- -- (0.87) --
------- -------- ------- ------- ------- -------- ------- ------ -------- -------
Total dividends and
distributions (3.92) (1.63) (0.73) (3.64) (0.82) -- -- (0.97) (0.03)
------- -------- ------- ------- -------- ------- ------- -------- ------- ------
Net change in net asset
value per share (5.09) 1.02 (3.25) 5.42 5.34 2.68 1.08 (4.26) 5.26
------- -------- ------- ------- -------- ------- ------- ------- ------- -------
Net asset value per share,
end of period $ $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17 $ 14.49 $ 13.41 $17.67
======= ======= ======= ======= ======== ======= ======= ======= ======== ======
% (3.59)% 10.54% (8.76)% 41.11% 37.01% 18.50% 8.05%++++ (18.42)%++++ 42.55%++++
Total Return
Ratios/Supplemental
Data:
Net assets, end of
period (000) $
$131,879 $158,091 $159,517 $178,228 $107,421 $85,637 $91,487 $134,000 $169,489
Ratio of expenses
to average net assets % 1.46% 1.52% 1.49%++ 1.44%++ 1.55%++ 1.51%++ 1.28%++ 1.21%++ 1.20%++
Ratio of net
investment income (loss)
to average net assets % 1.04% 1.20% 1.15%++ 1.14%++ 0.85%++ 0.82%++ (0.30)%++ 0.55%++ 0.15%++
Portfolio turnover
rate % 92% 43% 43% 73% 155% 175% 276% 384 250%
</TABLE>
______________________
+ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
++ Net of fee waivers and expense reimbursements which had the effect of
decreasing the ratio of expenses to average net assets and increasing the
ratio of net investment income (loss) to average net assets by 0.02%,
0.03%, 0.09%, 0.01%, 0.26%, 0.12% and 0.22%, for the years ended February
28, 1993, February 29, 1992, February 28, 1991, February 28, 1990,
February 28, 1989, February 29, 1988 and February 28, 1987, respectively.
+++ Restated to reflect a 2-for-1 stock split at close of
business on February 27, 1987.
++++ Unaudited.
Note: The total return figures presented do not include the effect of the
maximum 4.50% sales charge on A shares.
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FUND INVESTMENTS
INVESTMENT OBJECTIVES
BLUE CHIP FUND
The Blue Chip Fund seeks to achieve long-term capital appreciation through
investments in blue chip stocks. The Blue Chip Fund may be appropriate for
investors who want the potential for capital appreciation over the long-term.
THE OBJECTIVE OF THE BLUE CHIP FUND IS TO PROVIDE INVESTORS WITH LONG-TERM
CAPITAL APPRECIATION THROUGH INVESTMENTS IN BLUE CHIP STOCKS. THE BLUE CHIP
FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS
INVESTABLE ASSETS IN THE MASTER PORTFOLIO. THE MASTER PORTFOLIO HAS THE SAME
INVESTMENT OBJECTIVE AS THE BLUE CHIP FUND.
AGGRESSIVE GROWTH FUND
The Aggressive Growth Fund seeks to achieve maximum capital appreciation. In
seeking its investment objective, the Aggressive Growth Fund investments
primarily in common stocks and convertible securities of issuers from a variety
of industries that it is believed have the potential for above-average growth.
Any income received is incidental to capital appreciation. The Aggressive
Growth Fund may be appropriate for investors who want long-term asset growth
and are willing to accept stock market volatility and who want to participate
in a diversified portfolio of companies with strong growth potential.
WHILE EACH PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE
NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
SINCE THE INVESTMENT CHARACTERISTICS OF THE BLUE CHIP FUND WILL CORRESPOND TO
THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS
INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO AND THE
AGGRESSIVE GROWTH FUND.
GENERAL INVESTMENTS
MASTER PORTFOLIO. The Master Portfolio is a diversified portfolio which will
invest substantially all of its assets in stocks included in either the Dow
Jones Industrial Average or the Standard & Poor's 500 Index. The Master
Portfolio will hold approximately 100 stocks. The Master Portfolio expects
that under normal market conditions at least 80% of its assets will be invested
in blue chip stocks and the other 20% may be invested in cash equivalent
securities.
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Cash equivalents are the following short-term interest bearing instruments:
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities (some of which may be subject to repurchase agreements),
certificates of deposit, bankers' acceptances, time deposits and other
interest-bearing deposits issued by domestic and foreign banks and foreign
branches of U.S. banks, foreign government securities, and commercial paper
issued by U.S. and foreign issuers which is rated at the time of purchase at
least Prime-2 by Moody's Investors Service, Inc. ("Moody's") or A-2 by Standard
& Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit
Co. ("D&P") and Fitch Investor Services, Inc. ("Fitch").
The Master Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
AGGRESSIVE GROWTH FUND. The Aggressive Growth Fund is a diversified portfolio
comprised mainly of common stocks and securities convertible into common
stocks. The Aggressive Growth Fund's holdings will consist primarily of common
stocks of domestic companies, most of which will be smaller-capitalized
companies, that Bank of America expects will achieve above-average growth in
earnings and price. Smaller-capitalized companies generally have limited
product lines, markets and financial resources, and are dependent upon a
limited management group. As a result of the Aggressive Growth Fund's
investments, an investment in the Aggressive Growth Fund involves substantial
risks (see "Risk Factors" below).
While the Aggressive Growth Fund intends to invest primarily in common stock
and securities convertible into such stock, its policy is flexible as to the
proportion of its assets that will be invested in common stocks, and the
proportion may be changed without shareholder approval. However, as a matter
of fundamental policy, not less than 65% of the Aggressive Growth Funds's total
assets will be invested in equity securities (except during temporary defensive
periods).
During temporary defensive periods, or at other times subject to the limitation
above, the Aggressive Growth Fund may hold cash equivalents such as money
market instruments, which include short-term bank time deposits, certificates
of deposit and bankers' acceptances, commercial paper (which is unsecured
promissory notes issued by corporations) and obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities (some of which may be
subject to repurchase agreements) and invest in preferred stocks and other
fixed-income corporate and U.S. Government bonds with ratings of AA or better
by a nationally recognized statistical rating organization (or unrated bonds of
comparable quality) that cannot be converted into common stocks.
In addition, up to 20% of the Aggressive Growth Fund's total assets may be
invested in securities issued by foreign issuers. Such investments will be
made either directly in such issuers or indirectly through American Depository
Receipts ("ADRs") or closed-end
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investment companies. (Investments in closed-end investment companies will not
make up more than 10% of the Aggressive Growth Fund's total assets.)
The Aggressive Growth Fund may also purchase put and call options, write
covered call options, purchase and sell futures contracts and purchase futures
options as described below under "Other Investment Practices."
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds and the Master Portfolio may not be
changed without a vote by the holders of a majority of the outstanding shares
of the particular Fund or of the outstanding interests of the Master Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below.
Neither the Blue Chip Fund nor the Master Portfolio may:
1. Purchase securities (except securities issued by the U.S. Government,
its agencies or instrumentalities) if, as a result, more than 5% of
its total assets will be invested in the securities of any one issuer
or it would own more than 10% of the voting securities of such issuer,
except that up to 25% of its total assets may be invested without
regard to these limitations; and provided that all of its assets may
be invested in a diversified, open-end management investment company,
or a series thereof, with substantially the same investment
objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons, except that it may make time or demand
deposits with banks, provided that time deposits shall not have an
aggregate value in excess of 10% of its net assets, and may purchase
bonds, debentures or similar obligations that are publicly
distributed, may loan portfolio securities not in excess of 10% of the
value of its total assets, and may enter into repurchase agreements as
long as repurchase agreements maturing in more than seven days do not
exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or
sell futures contracts on financial instruments, such as bank
certificates of deposit and U.S. Government securities, foreign
currencies and stock indexes and options on any such futures if such
options are written by other persons and if (i) the futures or options
are listed on a national securities or commodities exchange, (ii) the
aggregate premiums paid on all such options that are held at any time
do not exceed 20% of its total net assets, and (iii) the aggregate
margin deposits required on all such futures or options thereon held
at any time do not exceed 5% of its total assets.
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The Aggressive Growth Fund may not:
1. Make loans, although it may invest in debt securities, enter into
repurchase agreements and lend its portfolio securities to a limited
extent.
2. Invest more than 10% of its total assets in instruments that the Board
of Directors determines to be illiquid. Investors should note,
however, that certain securities that might otherwise be considered
illiquid, such as variable amount master demand notes with maturities
of nine months or less, as well as securities that are not registered
under the federal securities laws but for which the Board of Directors
or Bank of America (pursuant to guidelines adopted by the Board) has
determined a liquid trading market exists, are not subject to this 10%
limitation.
3. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs (with certain exceptions,
including the ability to enter into futures contracts and related
options).
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Master Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Master Portfolio (this restriction
does not apply to options on futures contracts). Put options may be purchased
in order to protect the Master Portfolio's securities in expectation of a
declining market, and call options may be purchased to benefit from anticipated
price increases in the underlying securities or index. The Master Portfolio
may not write put options but may write fully covered call options as long as
the Master Portfolio remains fully covered throughout the life of the option,
either by owning the optioned securities or possessing a call issued by another
writer that is identical in all respects to the call written by the Master
Portfolio.
The Aggressive Growth Fund may sell, or "write," covered call options and may
buy put and call options on particular securities or various stock indices. In
addition, in order to "hedge" against changes in currency exchange rates, the
Aggressive Growth Fund may acquire options relating to foreign currencies.
Premiums paid for options purchased by the Aggressive Growth Fund will not
exceed 5% of its net assets and securities subject to options written by the
Aggressive Growth Fund will not exceed 25% of its net assets. All options
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will be listed on a national securities exchange and issued by the Options
Clearing Corporation.
A call option for a particular security gives the purchaser of the option the
right to buy, and a writer the obligation to sell, the underlying security at
the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is the consideration for undertaking the obligations under the option contract.
A put option for a particular security gives the purchaser the right to sell
the underlying security to the writer at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. In contrast to an option on a particular security, an option on
a stock index provides the parties to the contract with the right to receive or
obligation to make a cash settlement upon exercise of the option by its
purchaser.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss
of the amounts paid as premiums to the writer of the option. In writing a
covered call option, a Portfolio gives up the opportunity to profit from an
increase in the market price of the underlying security above the exercise
price (except to the extent the premium represents such a profit). Moreover,
the Portfolio will not be able to sell the underlying security on which a call
option has been written until the option expires or is exercised or the
Portfolio closes out the option. In addition, except to the extent that a call
option written by the Portfolio on a particular index is covered by an option
on the same index purchased by the Portfolio, movements in the index may cause
the Portfolio to incur a loss. Such loss might be lessened to the extent that
the value of the securities held by the Portfolio changed during the time the
option was outstanding.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Portfolios may purchase and sell stock index futures contracts
(as well as purchase related options) and, as relates to the Aggressive Growth
Fund, purchase and sell foreign currency futures contracts (as well as purchase
related options). The Portfolios may engage in futures transactions to hedge
against changes resulting from market conditions in the values of the
securities held by the particular Portfolio or which the Portfolio intends to
purchase, or in the case of the Aggressive Growth Fund, to protect against
fluctuating currency exchange rates. The Portfolios will only enter into these
transactions where they are economically appropriate for the reduction of risks
inherent in the ongoing management of the particular Portfolio.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the value of a specified
stock index (which assigns relative values to the common stocks included in the
index) at the close of the last trading day of the contract and
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the price at which the futures contract is originally struck. A Portfolio may
not purchase or sell a futures contract or purchase related options unless
immediately after any such transaction the aggregate amount of margin deposits
on its existing futures positions and the amount of premiums paid for related
options does not exceed 5% of the Portfolio's total assets (after taking into
account certain technical adjustments).
For a more detailed description of futures contracts and options and the costs
and risks related to such instruments, see the Statement of Additional
Information.
SHORT-TERM OBLIGATIONS. Subject to the investment policies stated above, the
Master Portfolio may invest in short-term obligations such as variable and
floating rate instruments, including master demand notes. Although payable on
demand by the Master Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes may depend on the borrower's
ability to pay, which will be continuously monitored by Bank of America. Such
notes will be purchased only from domestic corporations that either (a) are
rated Aa or better by Moody's or AA or better by S&P, or the equivalent from
another nationally recognized statistical rating organization ("NRSRO") (b)
have commercial paper rated at least Prime-2 by Moody's or A-2 by S&P, or the
equivalent by another NRSRO (c) are backed by a bank letter of credit or (d)
are determined by Bank of America to be of a quality comparable to securities
described in either clause (a) or (b).
Money market instruments such as short-term bank time deposits, certificates of
deposit and bankers' acceptances, commercial paper, and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities as well as
repurchase agreements and variable and floating rate instruments, may be
purchased by the Aggressive Growth Fund as long as such instruments are rated
within the two highest rating categories. Unrated instruments may also be
purchased if they are of comparable quality. Investments in variable and
floating rate instruments that have no active trading market and are not
payable upon seven days' notice will be subject to the percentage limitation on
illiquid instruments described above. During the current fiscal year, the
Aggressive Growth Fund does not expect to invest more than 5% of its total
assets at any time in any particular type of money market instrument.
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Master Portfolio may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share (i.e., "money market funds"). 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. The Aggressive
Growth Fund may acquire shares of closed-end investment companies, including
companies that invest in foreign issuers, subject to the requirements of
applicable securities laws. Although these closed-end companies may have
policies that differ from the Aggressive Growth Fund's policies, their
management and other types of expenses will be similar to those borne by the
Aggressive Growth Fund. As a shareholder of another investment company, the
Portfolios would bear, along with other shareholders, their pro rata portion of
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the other investment company's expenses, including advisory fees. Such
expenses are in addition to the expenses a Portfolio pays in connection with
its own operations.
REPURCHASE AGREEMENTS. The Portfolios may also enter into repurchase
agreements. Under these agreements, the Master Portfolio will acquire
securities from either a bank which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's (or the equivalent from another
nationally recognized statistical ratings organization) or a registered
broker-dealer, and the seller agrees to repurchase them within a specified time
at a fixed price (equal to the purchase price plus interest). The Aggressive
Growth Fund may also acquire such securities if rated within the two highest
ratings categories. Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (the "1940 Act"). Repurchase agreements
maturing in more than seven days will not exceed 10% of the value of the total
assets of a Portfolio. Repurchase agreements will be entered into only for
debt obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances or commercial
paper, and either the Portfolios' custodian or its agent will have physical
possession of the securities or the securities will be transferred to the
Portfolios' custodian, by appropriate entry in the Federal Reserve Bank's
records and, in either case, will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Portfolios might incur a loss if the
value of the securities securing the repurchase agreement declines, and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization upon the securities by the Portfolios may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may enter into reverse
repurchase agreements. Under these arrangements, a Portfolio will sell a
security held by the Portfolio to either a bank (which has a commercial paper
rating of A-2 or better by S&P, Prime-2 or better by Moody's or the equivalent
by another NRSRO) or a registered broker-dealer, with an agreement to
repurchase the security on an agreed date, price and interest payment. When a
Portfolio enters into a reverse repurchase agreement, it places in a separate
custodial account either liquid assets or other liquid high grade debt
securities that have a value equal to or greater than the repurchase price
(including accrued interest). The account is then continuously monitored to
make sure that an appropriate value is maintained. Reverse repurchase
agreements involve the possible risk that the value of portfolio securities the
Portfolios relinquish may decline below the price the Portfolios must pay when
the transaction closes. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Borrowings may magnify the potential for gain
or loss on amounts invested resulting in an increase in the speculative
character of the particular Portfolio's outstanding shares.
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SECURITIES LENDING. In order to earn additional income, each Portfolio may
lend its portfolio securities to broker-dealers that Bank of America considers
to be of good standing. Borrowers of portfolio securities may not be
affiliated directly or indirectly with the Company or the particular Portfolio.
If the broker-dealer should become bankrupt, however, a Portfolio could
experience delays in recovering its securities. A securities loan will only be
made when, in Bank of America's judgment, the possible reward from the loan
justifies the possible risks. In addition, such loans will not be made if, as
a result, the value of securities loaned exceeds 10% and 30% of the total
assets of the Master Portfolio and the Aggressive Growth Fund, respectively.
Securities loans will be fully collateralized.
DIVERSIFICATION. In compliance with current Securities and Exchange Commission
rules, the Aggressive Growth Fund intends to limit its investments in the
securities of any single issuer to no more than 5% of its total assets
(measured at the time of purchase), although up to 25% of its total assets may
be invested without regard to this limitation.
RISK FACTORS. Although investing in any mutual fund has certain inherent
risks, an investment in the Aggressive Growth Fund may have even greater risks
than investments in most other types of mutual funds. The Aggressive Growth
Fund is not a complete investment program, and it may not be appropriate for an
investor if he or she cannot bear financially the loss of at least a
significant portion of his or her investment. The Aggressive Growth Fund's net
asset value per share is subject to rapid and substantial changes because
greater risk is assumed in seeking maximum growth. The securities of the
smaller companies which the Aggressive Growth Fund expects to emphasize may be
subject to more abrupt or erratic market movements than larger, more
established companies, both because the securities typically are traded in
lower volume and because the issuers typically are subject to a greater degree
to changes in earnings and prospects. Many of the securities which Bank of
America believes would have the greatest growth potential may be considered
highly speculative. Additionally, such securities may not be traded every day
or in the volume typical of trading on a national securities exchange. As a
result, the disposition by the Aggressive Growth Fund of portfolio securities,
to meet redemptions or otherwise, may require the Aggressive Growth Fund to
sell these securities at a discount from market prices, to sell during periods
when such disposition is not desirable, or to make many small sales over a
lengthy period of time.
The Portfolios' investments in foreign securities, whether made directly or
indirectly, also involve certain inherent risks, including political or
economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns, changes in foreign currency exchange
rates and the possibility of adverse changes in investment or exchange control
regulations. There is typically less publicly available information about a
foreign company than about a U.S. company. Moreover, these companies may be
subject to less stringent reserve, auditing and reporting requirements than
their U.S. counterparts. Additionally, foreign stock markets are generally not
as developed or efficient as those in the U.S., and in most foreign markets
volume and liquidity are less than in the U.S. Fixed commissions on foreign
stock exchanges are also generally higher than the negotiated
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commissions on U.S. exchanges, and there is generally less government
supervision and regulation of foreign stock exchanges, brokers and companies
than in the U.S. There is also the possibility that foreign governments could
expropriate assets or levy confiscatory taxes, set limitations on the removal
of assets or suffer adverse diplomatic developments. Because the amount of the
commission are not less favorable than what they would be with any other
unaffiliated qualified firm.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. A Portfolio will only write options
where Bank of America believes a liquid secondary market will exist on a
national securities exchange for options of the same series, which would permit
a Portfolio to close out its option position. There is no assurance that a
liquid secondary market will exist on an exchange for a particular options or
at any particular time. In fact, for some options no secondary market on an
exchange may exist at all. If a Portfolio cannot close out an option, it will
not be able to sell the securities underlying the option until the option
expires or is exercised.
Furthermore, a Portfolio's ability to engage in transactions in options may be
limited by IRS requirements on its gross income from certain securities,
including options and futures contracts, held by a Portfolio for less than
three months. Bank of America does not believe that transactions in options
will significantly affect a Portfolio's ability to comply with IRS
requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
PORTFOLIO TRANSACTIONS. Investment decisions for each Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the same securities as a Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Portfolio and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure
may adversely affect the price paid or received by a Portfolio or the size of
the position obtained or sold by a Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to the particular Portfolio are not less
favorable than what they would be with any other qualified firm.
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PORTFOLIO TURNOVER. High portfolio turnover rates can result in corresponding
increases in brokerage commissions and other transaction costs. The Aggressive
Growth Fund's investment practices in particular, which involve an effort to
own stocks during periods of accelerating earnings growth and strong relative
price momentum, may result in portfolio turnover greater than that of other
mutual fund portfolios. Short-term capital gains realized from securities
transactions are taxable to shareholders as ordinary income.
MASTER-FEEDER STRUCTURE. The Blue Chip Fund is an open-end investment
portfolio that seeks to achieve its investment objective by investing all of
its investable assets in the Master Portfolio which has the same investment
objective. The Blue Chip Fund may withdraw its investment in the Master
Portfolio at any time if the Board of Directors of the Company determines that
it is in the best interest of the Blue Chip Fund to do so. Upon such
withdrawal, the Board of Directors would consider what action might be taken,
including the investment of all of the assets of the Blue Chip Fund in another
pooled investment entity having the same investment objective as the Blue Chip
Fund or the hiring of an investment adviser to manage the Blue Chip Fund's
assets in accordance with the investment policies described above with respect
to the Master Portfolio. See "Expense Summary," "Fund Investments" and "Fund
Management" for a description of this investment objective and the investment
policies, restrictions, management and expenses of the Blue Chip Fund and the
Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Blue Chip Fund and other entities that may invest in the Master
Portfolio from time to time (e.g., other investment companies and commingled
trust funds) will each be liable for all obligations of the Master Portfolio.
However, the risk of the Blue Chip Fund's incurring financial loss on account
of such liability is limited to circumstances in which both inadequate
insurance exists and the Master Portfolio itself is unable to meet its
obligations. Accordingly, the Company's Board of Directors believes that
neither the Blue Chip Fund nor its shareholders will be adversely affected by
reason of the Blue Chip Fund's investing in the Master Portfolio. As stated
above, the investment objective of the Blue Chip Fund and the Master Portfolio
is a fundamental policy and may not be changed, in the case of the Blue Chip
Fund, without the vote of its shareholders or, in the case of the Master
Portfolio, without the vote of its interestholders. Whenever the Blue Chip
Fund is requested to vote on matters pertaining to the investment objective or
a fundamental policy of the Master Portfolio, the Blue Chip Fund will hold a
meeting of its shareholders and will cast its vote in the same proportion as
the votes cast by the Blue Chip Fund's shareholders. The Blue Chip Fund will
vote any shares for which it receives no voting instructions in the same
proportion as the shares for which it does receive voting instructions. As
with any mutual fund, other investors in the Master Portfolio could control the
results of voting at the Master Portfolio level in certain instances (e.g. a
change in fundamental policies by the Master Portfolio which was not approved
by the Blue Chip Fund's shareholders). This could result in the Blue Chip
Fund's withdrawal of its investment in the Master Portfolio, and in increased
costs and expenses for the Blue Chip Fund. Further, the withdrawal of other
entities that may from time to time invest in
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the Master Portfolio could have an adverse effect on the performance of the
Master Portfolio and the Blue Chip Fund, such as decreased economies of scale
and increased per share operating expenses. In addition, the total withdrawal
by another investment company as an investor in the Master Portfolio will cause
the Master Portfolio to terminate automatically in 120 days unless the Blue
Chip Fund and any other investors in the Master Portfolio unanimously agree to
continue the business of the Master Portfolio.
As the Blue Chip Fund is required to submit such matters to a vote of its
shareholders, it will be required to incur the expenses of shareholder meetings
in connection with such withdrawals. If unanimous agreement is not reached to
continue the Master Portfolio, the Board of Directors of the Company would need
to consider alternative arrangements for the Blue Chip Fund, such as those
described above. The policy of the Blue Chip Fund, and other similar
investment companies, to invest their investable assets in trusts such as the
Master Portfolio is a relatively recent development in the mutual fund industry
and, consequently, there is a lack of substantial experience with the operation
of this policy.
There may also be other investment companies through which you can invest in
the Master Portfolio which may have higher or lower fees and expenses than
those of the Blue Chip Fund and which may therefore have different performance
results than the Blue Chip Fund. Information concerning whether an investment
in the Master Portfolio may be available through another entity investing in
the Master Portfolio may be obtained by calling 800-332-3863.
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND
SELLING EACH FUND'S SHARES AND REGARDING EACH FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
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<TABLE>
<CAPTION>
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
INITIAL INVESTMENT SUBSEQUENT 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
401(K) ACCOUNT $ $
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue three classes of shares. A shares are sold to investors
choosing the initial sales charge alternative, and B shares are sold to
investors choosing the deferred sales charge alternative. K shares are neither
subject to a front-end sales change not a contingent deferred sales change. K
shares, however, are sold only to: (a) businesses and other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America; and (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order; and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates. The three classes of shares in each Fund
represent interests in the same portfolio of investments of the particular
Fund, have the same rights and are identical in all respects, except that A
shares bear the expenses of a Shareholder Service Plan. B shares bear the
expenses of a Distribution and Services Plan and have exclusive voting rights
with
23
<PAGE> 333
respect to the Distribution and Services Plan. Class K shares bear the
expenses of a Distribution Plan and Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such plans. The three
classes also have different exchange privileges, as described below. B shares
also bear the expenses of the deferred sales charge arrangements and any
expenses resulting from such arrangements. The net income attributable to B
and K shares and the dividends payable on B and K shares will be reduced by the
amount of the Distribution and Services Plan fees attributable to B and K
shares and the incremental expenses associated with such plan. Lastly, B
shares of a Fund held for 8 years will automatically convert into A shares of
the particular Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on the A shares.
Each class calculates its net asset value ("NAV") as follows:
NAV = (Value of Assets Attributable to the Class) - (Fund Liabilities
Attributable to the Class)
---------------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on
days the Exchange is open.
The Master Portfolio's and the Aggressive Growth Fund's investments are valued
at market value or, where market quotations are not readily available, at fair
value as determined in good faith by the Master Portfolio or Aggressive Growth
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolio's
Board of Trustees or the Aggressive Growth Fund's Board of Directors.
Short-term debt securities are valued at amortized cost, which approximates
market value. For further information about valuing securities, see the
Statement of Additional Information. For price and yield information call
(800) 346-2087.
The per share net asset values of A, B and K shares of the Funds will diverge
due to the different distribution and other expenses borne by the classes.
CLASS A SHARES SALES LOAD. The front-end sales load ("front end sales load,"
"sales load," "front-end sales charge" or "sales charge") for the A shares of
the Funds begin at 4.50% and may decrease as the amount you invest increases,
as shown in the following chart:
24
<PAGE> 334
<TABLE>
<CAPTION>
Amount of Transaction Dealer's
As a % of As a % of Reallowance
offering net asset as a % of
price value offering price*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00** 0.00** 0.00**
</TABLE>
*Dealer's reallowance may be changed periodically.
**See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
From time to time, the Funds' distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Fund.
LARGE PURCHASE EXEMPTION. To the extent that no other A share no-load
exemption is available, the foregoing schedule of sales loads does not apply to
purchases of A shares of $1,000,000 or more. If a customer who is not a
participant in Bank of America's Daily Advantage(R) Retirement Plan Program
purchases $1,000,000 or more of A shares and redeems such shares, a contingent
deferred sales load will be imposed as follows:
<TABLE>
<CAPTION>
Number of Years Applicable Contingent
Elapsed Since Purchase Deferred Sales Load
---------------------- ---------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a
contingent deferred sales charge is applicable to a redemption of such shares,
the calculation will be made in a manner that results in the lowest possible
rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in
25
<PAGE> 335
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. Although no front end sales load
will be paid on Large Purchase Exemptions, the Distributor will compensate
brokers whose customers purchase shares at the following rates: 1.00% of the
amount under $ million, 0.50% of the next $47 million and 0/25% thereafter.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B shares may be purchased at net
asset value per share without the imposition of a sales charge at the time of
purchase. The Funds' distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time
the shares are purchased. The proceeds of the contingent deferred sales
charges and the ongoing distribution and services plan fees described below are
used to reimburse the Funds' distributor for its expenses, including the
compensation of broker-dealers.
B shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no charge will
be assessed on shares derived from reinvestment of dividends or capital gains
distributions. B shares will convert to A shares on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge (as a
Number of Years percentage of dollar amount
Elapsed Since Purchase* subject to the charge)
- ----------------------- ----------------------------
<S> <C>
Less than one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0%
More than one, but less
than two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0%
More than two, but less
than three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than three, but less
than four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0%
More than four, but less
than five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
More than five, but less
than six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
After six years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
26
<PAGE> 336
______________________
* The time period during which Pacific Horizon shares of the Pacific
Horizon Prime Fund acquired through an exchange are held is not
included when the amount of the contingent deferred sales charge is
calculated.
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B shares above the total amount of payments for
the purchase of B shares during the preceding 6 years; then of amounts
representing the cost of B shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the Class B shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund, that in the third year after purchase the net asset
value per share is $12, and that during the three-year period you had acquired
10 additional shares through dividend reinvestment. If at such time you make
your first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the
applicable rate in the third year after purchase).
K SHARES. Bank of America will compensate Affiliated Brokers for its customers
who invested in a Fund and are participants in the 401(k) Daily Advantage(R)
Retirement Plan Program. The Affiliated Brokers will be compensated by Bank of
America at the rate of 1% of the first $1 million of combined Pacific Horizon
Funds' and Time Horizon Funds' K shares in each 401(k) Daily Advantage
Retirement Plan Program.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on
the following types of transactions:
- - reinvestment of dividends or distributions;
- - accounts of corporate/business retirement plans (such as 401(k), 403(b)(7),
457 and Keogh accounts) which are sponsored by the Fund's administrator and
were invested in a Fund as of July 1, 1996 as long as the account remains open
on the Company's books;
27
<PAGE> 337
- - accounts of employer-sponsored employee pension or retirement plans (other
than 403(b) plans) which make direct investments in a Fund as of July 1, 1996
as long as the account remains open on the Company's books;
- - 403(b) plans invested in the Funds as of December 7, 1995;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for its
own account or for an account for which it is authorized to make investment
decisions (i.e., a discretionary account) other than purchases for 403(b)
plans; provided that investment advisers who have invested 403(b) plans in a
Fund on behalf of existing and new clients as of December 7, 1995 may continue
to invest on a no-load basis;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administrated by any bank or trust company
affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open on
the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of a
Fund (or any other fund in the Pacific Horizon Family of Funds) before April
20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its
28
<PAGE> 338
affiliates, and their parents, spouses, minor children and grandchildren as
well as members of the Board of Directors of Bank of America or any of its
affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - 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; and
- - holders of the BankAmeriCard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a sales load will apply to
subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to B Shares is not charged on (1) exchanges described under
"Shareholder Services -- Can I Exchange My Investment From One Fund to
Another?," (2) redemptions in connection with minimum required distributions
from IRA accounts due to the shareholders reaching age 70 1/2, (3) redemptions
in connection with a shareholder's death or disability (as defined in the
Internal Revenue Code); and (4) involuntary redemptions as a result of an
account's net asset value remaining below $500 after sixty days written notice.
In addition, no contingent deferred sales charge is charged on shares acquired
through the reinvestment of dividends or distributions.
RIGHTS OF ACCUMULATION. When buying A shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon Fund on which you paid a front-end sales load (including shares
that carry no sales load but were obtained through an exchange and can be
traced back to shares that were acquired with a sales load). Shares of any
investment portfolio of Time Horizon Funds (a "Time Horizon Fund"), an open-end
investment company managed by Bank of America generally will not be included
when determining reduced sales loads under the rights of accumulation program,
except that you may aggregate your investment in Pacific Horizon Funds and Time
Horizon Funds in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on Class A shares, you or your Service
Organization (which is an institution such as a bank or broker- dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want
29
<PAGE> 339
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 Class A shares carrying a sales load of
the Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific
Horizon U.S. Government Securities Fund, the Pacific Horizon Capital Income
Fund and shares of the Company's money market funds that can be traced back to
the purchase of shares carrying a sales load (or any combination thereof) with
an aggregate current value of $90,000. If you subsequently purchase additional
Class A shares carrying a sales load of a Fund with a current value of $10,000,
the load applicable to the subsequent purchase would be reduced to 3.75% of the
offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A shares by
means of a written Letter of Intent, which expresses your non- binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon Fund within a period of 13 months, beginning up to 90 days prior to the
date of the Letter's execution. A shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment
is fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent. Shares of Time Horizon Funds will not generally be
included when determining reduced sales loads under the letter of intent
program unless you are a participant in the 401(k) Daily Advantage(R)
Retirement Plan Program.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent
will redeem an appropriate number of shares held in escrow to realize the
difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
30
<PAGE> 340
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Funds permit you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular
circumstances it is more advantageous to invest in A shares, and incur a
front-end sales charge and an ongoing shareholder service plan fee; or to
invest in B shares and have the entire initial purchase price invested in a
Fund with the investment thereafter being subject to a contingent deferred
sales charge and ongoing distribution and services plan fees; or to invest in K
shares and incur neither a front-end sales charge nor a contingent deferred
sales charge. K shares do incur fees under a Distribution Plan and an
Administrative and Shareholder Service Agreement. K shares of the Funds,
however, are available to: (a) business or other organizations that participate
in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored by Bank of
America; and (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the front-end sales charge alternative (A
shares) because similar sales charge reductions are not available for purchases
under the contingent deferred sales charge alternative (B shares). Moreover, A
shares would not be subject to ongoing distribution and services plan fees, as
described below. However, because front-end sales charges are deducted at the
time of purchase, such investors who pay a front-end sales charge would not
have all their funds invested initially. The Company will not accept any order
for B shares from an investor who is eligible to purchase A shares without a
sales load or from an investor eligible to purchase K shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in a Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing distribution and services plan fees related to B shares may exceed
the front-end sales charge and ongoing shareholder service fees related to A
shares. However, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
distribution and services plan fees may be offset to the extent any return is
realized on the additional funds initially invested under the contingent
deferred sales charge alternative.
Certain investors might determine it to be more advantageous to have all their
funds invested initially in B shares, although subject to continuing
distribution and services plan fees, and to a contingent deferred sales charge
for a 6 year period of time.
31
<PAGE> 341
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
32
<PAGE> 342
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
Through Bank of America, your Broker or another Service Organization
(orders are not effective until received by the Fund's transfer agent)
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. File No. 54634
Los Angeles, CA
90074-4634
IN PERSON Deliver Account Application Deliver your payment directly
and your payment directly to to the address on the left.
BISYS Fund Services, Inc. the address on the left.
3435 Stelzer Road
Columbus, OH 43219-3035
BY WIRE Initial purchases of shares Contact the Funds' transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to transmit
immediately available funds
for purchase of shares of a
particular Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire and
any associated bank charges.
</TABLE>
33
<PAGE> 343
<TABLE>
<CAPTION>
TO BUY SHARES
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 of be used to make an initial minimum amount of $500 and the
money from your checking, NOW or bank purchase. maximum amount of $50,000 per
money market account) transaction as soon as
appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided on
the Account Application or in
a signature guaranteed letter
of instruction to the Transfer
Agent. Signature guarantees
are discussed under "How to
Sell Shares."
Call 800-346-2087 to make your
purchase.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at
its Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order
and required funds to the Transfer Agent on a timely basis in accordance with
the procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end
34
<PAGE> 344
of the Transfer Agent's business day. Except as provided in the following two
sentences, if the order is not received in proper form by a Service
Organization by 4:00 p.m. Eastern time or not received by the Transfer Agent by
the close of 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 Funds' agent to receive irrevocable
purchase and redemption orders and to transmit them on a net basis to the
Transfer Agent. In these instances orders received by the entity by 4:00 p.m.
Eastern time on a business day will be effected as of 4:00 p.m. Eastern time
that day if the order is actually received by the Transfer Agent not later than
the next business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or K
shares. Certificates for shares will no longer be issued.
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
America and Service Organizations may also impose minimum customer account and
other requirements in addition to those imposed by a Fund. If you purchase or
redeem shares directly from a Fund, you may do so without incurring any charges
other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
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
35
<PAGE> 345
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.
<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
Through the Distributor
(if you are a shareholder of record on the Company's books)
BY MAIL Send a signed, written request (each owner, including each joint owner,
must sign) to the Transfer Agent.
Pacific Horizon Blue Chip Fund or
Aggressive Growth Fund If you hold stock certificates for the shares being redeemed, make sure
c/o Pacific Horizon Funds, to endorse them for transfer, have your signature on them guaranteed by
Inc. your bank or another guarantor institution (as described in the section
P.O. Box 80221 entitled "What Kind Of Paperwork Is Involved In Selling Shares?") and
Los Angeles, CA 90080-9909 include them with your request.
IN PERSON Deliver your signed, written request (each owner, including each joint
owner, must sign) and any certificates (endorsed for transfer and
BISYS Fund Services, Inc. signature guaranteed as described in the section entitled "What Kind Of
3435 Stelzer Road Paperwork Is Involved In Selling Shares?") to the address on the left.
Columbus, OH 43219-3035
</TABLE>
36
<PAGE> 346
<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
BY WIRE As soon as appropriate information regarding your bank account has been
(Blue Chip Fund only) established on your Fund account, you may write, telephone or telegraph
redemption requests to the Transfer Agent, and redemption proceeds will
be wired in federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on the Account
Application or in a signature guaranteed letter of instruction to the
Transfer Agent. Signature guarantee requirements are discussed in the
section entitled "What Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day after your
request and any other necessary documents have been received by the
Transfer Agent.
Wire Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent that
you do not wish to have them.
Requests must be for at least $1,000 and may be subject to limits on
frequency and amount.
Wire Privileges may be modified or suspended at any time, and are not
available for shares issued in certificate form.
Contact your bank for information on any charges imposed by the bank in
connection with receipt of redemptions by wire.
</TABLE>
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<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of $50,000 per
(a service permitting transfers of transaction) by telephone after appropriate information regarding your
money to your checking, NOW or bank bank account has been established on your Fund account. This information
money market 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 orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate on the
Account Application or in a subsequent written notice to the Transfer
Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for additional
important information about the TeleTrade Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS,
ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED
"SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A shares are redeemed (except
pursuant to the Large Purchase Exemption described above), if you purchase
shares through Bank of America or a Service Organization, they may charge a fee
for providing certain services in connection with investments in Fund shares.
When you redeem your B shares within 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon shares of the Pacific Horizon
Prime Fund), you may be subject to a contingent deferred sales charge as
described above.
The Funds impose no charge when K shares are redeemed. The Company reserves
the right to redeem accounts (other than 401(k), IRA and non- working spousal
IRA accounts) involuntarily if, after sixty days' written notice, the account's
net asset value remains below a $500 minimum balance. The contingent deferred
sales charge will not be imposed upon such involuntary redemptions.
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WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A,
B or K shares. If you own both A or K and B shares of a Fund, A or K shares
will be redeemed first unless you request otherwise. Certain types of
redemption requests as well as all endorsed share certificates will need to
include a signature guarantee. Signature guarantees must accompany redemption
requests for (i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of record
on the Company's books, or (iii) an amount of $50,000 or less if the address of
record has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds, an open-end
investment company managed by Bank of America, within 90 days of your
redemption trade date without paying a sales load. Upon such a reinstatement,
the Funds' distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B shares or any Pacific Horizon shares of
the Pacific Horizon Prime Fund. Shares so reinvested will be purchased at a
price equal to the net asset value next determined after the Transfer Agent
receives a reinstatement request and payment in proper form.
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<PAGE> 349
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 Blue Chip Fund are entitled to dividends arising from the
net investment income and net realized gains, if any, earned on investments in
the Master Portfolio which are allocable to that Fund. The Blue Chip and
Aggressive Growth Funds' net income is declared and paid as a dividend on a
quarterly and annual basis, respectively, and net realized capital gains (if
any) are distributed at least annually. Dividends are paid no later than the
fifth business day of the month following the close of the period for which it
is declared. Dividends from net investment income payable to shareholders who
redeem all their shares of a Fund will be paid in cash within five business
days after such shares are redeemed. Distribution from net realized capital
gains payable to shareholders who redeem all their shares of a Fund will be
paid in cash within ten days after the close of the period for which such
distribution is declared.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, c/o Pacific Horizon Funds, Inc., 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> 350
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others
described in this Prospectus may not be available for, or may have different
conditions imposed on them than as described in this Prospectus with respect
to, certain clients of Bank of America and particular Service Organizations.
Consult these entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to B shares 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 Funds' distributor at 800-332-3863. Investors should also read the
IRA Disclosure Statement and the Bank Custodial Agreement for further details
on eligibility, service fees and tax implications, and should consult their tax
advisers.
Additionally, K shares are available to business and other organizations that
participate in the 401(k) Daily Advantage(R) Retirement Plan Program sponsored
by Bank of America.
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.
Specifically, A shares may be exchanged for other A shares, B shares may be
exchanged for other B shares and K shares may be exchanged for other K shares.
NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING A SHARES PURCHASED
WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME
HORIZON FUNDS. A AND B SHARES MAY BE EXCHANGED FOR OTHER A AND B SHARES,
RESPECTIVELY, OR FOR PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND
WITHOUT THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE TIME THE
EXCHANGE IS MADE. IN
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<PAGE> 351
ADDITION, PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND THAT WERE
ACQUIRED THROUGH AN EXCHANGE OF B SHARES MAY BE EXCHANGED FOR B SHARES WITHOUT
THE PAYMENT OF ANY CONTINGENT DEFERRED SALES CHARGE AT THE TIME THE EXCHANGE IS
MADE. IN DETERMINING THE HOLDING PERIOD FOR CALCULATING THE CONTINGENT
DEFERRED SALES CHARGE PAYABLE UPON REDEMPTION OF B SHARES, THE HOLDING PERIOD
OF THE SHARES ORIGINALLY HELD WILL BE ADDED TO THE HOLDING PERIOD OF THE SHARES
ACQUIRED THROUGH THE EXCHANGE UNLESS THE SHARES ACQUIRED THROUGH THE EXCHANGE
ARE PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND. THE TIME PERIOD
DURING WHICH PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND ACQUIRED
THROUGH AN EXCHANGE ARE HELD IS NOT INCLUDED WHEN THE AMOUNT OF THE CONTINGENT
DEFERRED SALES CHARGE IS CALCULATED.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above.
An investment in a Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding
the funds into which you wish to make an exchange from your Service
Organization or the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below 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 Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice
of any material modification to or termination of the Exchange Privilege will
be given to shareholders except where notice is not required under the
regulations of the Securities and Exchange Commission.
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<PAGE> 352
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will be payable to the registered owners of
your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemptions) 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. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemption requests), for example because
of unusual market activity, you are urged to consider redeeming your shares by
mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
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<PAGE> 353
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC
WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load. Use of this plan may also be disadvantageous for B shares
due to the potential need to pay a contingent deferred sales charge.
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<PAGE> 354
CAN MY DIVIDENDS FROM A
FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request
to the Transfer Agent. Participants in the Directed Distribution Plan are
subject to the minimum initial investment requirements of the particular fund
involved. Investments will be made at a price equal to the net asset value of
the purchased shares next determined after receipt of the distribution proceeds
by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION
PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF
YOU RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program.
You may also choose at any time to terminate your participation by notifying
the appropriate federal agency in writing. Further, the Fund may terminate
your participation after 30 days' notice.
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<PAGE> 355
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under
"Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser for the Portfolios. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries.
In its separate advisory agreements with Master Trust and the Company
(collectively, the "Advisory Agreements"), Bank of America has agreed to manage
the Portfolios' investments and to be responsible for, place orders for, and
make decisions with respect to, all purchases and sales of the Portfolios'
securities. The advisory agreement for the Master Portfolio also provides that
Bank of America may: 1) in its discretion, provide advisory services through
its own employees or employees of one or more of its affiliates that are under
the common control of Bank of America's parent, BankAmerica Corporation,
provided such employees are under the management of Bank of America and 2)
employ a sub-adviser provided that Bank of America remains fully responsible to
the Master Portfolio for the acts and omissions of the sub-adviser.
Bank of America Illinois' Investment Advisors Division is responsible for the
day-to-day investment activities of the Master Portfolio. The investment
management team is headed by James Miller, Executive Vice President and Chief
Investment Officer of BofA Illinois (a wholly-owned subsidiary of Bank America
Corporation). Mr. Miller has been the Fund's manager since May 1995 and has
been associated with BofA Illinois Investment Management (and its predecessor
Continental Bank) since 1988. Mr. Miller is a Chartered Financial Analyst, a
member of the Association of Investment Management and Research, and a former
Director of the Investment Analysts Society of Chicago.
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<PAGE> 356
Scott A. Billeadeau Portfolio Manager, is primarily responsible for the
day-to-day investment activities of the Aggressive Growth Fund. Mr.
Billeadeau has been the Fund's manager since November 1994 and has been
associated with Bank of America since 1991. During his tenure, he has
performed research and portfolio analysis for the Fund and is also responsible
for research and portfolio management of two of Bank of America's commingled
accounts, the EBT Aggressive Equity Fund and Aggressive Equity Fund G.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.75% and
0.60% of the Blue Chip and Aggressive Growth Funds' average daily net assets,
respectively. This fee is higher than that paid by most other investment
companies but is comparable to the fees paid by other investment companies with
similar investment objectives and policies. This amount may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers".) During the fiscal year ended February 29, 1996, Bank of
America waived a portion of its advisory fee for the Master Portfolio. For the
same period, the Aggressive Growth Fund paid Bank of America advisory fees at
an effective annual rate of 0.60% of that Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution and Services Plan, Distribution
Plan and Administrative and Shareholder Service Plan as described under "Plan
Payments," and may receive fees charged directly to their accounts in
connection with investments in shares of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds
and the Master Portfolio. Concord is an indirect, wholly-owned subsidiary of
The BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master Portfolio; provide a facility to receive purchase and redemption
orders; provide statistical and research data, data processing services and
clerical services; coordinate the preparation of reports to shareholders of the
Funds, interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolio; calculate the net asset value of
the Funds and the Master Portfolio 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
Funds and the Master Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Blue Chip Fund at the annual rate of 0.15% of the
Fund's average daily net assets, an administration fee from the Master
Portfolio at the annual rate of 0.05% of such Portfolio's
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<PAGE> 357
average daily net assets and an administration fee from the Aggressive Growth
Fund at the annual rate of 0.30% of the Fund's average net assets. These
amounts may be reduced pursuant to undertakings by Concord. (See the
information below under "Fee Waivers".) During the fiscal year ended February
29, 1996, Concord waived a portion of its administration fee for both the Blue
Chip Fund and the Master Portfolio. For the same period, the Aggressive Growth
Fund paid Concord administration fees at an effective annual rate of 0.30% of
that Fund's average daily net assets.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") (with respect to the Blue Chip
Fund and the Master Portfolio) and The Bank of New York ("BONY") (with respect
to the Aggressive Growth Fund) under which PFPC, and an off-shore affiliate of
PFPC, and BONY perform certain of the services listed above, e.g., calculating
the net asset value of the Funds and the Master Portfolio, calculating
dividends and capital gains distributions to shareholders, and maintaining the
books and records of the Funds and the Master Portfolio. The Funds and the
Master Portfolio bear all fees and expenses charged by PFPC for these services,
and the Aggressive Growth Fund bears all fees and expenses charged by BONY for
these services.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. The Distributor is an indirect, wholly-owned subsidiary of The BISYS
Group, Inc. and is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Blue Chip Fund and the Master Portfolio. The
Bank of New York, 90 Washington Street, New York, New York 10286, serves as the
Custodian of the Aggressive Growth Fund. BISYS Fund Services, Inc. is the
transfer and dividend disbursing agent for each of the Funds and is located at
3435 Stelzer Road, Columbus, Ohio 43219.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses
in connection with the performance of their services and the Funds and Master
Portfolio bear the expenses incurred in their operations. Expenses can be
reduced by voluntary fee waivers and expense reimbursements by Bank of America
and other service providers, as well as by certain expense limitations imposed
by state securities regulators. Periodically, during the course of each Fund's
fiscal year, Bank of America, Concord and/or the Distributor may prospectively
choose not to receive fee payments and/or may assume certain expenses of the
Funds or the Master Portfolio as a result of competitive pressures and in order
to preserve and protect the business and reputation of Concord and Bank of
America. However, the service providers retain the ability to discontinue such
fee waivers and/or expense reimbursements at any time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT STATEMENTS BECAUSE THEY CONTAIN
INFORMATION YOU WILL NEED TO CALCULATE
YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN
THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and Management intends that each Fund will so qualify in
future years as long as such qualification is in the best interest of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code. It is expected that the Master Portfolio will not
be subject to federal income taxes. The Master Portfolio intends to qualify as
a partnership (or other pass-through entity) for federal income tax purposes.
As such, the Master Portfolio is not subject to tax, and the Blue Chip Fund
will be treated for federal income tax purposes as recognizing its pro rata
share of the Master Portfolio's income and deductions, and owning its pro rata
share of the Master Portfolio's assets. The Blue Chip Fund's status as a
regulated investment company is dependent on, among other things, the Master
Portfolio's continued qualification as a partnership (or other pass-through
entity) for federal income tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gain over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gain over net short-term capital loss ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A dividend paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend
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<PAGE> 359
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 gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to the same
limitations.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences as described above.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN
AND AGGREGATE TOTAL RETURN.
PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE
RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, a Fund's total return, (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be
quoted in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by such Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for Class A shares and the applicable contingent
deferred sales charge for Class B shares. Each Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with
50
<PAGE> 360
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.
PERFORMANCE COMPARISONS
Each Fund may compare its total return to that of other mutual funds with
similar investment objectives and to stock and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to the Consumer Price Index or to data prepared by:
Lipper Analytical Services, Inc.; Donoghue's Money Fund Report; Mutual Fund
Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies Services;
or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as MONEY,
FORBES, BARRON'S, THE WALL STREET JOURNAL and THE NEW YORK TIMES, or in local
or regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Because a Fund's performance will fluctuate, it should not be compared with
bank deposits, savings accounts and similar investments that often provide an
agreed or guaranteed fixed yield for a stated period of time. Performance is
generally a function of the kind and quality of the instruments in a portfolio,
portfolio maturity, operating expenses and market conditions. Not included in
a Fund's calculations of total return are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE
PER SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES
INTO ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 400 million shares of
Class D Common Stock, 600 million shares of Class D - Special Series 3 Common
Stock and 50 million shares
51
<PAGE> 361
of Class D - Special Series 5 Common Stock representing interests in the
Aggressive Growth Fund; 40 million shares of Class N Common Stock, 60 million
shares of Class N - Special Series 3 Common Stock and 50 million shares of
Class N - Special Series 5 Common Stock, representing interests in the Blue
Chip Fund and as well as additional classes of shares representing interests in
other investment portfolios of the Company. Class D and Class N Common Stock
are the "A" shares, Class D - Special Series 3 Common Stock and Class N -
Special Series 3 Common Stock are the "B" shares and Class D - Special Series 5
Common Stock and Class N - Special Series 5 Common stock are the "K" shares.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class D Common Stock, Class D - Special Series 3 Common
Stock, Class D - Special Series 5 Common Stock, Class N Common Stock, Class N -
Special Series 3 Common Stock or Class N - Special Series 5 Common Stock) into
one or more series. For more information about the Company's other portfolios,
contact the Company at the telephone number listed on the inside cover page.
Shares representing interests in the Funds are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the particular Fund on liquidation. Fund shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by
law (or when permitted by the Board of Directors). Only A shares will vote on
matters relating solely to A, only B shares will vote on matters relating
solely to B shares and only K shares will vote on matters (such as the
distribution and services plan described below) relating solely to K shares.
The Funds do not presently intend to hold annual meetings of shareholders to
elect directors or for other business unless and until such time as less than a
majority of the directors holding office has been elected by the shareholders.
At that time, the directors then in office will call a shareholders' meeting
for the election of directors. Under certain circumstances, however,
shareholders have the right to call a shareholder meeting to consider the
removal of one or more directors. Such meetings will be held when requested by
the shareholders of 10% or more of the Company's outstanding shares of common
stock. The Funds will assist in shareholder communications in such matters to
the extent required by law and the Company's undertaking with the Securities
and Exchange Commission.
52
<PAGE> 362
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN")
FOR A SHARES, A DISTRIBUTION AND SERVICES PLAN FOR B SHARES AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
The Company has adopted a Shareholder Service Plan for A shares, under which
the Class A shares of each Fund reimburse the Distributor for shareholder
servicing fees the Distributor pays to Service Organizations. The Company has
also adopted a Distribution and Services Plan pursuant to Rule 12b-1 under the
1940 Act, under which the B shares of each Fund reimburse the Distributor for
services rendered and costs incurred in connection with distribution of the B
shares and for shareholder servicing fees the Distributor pays to Service
Organizations. The Company has adopted a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act under which the K shares of a Fund reimburse the
Distributor for services rendered and costs incurred in connection with
distribution of the K shares. The Company has also adopted an Administrative
and Shareholder Service Plan for K shares, under which K shares of the Fund
reimburse the Distributor for administrative and shareholder services 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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's Class
A shares. Excluded from this calculation, however, are all shares acquired via
a transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. During the
fiscal year ended February 29, 1996, the Distributor waived all payments under
the Plan with respect to the Blue Chip Fund. For the same period, the
Aggressive Growth Fund made payments under the Plan at an effective annual rate
of 0.25% of the Fund's average net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
53
<PAGE> 363
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.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, each Fund pays
the Distributor for distribution expenses primarily intended to result in the
sale of such Fund's B and K shares and with respect to B shares for shareholder
servicing expenses. Such distribution expenses include expenses incurred in
connection with advertising and marketing each Fund's B and K shares; payments
to Service Organizations for assistance in connection with the distribution of
B and K shares; and expenses incurred in connection with preparing, printing
and distributing prospectuses for the Funds (except those used for regulatory
purposes, for solicitation or distribution to existing or potential A
shareholders, or for distribution to existing B and K shareholders of the
Funds) and in implementing and operating the Distribution and Services Plan and
Distribution Plan.
Shareholder servicing expenses under the Distribution and Services Plan and
Administrative and Shareholder Service Plan include, but are not limited to,
expenses incurred in connection with shareholder services provided by the
Distributor and payments to Service Organizations for the provision of support
services with respect to the beneficial owners of B and K shares, such as
assisting clients in processing exchange and redemption requests and in
changing dividend options and account descriptions and responding to client
inquiries concerning their investments. Administrative services under the
Administrative Services Plan include, but are not limited to, expenses incurred
in connection with administrative services provided by the Distributor and
payments to Service Organizations for the provision of administrative services
to beneficial owners of K shares, such as establishing and maintaining accounts
and records relating to their clients who invest in K shares, providing
information to the Funds necessary for accounting or subaccounting, and
providing information periodically to clients showing their position in K
shares.
Under the Distribution and Services Plan and Distribution Plan, payments by a
Fund for distribution expenses may not exceed 0.75% and 0.75% (annualized),
respectively, of the average daily net assets of such Fund's B and K shares.
Under the Distribution and Services Plan and Administrative and Shareholder
Services Plan, payments for shareholder servicing expenses may not exceed 0.25%
(annualized), of the average daily net assets of such Fund's B and K shares.
Under the Administrative and Shareholder Services Plan, payments for
54
<PAGE> 364
administrative servicing expenses may not exceed 0.25% (annualized) of the
average daily net assets of a Fund's K shares. The total of all 12b-1 fees,
administrative services fees and shareholder service fees may not exceed, in
the aggregate, the annual rate of 1.00% of the average daily net assets of a
Fund's K shares. These amounts may be reduced pursuant to undertakings by the
Distributor. Payments for distribution expenses under the Distribution and
Services Plan and Distribution Plan are subject to Rule 12b-1 under the 1940
Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
55
<PAGE> 365
PACIFIC HORIZON FUNDS, INC.
X Shares:
California Tax-Exempt Money Market Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Information
3. Condensed Financial Information . . . . Financial Highlights;
Performance Calculation
4. General Description of Registrant . . . Description of Shares; Cover
Page; Investment Objective
and Policies; Investment
Limitations; Other Investment
Practices; Special
Considerations and Risks
5. Management of the Fund . . . . . . . . . Management of the Fund
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend; Distributions and
Taxes
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . Purchase and Redemption of
Shares; Management of the Fund
8. Redemption or Repurchase . . . . . . . . Purchase and Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 366
PROSPECTUS
________________, 1996
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
(Investment Portfolio Offered by Pacific Horizon Funds, Inc.)
_______________________________________________________________________________
THIS PROSPECTUS APPLIES TO THE X SHARES OF THE CALIFORNIA TAX-EXEMPT MONEY
MARKET FUND (THE "FUND"), A NO-LOAD TAX-EXEMPT, NON-DIVERSIFIED INVESTMENT
PORTFOLIO OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE "COMPANY"). THE COMPANY
IS REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS AN OPEN-END
MANAGEMENT INVESTMENT COMPANY. THE FUND IS DESIGNED TO PROVIDE INVESTORS WITH
DAILY LIQUIDITY.
THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK AS HIGH A LEVEL OF CURRENT
INTEREST INCOME FREE OF FEDERAL INCOME TAX AND CALIFORNIA STATE PERSONAL INCOME
TAX AS IS CONSISTENT WITH THE PRESERVATION OF CAPITAL AND RELATIVE STABILITY OF
PRINCIPAL. THE FUND SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING PRIMARILY IN
U.S. DOLLAR-DENOMINATED OBLIGATIONS THE INTEREST ON WHICH, IN THE OPINION OF
BOND COUNSEL, IS EXEMPT FROM REGULAR FEDERAL INCOME TAX ("MUNICIPAL
SECURITIES") AND IS ALSO EXEMPT FROM TAXATION UNDER THE LAWS OR CONSTITUTION OF
CALIFORNIA.
CURRENTLY, CLASS X SHARES ARE AVAILABLE ONLY TO QUALIFIED RETAIL CUSTOMERS WHO
PURCHASE SUCH SHARES THROUGH A SWEEP ACCOUNT ("SWEEP ACCOUNT") OFFERED BY BA
INVESTMENT SERVICES, INC. ("BAIS") AND CERTAIN OTHER BROKER-DEALERS AND
FINANCIAL SERVICE ORGANIZATIONS ("SERVICE ORGANIZATIONS"). A SWEEP ACCOUNT
COMBINES A BROKERAGE ACCOUNT (THE "TRANSACTION ACCOUNT") WITH A DAILY SWEEP OF
BALANCES TO OR FROM THE FUND'S CLASS X SHARES. BAIS OR SERVICE ORGANIZATIONS,
AS APPLICABLE, ARE RESPONSIBLE FOR PROVIDING PERSONS INVESTING IN CLASS X
SHARES THROUGH A SWEEP ACCOUNT WITH A SWEEP ACCOUNT AGREEMENT AND DISCLOSURE
STATEMENT (COLLECTIVELY, THE "DISCLOSURE DOCUMENTS") DESCRIBING THE VARIOUS
FEATURES AND OPERATIONS OF THE SWEEP ACCOUNT. THE DISCLOSURE DOCUMENTS SHOULD
BE REVIEWED IN CONJUNCTION WITH THIS PROSPECTUS.
THE FUND IS CONCENTRATED IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA OR
ENTITIES WITHIN THE STATE OF CALIFORNIA AND THE FUND MAY INVEST A SIGNIFICANT
PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER. THEREFORE, INVESTMENT IN THE FUND
MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
PORTFOLIO SECURITIES HELD BY THE FUND HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND.
<PAGE> 367
PORTFOLIO SECURITIES WHICH HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY
THE FUND WITHIN THIRTEEN MONTHS (AS WELL AS CERTAIN U.S. GOVERNMENT
OBLIGATIONS WITH FLOATING OR VARIABLE INTEREST RATES) AND SECURITIES HELD AS
COLLATERAL FOR REPURCHASE AGREEMENTS MAY HAVE LONGER MATURITIES. SHARES OF THE
FUND MAY BE PURCHASED OR REDEEMED AT ANY TIME WITHOUT CHARGE OR PENALTY IMPOSED
BY THE FUND.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA") SAN
FRANCISCO, CALIFORNIA, ACTS AS INVESTMENT ADVISER TO THE COMPANY. CONCORD
FINANCIAL GROUP, INC. SPONSORS THE FUND AND ACTS AS ITS DISTRIBUTOR AND CONCORD
HOLDING CORPORATION ACTS AS ITS ADMINISTRATOR, NEITHER OF WHICH IS AFFILIATED
WITH BANK OF AMERICA.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUND DESCRIBED
HEREIN THAT YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED
FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION DATED __________,
1996 (AS IT MAY, FROM TIME TO TIME BE REVISED), IS INCORPORATED BY REFERENCE
HEREIN AND DISCUSSES CERTAIN SUBJECTS IN THIS PROSPECTUS FURTHER AS WELL AS
OTHER MATTERS WHICH MAY BE OF INTEREST TO INVESTORS. A FREE COPY OF THE
STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED BY CALLING 800-332-3863.
_______________________________________________________________________________
Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, or obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. The Fund seeks to maintain a net asset
value per share at $1.00 for purposes of purchases and redemptions, although
there can be no assurance that it will be able to do so on a continuous basis.
Investment in the Fund involves investment risk, including the possible loss of
principal amount invested.
_______________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_______________________________________________________________________________
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus and in the
Statement of Additional Information, in
-2-
<PAGE> 368
connection with the offering of the Fund's shares and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or its distributor. This prospectus does not
constitute an offer by the Fund or by the distributor to sell, or a
solicitation of any offer to buy, any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
distributor to make such offer in such jurisdiction.
______________________________________________________________________________
<PAGE> 369
CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION . . . . . . . . . . . . . . . . 2
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . 3
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . 5
MUNICIPAL SECURITIES . . . . . . . . . . . . . . . 6
OTHER INVESTMENT PRACTICES . . . . . . . . . . . . 7
SPECIAL CONSIDERATIONS AND RISKS . . . . . . . . . 9
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . 11
INVESTMENT DECISIONS . . . . . . . . . . . . . . . 11
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . 12
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . 14
DIVIDENDS, DISTRIBUTIONS AND TAXES . . . . . . . . 16
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . 18
</TABLE>
<TABLE>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
</TABLE>
<PAGE> 370
EXPENSE INFORMATION
The following table sets forth certain information regarding the shareholder
transaction expenses imposed by the Fund and the annual operating expenses
expected to be incurred by the Fund for the next twelve months with respect to
its X Shares. Actual expenses may vary. Hypothetical examples based on the
table are also shown.
<TABLE>
<CAPTION>
CALIFORNIA
TAX-EXEMPT
SHAREHOLDER TRANSACTION EXPENSES MONEY MARKET
------------
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . None
Sales Load Imposed on Redemptions (1) . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . %
Rule 12b-1 and Shareholder Service Fees (2) . . . . . . . . . . . .55%
All Other Expenses . . . . . . . . . . . . . . . . . . . . . . .
Administration Fees . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . .
Total Fund Operating Expenses (3) . . . . . . . . . . . . . . . .
- ----------------------- =====
</TABLE>
(1) The Company reserves the right to impose a charge for wiring
redemption proceeds.
(2) Includes distribution fees payable at the annual rate of 0.30% of the
average daily net assets of the Fund's Class X Shares and shareholder
service fees payable at the annual rate of 0.25% of the average daily
net assets of the Fund's Class X Shares. Because of the Distribution
Plan payments paid by the Fund as shown in the above table, long-term
Class X shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association
of Securities Dealers, Inc.
(3) Additional fees charged by BAIS or Service Organizations related to
the Sweep Account are not included in this table. For additional
information with respect to Sweep Account fees and charges, including
a description of the services available to Sweep Account holders, you
should refer to the Disclosure Documents.
______________________________________________________________________________
<TABLE>
<CAPTION>
EXAMPLES 1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following
expenses on a $1,000 invest-
ment, assuming (1) a 5% annual
return and (2) redemption at the
end of each time period:
California Tax-Exempt Money
Market Fund- X Shares . . . . . . $___ $___
</TABLE>
______________________________________________________________________________
The foregoing Expense Summary and Example are intended to assist investors in X
Shares in understanding the various shareholder transaction and operating
expenses that investors bear either directly or indirectly. From time to time,
the investment adviser and administrator may prospectively waive a portion of
their respective fees and/or assume certain expenses of the
-2-
<PAGE> 371
Fund. For a further description of the Fund's operating expenses, see
"Management of the Fund" and "Description of Shares" in this Prospectus.
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURN AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURN
AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The Fund commenced operations on December 6, 1989 as a portfolio of the Company
with a single series of shares, Pacific Horizon Shares. On March 1, 1993 and
on February 24, 1996, the Fund began offering a second and third series of
shares known as the Horizon Service Shares and the Horizon Shares,
respectively. As of the date of this prospectus, the Fund began offering X
Shares. The shares of each class in the Fund represent equal pro rata
interests in the Fund, except that they bear different expenses which reflect
the difference in the range of services provided to them. Class X Shares bear
the expense of a distribution and services plan (the "Distribution and Services
Plan") at annual rates not to exceed 0.55% of the average daily net asset value
on the Fund's outstanding Class X Shares. See "Description of Shares" below.
The table below sets forth certain information concerning the investment
results for Pacific Horizon Shares of the Fund for the periods indicated. The
table is presented for informational purposes only. Actual investment results
of the Class X Shares of the Fund may be different. The information contained
in the Financial Highlights has been audited by ________________
_______________, independent accountants of the Fund, whose unqualified report
thereon insofar as it relates to the _____ year period ended ________ __, ____
is incorporated by reference in the Statement of Additional Information, which
may be obtained upon request. The Financial Highlights should be read in
conjunction with the financial statements and notes thereto and the unqualified
report of the independent accountants which are incorporated by reference in
the Statement of Additional Information. See "Description of Shares" below for
certain differences among the Pacific Horizon Shares, Horizon Shares, Horizon
Service Shares and Class X Shares, including differences relating to expenses.
-3-
<PAGE> 372
Selected Data for a Pacific Horizon Share Outstanding Throughout Each of the
Periods Indicated:
<TABLE>
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
<CAPTION>
Year Ended Period
---------------------------------------------------------------------------- Ended
February 29, February 28, February 28, February 28, February 29, February 28, February 28,
1996++ 1995++ 1994++ 1993++ 1992 1991 1990*
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C>
PACIFIC HORIZON SHARES:
Net asset value per share, beginning
of period . . . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income . . . . . . . 0.0249 0.0186 0.0224 0.0364 0.0495 0.0118
Net realized gain (loss)
on securities . . . . . . . . . . (0.0001) 0.0002 (0.0002) 0.0000 (0.0001) 0.0000
------- -------- -------- -------- -------- --------
Total income from investment
operations . . . . . . . . . . . 0.0248 0.0188 0.0222 0.0364 0.0494 0.0118
Less Dividends:
Dividends from net investment
income . . . . . . . . . . . . . (0.0249) (0.0186) (0.0224) (0.0364) (0.0495) (0.0118)
------- -------- -------- -------- -------- --------
Net Change in net asset value
per share . . . . . . . . . . . . . (0.0001) 0.0002 (0.0002) 0.0000 (0.0001) 0.0000
------- -------- -------- -------- -------- --------
Net asset value per share,
end of period . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- -------- --------
Total return . . . . . . . . . . . . 2.52% 1.88% 2.27% 3.70% 5.06% 1.18%+++
Ratios/supplemental data:
Net assets, end of period (000) . . $186,643 $203,724 $128,448 $107,424 $118,816 $ 51,380
Ratio of expenses to average
net assets . . . . . . . . . . . 0.62% 0.66%** 0.66%** 0.57%** 0.55%** 0.49%+**
Ratio of net investment income
to average net assets . . . . . . 2.48% 1.86%** 2.21%** 3.62%** 4.81%** 5.10%+**
- ------------------------
</TABLE>
* For the period December 6, 1989 (commencement of operations) through
February 28, 1990.
** Net of fee waivers and expense reimbursements by the Adviser and
the Administrator which had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.02%, 0.08%, 0.13% and 0.22% for the years ended
February 28, 1994, February 28, 1993, February 29, 1992 and February 28,
1991, respectively, and 0.49% (annualized) for the period ended February
28, 1990.
+ Annualized.
++ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
+++ Not annualized.
YIELD INFORMATION. From time to time the "yield," "effective yield" or
"tax-equivalent yield" of the Fund may be quoted in advertisements or reports
to shareholders. Each yield figure is based on historical earnings and is not
intended to indicate future performance. The "yield" of the Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement or report). This income is then
"annualized" -- that is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. The Fund's "tax-equivalent yield" shows the level of
taxable yield needed to produce an after-tax equivalent to the Fund's tax-free
yield. This is done by increasing the Fund's yield (calculated as above) by
the amount necessary to reflect the payment of Federal and California income
tax at a stated tax rate. The Fund's "tax-equivalent yield" will always be
higher than its "yield."
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Additionally, the yields of the Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Fund's yields may be compared to Donoghue's Tax-Free Money Fund Average and
Donoghue's Money Fund Averages, which are averages compiled by Donoghue's Money
Fund Report. Yield data as reported in national financial publications,
including Money, Forbes, Barron's, Wall Street Journal and New York Times, or
in publications of a local or regional nature, may also be used in comparing
the yields of the Fund. A complete listing of the indices, rankings and
publications discussed above is contained in the Statement of Additional
Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the shares of the Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
yield is generally a function of the kind and quality of the instruments held
in a portfolio, portfolio maturity, operating expenses and market conditions.
Any fees charged by Bank of America or Service Organizations directly to their
customer accounts in connection with investments in shares of the Fund (which
fees may include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income) will
not be included in the Fund's calculations of yield.
INVESTMENT OBJECTIVE AND POLICIES
IN GENERAL
This section describes the investment objectives and policies of the Fund.
Assets of the Fund will be invested in dollar-denominated debt securities with
remaining maturities of thirteen months or less as defined by the Securities
and Exchange Commission (the "SEC"), and the dollar-weighted average portfolio
maturity of the Fund will not exceed 90 days. All securities acquired by the
Fund will be determined by the investment adviser, under guidelines established
by the Company's Board of Directors, to present minimal credit risks.
Securities acquired by the Fund will be Eligible Securities, which consist
either of instruments that are rated at the time of purchase in the top two
rating categories by one or more NRSROs, or are issued by issuers with such
ratings. The Appendix to the Statement of Additional Information includes a
description of the applicable NRSRO ratings. Unrated instruments (including
instruments with long-term but no short-term ratings) purchased by the Fund
will be of comparable quality to the rated instruments that the Fund may
purchase, as determined by the Fund's investment adviser pursuant to guidelines
approved by the Board of Directors.
The Fund's investment objective is to seek as high a level of current interest
income free of Federal income tax and California state personal income tax as
is consistent with the preservation of capital and relative stability of
principal. The Fund's assets are primarily invested in Municipal Securities
issued by or on behalf of the State of California and other governmental
issuers. Municipal Securities acquired by the Fund will generally have
remaining maturities of thirteen months or less.
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As a matter of fundamental policy, under normal market conditions at least 80%
of the Fund's net assets will be invested in Municipal Securities, the interest
on which is exempt from taxation under the California Constitution or the laws
of California ("California Municipal Securities"). So long as at least 50% of
the Fund's total assets are invested in debt obligations, the interest on which
is exempt from taxation by the state of California ("California Exempt
Securities," which are generally limited to California Municipal Securities and
certain U.S. Government and U.S. Possession obligations) as of the end of each
quarter, dividends paid by the Fund which are derived from interest on
California Exempt Securities will be exempt from California state personal
income tax; if this policy is not achieved, no portion of the Fund's dividends
will be exempt from California state personal income tax. Dividends derived
from interest on Municipal Securities other than California Municipal
Securities will be subject to California state personal income tax. See
"Taxes."
The Fund may hold uninvested cash reserves pending investment, during temporary
defensive periods, or if, in the opinion of the Fund's investment adviser,
suitable tax-exempt obligations are unavailable. In accordance with the Fund's
investment objective, and subject to the Fund's fundamental policy that under
normal market conditions 80% of its net assets be invested in California
Municipal Securities, investments may be made in taxable obligations of up to
thirteen months in maturity if, for example, suitable tax-exempt obligations
are unavailable or if acquisition of U.S. Government or other taxable
securities is deemed appropriate for temporary defensive purposes. Such
taxable obligations include, without limitation, obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (some of
which may be subject to repurchase agreements), certificates of deposit and
bankers' acceptances of selected banks and commercial paper. Because the Fund
invests in securities backed by banks and other financial institutions, changes
in the credit quality of these institutions could cause losses to the fund and
affect its share price. These obligations are described further in the
Statement of Additional Information. Under normal market conditions, the Fund
anticipates that not more than 5% of its net assets will be invested in any one
category of taxable securities. Additionally, the Fund will not invest more
than 10% of its total assets in securities that are illiquid because of absence
of a readily available market or otherwise, including repurchase agreements
providing for settlement more than seven days after notice.
MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds are generally revenue
securities, which are not payable from the unrestricted revenues of the
issuers, and the credit ratings of such bonds are usually directly related to
the credit ratings of the users of the facilities involved. The Fund may also
acquire "moral obligation" securities, which are normally issued by special
purpose public authorities. If the issuer of moral obligation securities is
unable to meet its debt service obligations from current revenues it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
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Municipal Securities include debt obligations issued by governmental entities
to obtain funds for various public purposes, including the construction of a
wide range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from regular
Federal income tax. Municipal Securities also include short-term tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
other forms of short-term loan obligations. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds
of bond placements or revenues. The Fund may also purchase tax-exempt
commercial paper.
Securities acquired by the Fund may be in the form of custodial receipts
evidencing rights to receive a specific future interest payment, principal
payment or both on certain Municipal Securities. Such obligations are held in
custody by a bank on behalf of holders of the receipts. These custodial
receipts are known by various names, including "Municipal Receipts," "Municipal
Certificates of Accrual on Tax- Exempt Securities" ("M-CATS") and "Municipal
Zero-Coupon Receipts." The Fund may also purchase from time to time
participation interests in debt securities held by trusts or financial
institutions. A participation interest gives the Fund a specified undivided
interest (up to 100%) in the underlying obligation. Participation interests
purchased by the Fund may have fixed, floating or variable rates of interest,
and will have remaining maturities of thirteen months or less as determined in
accordance with the regulations of the SEC (although the securities held by the
issuer may have longer maturities). If a participation interest is unrated,
the investment adviser will have determined that the interest is of comparable
quality to those instruments in which the Fund may invest pursuant to
guidelines approved by the Company's Board of Directors. For certain
participation interests, the Fund will have the right to demand payment, on not
more than 30 days' notice, for all or any part of such participation interest,
plus accrued interest; as to these instruments, the Fund intends to exercise
its right to demand payment as needed to provide liquidity, to maintain or
improve the quality of its investment portfolio or upon a default (if permitted
under the terms of the instrument). Although a participation interest may be
sold by the Fund under normal circumstances they will be held until maturity.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from regular Federal income tax (and, with respect to
California Municipal Securities, California state personal income tax), are
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Fund nor its investment adviser will review the proceedings
relating to the issuance of Municipal Securities or the bases for such
opinions.
OTHER INVESTMENT PRACTICES
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the Fund may
include variable and floating rate instruments, which may have a stated
maturity in excess of the Fund's maturity limitations but which will, in such
event, permit the Fund to demand payment of the principal of the instrument at
least once every thirteen months upon not more than thirty days notice. Such
instruments may include variable amount master demand notes that permit the
indebtedness thereunder to vary, in addition to providing for periodic
adjustments in the
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interest rate. There may be no active secondary market with respect to a
particular variable or floating rate instrument. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value to the
Fund will approximate their par value. Illiquid variable and floating rate
instruments (instruments which are not payable upon seven days notice and do
not have an active trading market) that are acquired by the Fund are subject to
the Fund's percentage limitations on illiquid investments. The Fund's
investment adviser will continuously monitor the creditworthiness of issuers of
variable and floating rate instruments in which the Fund invests, and their
ability to repay principal and interest.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Fund
may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Fund to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Fund to lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in interest rates. Delayed settlement describes a
securities transaction in the secondary market for which settlement will occur
sometime in the future. When-issued, forward commitment and delayed settlement
transactions involve the risk, however, that the yield or price obtained in a
transaction may be less favorable than the yield or price available in the
market when the securities delivery takes place. The Fund's forward
commitments, when-issued purchases and delayed settlements are not expected to
exceed 25% of the value of its total assets absent unusual market conditions.
The Fund's liquidity and the ability of the investment adviser to manage its
portfolio may be adversely affected in the event its forward commitments,
commitments to purchase when-issued securities and delayed settlements ever
exceed 25% of the value of its total assets. The Fund does not intend to
engage in these transactions for speculative purposes but only in furtherance
of its investment objectives.
"STAND-BY COMMITMENTS." The Fund may acquire "stand-by commitments" with
respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase at the Fund's option specified
Municipal Securities at a specified price. The Fund will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes. The Fund expects that
"stand-by commitments" will generally be available without the payment of any
direct or indirect consideration. However, if necessary or advisable, the Fund
will pay for a "stand-by commitment" either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the
same securities).
REPURCHASE AGREEMENTS. The Fund may agree to purchase securities from
financial institutions, such as banks and broker-dealers, as are deemed
creditworthy by the Company's investment adviser under guidelines approved by
the Board of Directors, subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Although the
securities subject to a repurchase agreement may bear maturities exceeding
thirteen months, the Fund intends only to enter into repurchase agreements
having maturities not exceeding 60 days. Securities subject to repurchase
agreements are held either by the Company's custodian, or sub-custodian, or in
the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to deliver instruments the value of
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which is 102% of the repurchase price (excluding accrued interest), provided
that notwithstanding such requirement the adviser shall require that the value
of the collateral, after transaction costs (including loss of interest)
reasonably expected to be incurred on a default, shall be equal to or greater
than the resale price (including interest) provided in the agreement. Default
by the seller would, however, expose the Fund involved to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations. Repurchase agreements are considered to be loans under
the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to financial institutions and agree to
repurchase them at an agreed upon date and price. At the time the Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account liquid assets or high grade debt securities having a value equal to or
greater than the repurchase price and the investment adviser will continuously
monitor the account to ensure that the value is maintained. The Fund would
only enter into reverse repurchase agreements to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. Reverse
repurchase agreements involve the risk that the market value of the portfolio
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase. Interest paid by the Fund in connection with
a reverse repurchase agreement will reduce the net investment income of the
Fund. Reverse repurchase agreements are considered to be borrowings under the
Investment Company Act of 1940. The Fund will not purchase securities while it
has borrowings (including reverse repurchase agreements) outstanding.
SPECIAL CONSIDERATIONS AND RISKS
THE FUND IS CONCENTRATED IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA OR
ENTITIES WITHIN THE STATE OF CALIFORNIA AND THE FUND MAY INVEST A SIGNIFICANT
PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER. THEREFORE, INVESTMENT IN THE FUND
MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
In seeking to achieve its investment objective, the Fund may invest in private
activity bonds the interest on which, although exempt from regular Federal
income tax, may constitute an item of tax preference for purposes of the
Federal alternative minimum tax. See "Taxes." Investments in such securities,
however, will not exceed under normal market conditions 20% of the Fund's total
assets when added together with any taxable investments held by the Fund.
Moreover, although the Fund does not presently intend to do so on a regular
basis, the Fund may invest more than 25% of its assets in Municipal Securities
the interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the investment adviser. To
the extent the Fund's assets are concentrated in Municipal Securities payable
from revenues on similar projects or issued by issuers located in the same
state, the Fund will be subject to the peculiar economic, political and
business risks presented by the laws and economic conditions relating to such
states and projects to a greater extent than it would be if its assets were not
so concentrated.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940. Investment return on a non- diversified
portfolio typically is dependent upon the
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performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security
may affect the overall value of a non-diversified portfolio more than it would
a diversified portfolio, and thereby subject the market-based net asset value
per share of the non-diversified portfolio to greater fluctuations. In
addition, a non-diversified portfolio may be more susceptible to economic,
political and regulatory developments than a diversified investment portfolio
with similar objectives may be.
The Fund's concentration in California Municipal Securities raises additional
considerations. Payment of the interest on and the principal of these
obligations is dependent upon the continuing ability of California issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk
inherent in the Fund's concentration in such obligations versus the safety that
comes with a less geographically concentrated investment portfolio and should
compare the yield available on a portfolio of California issues with the yield
of a more diversified portfolio including non-California issues before making
an investment decision.
Many of the Fund's Municipal Securities are likely to be obligations of
California governmental issuers which rely in whole or in part, directly or
indirectly, on real property taxes as a source of revenue. "Proposition
Thirteen" and similar California constitutional and statutory amendments and
initiatives in recent years have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters in recent years, through limiting various other
taxes, have resulted in a substantial reduction in state revenues. Decreased
state revenues may result in reductions in allocations of state revenues to
local governments.
Because of the complex nature of the various initiatives mentioned above and
certain possible ambiguities and inconsistencies in their terms and the scope
of various exemptions and exceptions, as well as the impossibility of
predicting the level of future appropriations for state and local California
governmental entities, it is not presently possible to determine the impact of
these initiatives and related measures on the ability of California
governmental issuers to pay interest or repay principal on their obligations.
There have, however, been certain adverse developments with respect to
Municipal Securities of California governmental issuers over the past several
years.
In addition to the various initiatives discussed above, economic factors such
as the reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the economy of California. In
recent years, these economic factors reduced revenues to the state government
at a time when expenses of state government such as education costs, various
welfare costs and other expenses were rising. Such economic factors adversely
impacted the ability of state and local California governmental entities to
repay debt and these factors, and others that cannot be predicted, may have an
adverse impact in the future.
In addition to the risk of nonpayment of state and local California
governmental debt, if such debt declines in quality and is downgraded by the
NRSROs, it may become ineligible for purchase by the Fund pursuant to current
SEC regulations. Since there are large numbers of buyers of such debt that are
similarly restricted, the supply of Eligible Securities (as defined above)
could become inadequate at certain times. A more detailed description of
special factors
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affecting investments in California Municipal Securities, of which investors
should be aware, is set forth in the Statement of Additional Information.
INVESTMENT LIMITATIONS
The investment objective of the Fund is a fundamental policy that may not be
changed without a vote of the holders of a majority of the Fund's outstanding
shares (as defined in the Investment Company Act of 1940). The Fund's policies
may be changed by the Company's Board of Directors without the affirmative vote
of the holders of a majority of the Fund's outstanding shares, except that the
investment limitations set forth below may not be changed without such a vote
of shareholders. A description of certain other fundamental investment
limitations is contained in the Statement of Additional Information.
The Fund may not:
1. Under normal market conditions invest less than 80% of its net assets
in California Municipal Securities.
2. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the
securities of such issuer, except that (a) up to 50% of the value of
the Fund's total assets may be invested without regard to this 5%
limitation provided that no more than 25% of the value of the Fund's
total assets are invested in the securities of any one issuer and (b)
this 5% limitation does not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities.
3. Borrow money or issue senior securities, except that the Fund may
borrow from banks or enter into a reverse repurchase agreement to meet
redemptions or for other temporary purposes in amounts up to 10% of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of its total assets at the time of such borrowing.
INVESTMENT DECISIONS
Investment decisions for the Fund are made independently from those for other
investment companies and accounts managed by Bank of America and its affiliated
entities. Such other investment companies and accounts may also invest in the
same securities as the Fund. When a purchase or sale of the same security is
made at substantially the same time on behalf of the Fund and another
investment company or account, available investments or opportunities for sales
will be allocated in a manner which Bank of America believes to be equitable.
In some instances, this investment procedure may adversely affect the price
paid or received by the Fund or the size of the position obtained or sold by
the Fund. In addition, in allocating purchase and sale orders for portfolio
securities (involving the payment of brokerage commissions or dealer
concessions), Bank of America may take into account the sale of shares of the
Fund by broker-dealers and other financial institutions (including affiliates
of Bank of America and the Fund's distributor), provided Bank of America
believes that the quality of
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the transaction and the amount of the commission are not less favorable than
what they would be with any other unaffiliated qualified firm.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The business of the Company is managed under the direction
of its Board of Directors. Information about the Directors and Officers of the
Company is included in the Statement of Additional Information.
INVESTMENT ADVISER. Bank of America National Trust and Savings Association
("Bank of America") serves as the Fund's investment adviser. Bank of America,
which has principal offices located at 555 California Street, San Francisco,
California 94104, is a national banking association formed in 1904 which
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries. Bank of America is the
successor by merger to Security Pacific National Bank ("Security Pacific"),
which previously served as investment adviser to the Company since it commenced
operations in 1984. Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
As investment adviser Bank of America manages the Fund's investments and is
responsible for all purchases and sales of the Fund's portfolio securities.
For its investment advisory services, Bank of America is entitled to receive a
fee accrued daily and payable monthly at the following annual rates: .10% of
the first $3 billion of the Fund's net assets, plus .09% of the next $2 billion
of the Fund's average daily net assets, plus .08% of the Fund's net assets over
$5 billion. For the fiscal year ended February 29, 1996, the Fund paid Bank of
America advisory fees at the effective annual rate of __% of its average net
assets.
In addition, BAIS or Service Organizations may receive fees charged directly to
its customers' accounts in connection with investments in Fund shares.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator" ) serves as
the Company's administrator and assists generally in supervising the Fund's
operations. The Administrator is a wholly-owned subsidiary of The BISYS Group,
Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio 43219.
Under its basic administrative services agreement for the Fund, the
Administrator has agreed to provide facilities, equipment and personnel to
carry out administrative services that are for the benefit of all series of
shares in the Fund, including coordination of reports to shareholders and the
SEC; calculation of the net asset value of Fund shares and dividends and
capital gains distributions to shareholders; payment of the costs of
maintaining the Fund's offices; preparation of tax returns; provision of
internal legal and accounting compliance services; maintenance (or oversight of
the maintenance by others approved by the Board of Directors) of the Fund's
books and records; and the provision of various services for shareholders who
have
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made a minimum initial investment of at least $500,000, including the provision
of a facility to receive purchase and redemption orders for the accounts of
such shareholders.
For these administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7 billion of the Fund's average daily net assets,
plus .09% of the next $3 billion of the Fund's average daily net assets, plus
.08% of the Fund's average daily net assets over $10 billion. For the fiscal
year ended February 29, 1996, the Fund paid the Administrator administration
fees at the effective annual rates of __% of their respective average daily net
assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above -- e.g.
calculating the net asset value of Fund shares and dividends to shareholders
and maintaining the Fund's books and records. The Fund bears all fees and
expenses charged by the bank for these services.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the
principal underwriter and distributor of shares of the Fund. The Distributor
is a wholly-owned subsidiary of the Administrator organized to distribute
shares of mutual funds to institutional and retail investors. Its offices are
located at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor makes a continuous offering of the Fund's shares and bears the
costs and expenses of printing and distributing to selected dealers and
prospective investors copies of any prospectuses, statements of additional
information and annual and interim reports of the Fund (after such items have
been prepared and set in type by the Fund) that are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it
for use by selected dealers in connection with the offering of the Fund's
shares for sale to the public.
CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90 Washington
Street, New York, New York 10286, serves as the Fund's custodian. BISYS Fund
Services Ohio, Inc. (the "Transfer Agent"), 3435 Stelzer Road, Columbus, Ohio
43219-3035 serves as transfer agent and dividend disbursing agent. The Company
has also entered into a Cash Management and Related Services Agreement with The
Bank of New York pursuant to which The Bank of New York receives and disburses
funds in connection with the purchase and redemption of and the payment of
dividends and other distributions with respect to, the Fund.
DISTRIBUTION AND SERVICES PLAN
Under the Distribution and Services Plan, the Fund pays the Distributor for
distribution expenses primarily intended to result in the sale of the Fund's
Class X shares and for shareholder servicing expenses. Such distribution
expenses include expenses incurred in connection with advertising and marketing
the Fund's Class X shares; payments to Service Organizations for assistance in
connection with the distribution of Class X shares; and expenses incurred in
connection with preparing, printing and distributing prospectuses for the Fund
(except those used for regulatory purposes, or for distribution to existing
shareholders of the Fund) and in implementing and operating the Distribution
and Services Plan. Shareholder servicing expenses
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include expenses incurred in connection with shareholder services provided by
the Distributor and payments to Service Organizations for the provision of
support services with respect to the beneficial owners of Class X shares, such
as establishing and maintaining accounts and records relating to their clients
who invest in Class X shares, assisting clients in processing exchange and
redemption requests and in changing dividend options and account descriptions,
and responding to client inquiries concerning their investments and developing,
maintaining and operating systems necessary to support Sweep Accounts.
Under the Distribution and Services Plan, payments by the Fund for distribution
expenses may not exceed 0.30% (annualized) of the average daily net assets of
such Fund's Class X shares and payments for shareholder servicing expenses may
not exceed 0.25% (annualized) of the average daily net assets of such Fund's
Class X shares. These amounts may be reduced pursuant to undertakings by the
Distributor. Payments for distribution expenses under the Distribution and
Services Plan are subject to Rule 12b-1 under the 1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and the Distributor) that they are or will be licensed as
dealers as required by applicable law or will not engage in activities which
would require them to be so licensed.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of
Additional Information, the Fund's service contractors bear all expenses in
connection with the performance of their services and the Fund bears the
expenses incurred in its operations. From time to time during the course of
the Fund's fiscal year, the Administrator and/or Bank of America may
voluntarily not receive payment of fees and/or assume certain expenses of the
Fund, while retaining the ability to be reimbursed by the Fund for such amounts
prior to the end of the fiscal year and, subject to the expense limitations of
certain states, to stop such fee waivers and expense reimbursement at any time.
This will have the effect of increasing yield to investors at the time such
fees are not received or amounts are assumed and decreasing yield when such
fees or amounts are reimbursed.
PURCHASE AND REDEMPTION OF SHARES
OPENING AN ACCOUNT. Class X Shares of the Fund are offered by this Prospectus
to customers of BAIS or Service Organizations that establish a Sweep Account
with BAIS or a Service Organization. Each Sweep Account combines a Transaction
Account with a periodic sweep of balances to or from the Fund. Investors may
open a Sweep Account by completing and signing the Disclosure Documents. The
Disclosure Documents contain important information about the various features
and operations of the Sweep Account and should be reviewed in conjunction with
this Prospectus.
Class X Shares may be purchased by making a deposit into your Transaction
Account. On each day that both the Fund's custodian and the New York Stock
Exchange (the "Exchange") are open for business (a "Business Day") and that
BAIS or a Service Organization is open for business, BAIS or a Service
Organization computes the net amount of all deposits, withdrawals, charges and
credits made to and from a Transaction Account in accordance with their Sweep
Account procedures (the "Net Sweep Amount"). If deposits and credits exceed
withdrawals and charges, you authorize BAIS or a Service Organization, on your
behalf, to transmit a purchase
-14-
<PAGE> 383
order to the Fund designated in your Sweep Account in the amount of that day's
Net Sweep Amount in accordance with the Sweep Account procedures of Bank of
America or a Service Organization. Your purchase order will be made effective
and full and fractional Shares will be purchased at the net asset value per
share next determined after receipt by the Transfer Agent. It is the
responsibility of BAIS or the Service Organization to transmit orders for the
purchases of shares by its customers to the Transfer Agent and deliver required
funds on a timely basis, in accordance with the procedures stated above. Share
purchases and redemptions executed through BAIS or a Service Organization are
executed only on Business Days that BAIS or a Service Organization,
respectively, is open for business. Contact Bank of America or your Service
Organization for additional information about Bank of America's or the Service
Organization's Sweep Account procedures.
SHARE PRICE. The net asset value per share of the Fund is the value of all
securities and other assets owned by the Fund that are allocable to X Shares,
less the liabilities charged to X Shares, divided by the number of outstanding
X Shares.
Shares of the Fund may be purchased on any Business Day that BAIS or the
particular Service Organization, as applicable, is open for business. The net
asset value of the Fund is determined on each Business Day as of 2:30 p.m.
Eastern time and the close of regular trading hours on the Exchange (or 4:00
p.m. Eastern time if the Exchange is closed). All transaction orders are
processed by the Company at the net asset value next determined after the order
is received by the Company. In computing net asset value, the Fund uses the
amortized cost method of valuation as described in the Statement of Additional
Information under "Additional Purchase and Redemption Information--Valuation."
The net asset value per share for purposes of pricing purchase and redemption
orders for the Fund is determined independently of that for other portfolios of
the Company. For voice recorded price and yield information call (800)
227-1545.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account. See the Fund's
Sweep Account Application for further information about this requirement.
REDEMPTION OF SHARES
If, on any Business Day that BAIS or the particular Service Organization is
open for business, withdrawals from and charges to your Sweep Account,
including without limitation check transactions, exceed deposits and credits,
BAIS or the Service Organization, as applicable, will transmit a redemption
order on your behalf to the Fund in the dollar amount of that day's Net Sweep
Amount. If your Sweep Account with BAIS or the Service Organization, as
applicable, is closed as described in the Disclosure Documents, BAIS or the
Service Organization, as applicable, transmits a redemption request on your
behalf to the Fund for the balance of the Class X Shares of the Fund held
through your Sweep Account. Redemptions are effected by the Company on a
Business Day at the net asset value per share next determined after receipt of
the redemption order by the Transfer Agent. The Fund will make payment for all
shares redeemed after receipt by the Transfer Agent of a request in proper
form, except as provided by the rules of the Securities and Exchange
Commission. During the period prior to the time the shares are redeemed,
dividends on such shares will accrue and be payable, and an investor
-15-
<PAGE> 384
will be entitled to exercise all other rights of beneficial ownership. The
Fund imposes no charge when shares are redeemed. It is the responsibility of
BAIS or the particular Service Organization to transmit the redemption order
and credit its customer's Transaction Account with the redemption proceeds on a
timely basis. BAIS or the Service Organization may withhold redemption
proceeds pending check collection or processing or for other reasons all as set
forth more fully in the Disclosure Documents.
ADDITIONAL SHAREHOLDER SERVICES
Certain optional services available to persons who invest directly in Pacific
Horizon, Horizon, and Horizon Service Shares of the Fund, including but not
limited to certain exchange privileges which allow shareholders to exchange
their Fund shares for shares of other funds in the Company, an automatic
investment program, automatic withdrawal program, and direct deposit program,
are not available to persons who invest in Class X Shares of the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The shareholders of the Fund are entitled to
dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments held by the Fund. The Fund's net
income is declared daily as a dividend. Shares begin accruing dividends on the
day the purchase order for the shares is executed and continue to accrue
dividends through and including the day before the redemption order for the
shares is executed. Dividends are paid within five business days after the end
of each month. Although the Fund does not expect to realize net long-term
capital gains, any such capital gains as may be realized will be distributed no
more than twice a year after reduction for any available capital loss
carryforward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the net asset
value of such shares on the payment date.
TAXES. Management of the Company believes that the Fund qualified separately
for its last taxable year as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), and it is intended that
the Fund will continue to qualify as a regulated investment company in future
years as long as such qualification is in the best interest of its
shareholders. Such qualification generally relieves the Fund of liability for
federal income taxes to the extent its earnings are distributed in accordance
with the Code. The policy of the Fund is to pay to shareholders at least 90%
of its exempt-interest income, net of certain deductions, for each taxable
year. Dividends derived from interest on Municipal Securities (known as
exempt-interest dividends) and paid to shareholders typically will not be
subject to regular federal income tax.
At the close of each quarter of its taxable year, if at least 50% of the value
of the Fund's total assets consists of California Exempt Securities and if the
Fund qualifies as a regulated investment company under the Code, then the Fund
will be qualified to pay dividends exempt from California state personal income
tax to its shareholders. If the Fund so qualifies, dividends
-16-
<PAGE> 385
derived from interest attributable to California Exempt Securities will be
exempt from California state personal income tax. (Such treatment may not
apply, however, to investors who are "substantial users" or "related persons"
with respect to facilities financed by portfolio securities held by the Fund.)
Any dividends paid to shareholders subject to California state franchise tax or
California state corporate income tax may be taxed as ordinary dividends to
such shareholders notwithstanding that all or a portion of such dividends are
exempt from California state personal income tax.
Except as noted with respect to the California state personal income tax,
distributions of net investment income may be taxable to investors under state
or local law as dividend income even though all or a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. Moreover, to the
extent, if any, that dividends paid to shareholders are derived from taxable
interest or from capital gains, such dividends will be subject to federal
income tax and California state personal income tax, whether or not such
dividends are reinvested.
The portion of dividends (if any) attributable to interest on certain private
activity bonds issued after August 7, 1986 must be included by shareholders as
an item of tax preference for purposes of determining liability (if any) for
the 26% to 28% federal alternative minimum tax applicable to individuals and
the 20% federal alternative minimum tax and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified federal alternative minimum taxable income over
$2,000,000. Shareholders receiving Social Security benefits should note that
all exempt-interest dividends will be taken into account in determining the tax
liability on such benefits.
Dividends declared in December of any year payable to shareholders of record on
a specified date in December will be deemed for federal tax purposes to have
been paid by the Fund and received by its shareholders on December 31, if such
dividends are paid during January of the following year.
OTHER STATE AND LOCAL TAXES. Investors are advised to consult their tax
advisers concerning the application of state and local taxes generally, which
may have different consequences from those of the Federal income tax and the
California state personal income tax described above. Exempt-interest
dividends generally will be exempt from state and local taxes as well.
However, except as noted with respect to California state personal income tax,
dividends paid by the Fund may be taxable to investors under state or local law
as dividend income even though all or a portion of such dividends may be
derived from interest on obligations that, if realized directly, would be
exempt from such taxes.
GENERAL. Shareholders will be advised at least annually as to the federal
income tax and the California state personal income tax consequences of
dividends and distributions made each year. The foregoing is only a brief
summary of some of the important tax considerations generally affecting the
Fund and its shareholders. Additional tax information of relevance to
particular investors, including investors who may be "substantial users" or
"related persons" with respect to facilities financed by Municipal Securities,
is contained in the Statement of Additional
-17-
<PAGE> 386
Information. Potential investors in the Fund should consult their tax advisers
with specific reference to their own tax situation.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation, and is
registered under the Investment Company Act of 1940 as an open- end management
investment company. The Fund commenced operations on December 6, 1989 as a
portfolio of the Company with a single series of shares, Pacific Horizon
Shares. On March 1, 1993 and February 24, 1996 the Fund began offering Horizon
Service Shares and Horizon Shares, respectively, and as of the date of this
prospectus, the Fund began offering X Shares. Horizon Shares and Horizon
Service Shares, which are described in a separate prospectus available upon
request, are sold to institutions and may not be purchased by individuals
directly.
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify
and reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class
of shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the issuance
of the following series of shares representing interests in the Fund: 500
million X Shares, five hundred million Horizon Shares, five hundred million
Horizon Service Shares and Pacific Horizon Shares. Pacific Horizon Shares,
Horizon Shares and Horizon Service Shares of the Fund are described in separate
Prospectuses available from the Distributor at the telephone number on the
cover of this Prospectus. The Board of Directors has also authorized the
issuance of additional classes and series of shares representing interests in
other investment portfolios of the Company, which are likewise described in
separate Prospectuses available from the Distributor. This Prospectus relates
primarily to the X Shares of the Fund and describes only the investment
objectives and policies, operations, contracts and other matters relating to
such shares.
Each X Share, Pacific Horizon Share, Horizon Share and Horizon Service Share in
the Fund has a par value of $.001, and, except as noted below, is entitled to
participate equally in the dividends and distributions declared by the Board of
Directors with respect to the Fund and in the net distributable assets of the
Fund on liquidation. Holders of the Fund's Horizon Service Shares bear the
fees described in the Prospectus for such shares that are paid to Shareholder
Organizations by the Fund under the Company's Shareholder Services Plan.
Similarly, holders of the Fund's Pacific Horizon Shares bear the fees described
in the Prospectus for such shares that are paid to Bank of America and the
Administrator by the Fund under the Company's Administrative Services Plan for
Pacific Horizon Shares. The fees paid under the Administrative Services Plan
are for services related to investor programs and facilities that are offered
in connection with Pacific Horizon Shares. Holders of Horizon Shares are not
subject to fees such as those paid under the Shareholder Services Plan or the
Administrative Services Plan. Holders of the Fund's X Shares bear the fees
described in this Prospectus that are paid to the Distributor and Service
Organizations by the Fund under the Company's Distribution and Services Plan.
The fees paid under the Distribution and Services Plan are for distribution and
shareholder services paid to Service Organizations in connection with X Shares.
As a result of the different fees borne by the series of shares in the Fund, at
any given time, the net yield on
-18-
<PAGE> 387
the Fund's X Shares generally will be approximately 0.23% less than the yield
on the Fund's Pacific Horizon Shares; 0.25% less than the yield on the same
Fund's Horizon Service Shares; and 0.55% less than the yield on the same Fund's
Horizon Shares. Standardized yield quotations will be computed separately for
each series of Shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class or series except as otherwise required by law or when class voting is
permitted by the Board of Directors. It is contemplated that all shareholders
of the Fund will vote together as a single class on matters relating to the
Fund's investment advisory agreement and on any change in its fundamental
investment limitations. Only holders of Pacific Horizon Shares of the Fund, if
affected by changes to such Plan, will be entitled to vote on matters submitted
to a vote of shareholders pertaining to the Fund's Administrative Services Plan
relating to the particular series. Only holders of Horizon Service Shares of
the Fund, if affected by changes to such Plan, will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Fund's
Shareholder Services Plan relating to the particular series. Only holders of X
Shares, if affected by changes to such Plan, will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Fund's
Distribution and Services Plan relating to the particular series. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant at its discretion. When issued for payment as described in this
Prospectus, shares will be fully paid and non-assessable. Certificates for
shares will not be issued.
The Company does not presently intend to hold annual meetings of shareholders
for the election of directors and other business unless and until such time as
less than a majority of the directors holding office have been elected by the
shareholders of the Company, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested by the holders of record of 10% or more of the
Company's outstanding shares of common stock. To the extent required by law
and the Company's undertaking with the Securities and Exchange Commission, the
Company will assist in shareholder communications in such matters. Shares have
cumulative voting rights to the extent that may be required by applicable law.
PERFORMANCE CALCULATIONS
From time to time, a Fund may quote its "yield," "effective yield" and
"tax-equivalent yield" in advertisements or in communications to shareholders.
Each yield figure is based on historical earnings and is not intended to
indicate future performance. The "yield" of a Fund refers to the income
generated by an investment in the Fund over a seven-day period (which period
will be identified in the advertisement or report). This income is then
"annualized" -- that is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" of a Fund is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of the assumed
reinvestment. A Fund's "tax-equivalent yield" shows the level of taxable yield
needed to produce an after-tax equivalent to the Fund's tax-free yield. This is
done by increasing the Fund's yield (calculated as above) by
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<PAGE> 388
the amount necessary to reflect the payment of federal, and in the case of the
California Tax-Exempt Money Market Fund, California income tax, at a stated tax
rate. A Fund's "tax-equivalent yield" will always be higher than its yield.
Additionally, the yields of a Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Tax-Exempt Money Fund's yields may be compared to Donoghue's Money Fund
Averages and the California Tax-Exempt Money Market Fund's yields may be
compared to Donoghue's Tax-Free Money Fund Average, which are averages compiled
by Donoghue's Money Fund Report. Yield data as reported in national financial
publications, including Money, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature, may also
be used in comparing the yields of a Fund. A complete listing of the indices,
rankings and publications discussed above is contained in the Statement of
Additional Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in shares of a Fund with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Bank of America or other institutional investors directly to
their customer accounts in connection with investments in shares of a Fund
(which fees may include, for example, account maintenance fees, compensating
balance requirements or fees based upon account transactions, assets or income)
will not be included in the Fund's calculations of yield.
____________________
Shareholder inquiries should be addressed to the Distributor at the address or
telephone numbers stated on the inside cover of this Prospectus.
-20-
<PAGE> 389
X SHARES
OF THE
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
PROSPECTUS
____________________, 1996
<PAGE> 390
PACIFIC HORIZON FUNDS, INC.
X Shares:
Prime Fund
and
Treasury Fund
______________________
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Performance Calculation
4. General Description of Registrant . . . Description of Shares; Cover
Page; Investment Objectives
and Policies; Investment
Limitations
5. Management of the Fund . . . . . . . . . Management of the Funds
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . Description of Shares;
Dividend, Distributions and
Taxes
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . Purchase of Shares;
Management of the Funds;
Distribution and Services
Plan; Performance Calculation
8. Redemption or Repurchase . . . . . . . . Redemption of Shares;
Distribution and Services Plan
9. Pending Legal Proceedings . . . . . . . *
</TABLE>
______________
* Item inapplicable or answer negative.
<PAGE> 391
PROSPECTUS
___________, 1996
PRIME FUND
TREASURY FUND
(Investment Portfolios offered by Pacific Horizon Funds, Inc.)
________________________________________________________________________________
________________________________________________________________
THIS PROSPECTUS APPLIES TO THE X SHARES OF TWO DIVERSIFIED INVESTMENT
PORTFOLIOS OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE "COMPANY")--THE
PRIME FUND AND TREASURY FUND (THE "FUNDS"). THE COMPANY IS REGISTERED UNDER
THE INVESTMENT COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT
INVESTMENT COMPANY. THE FUNDS ARE DESIGNED TO PROVIDE INVESTORS WITH DAILY
LIQUIDITY.
THE INVESTMENT OBJECTIVES OF THE PRIME FUND AND THE TREASURY FUND ARE TO SEEK
HIGH CURRENT INCOME AND STABILITY OF PRINCIPAL. THE PRIME FUND
SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING SUBSTANTIALLY ALL OF ITS ASSETS IN
A DIVERSIFIED PORTFOLIO OF U.S. DOLLAR-DENOMINATED "MONEY
MARKET" INSTRUMENTS SUCH AS BANK CERTIFICATES OF DEPOSIT AND BANKERS'
ACCEPTANCES, COMMERCIAL PAPER AND REPURCHASE AGREEMENTS, IN ADDITION TO
OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR
INSTRUMENTALITIES. THE TREASURY FUND SEEKS TO ACHIEVE THIS OBJECTIVE
BY INVESTING SOLELY IN DIRECT OBLIGATIONS ISSUED BY THE U.S. TREASURY AND
REPURCHASE AGREEMENTS RELATING TO SUCH TREASURY OBLIGATIONS.
CURRENTLY, CLASS X SHARES ARE AVAILABLE ONLY TO QUALIFIED RETAIL CUSTOMERS WHO
PURCHASE SUCH SHARES THROUGH A SWEEP ACCOUNT ("SWEEP ACCOUNT")
OFFERED BY BA INVESTMENT SERVICES, INC. ("BAIS") AND CERTAIN OTHER
BROKER-DEALERS AND FINANCIAL SERVICE ORGANIZATIONS ("SERVICE
ORGANIZATIONS"). A SWEEP ACCOUNT COMBINES A BROKERAGE ACCOUNT (THE
"TRANSACTION ACCOUNT") WITH A DAILY SWEEP OF BALANCES TO OR FROM THE FUNDS'
CLASS X SHARES. BAIS OR SERVICE ORGANIZATIONS, AS APPLICABLE, ARE RESPONSIBLE
FOR PROVIDING PERSONS INVESTING IN CLASS X SHARES THROUGH A
SWEEP ACCOUNT WITH A SWEEP ACCOUNT AGREEMENT AND DISCLOSURE STATEMENT
(COLLECTIVELY, THE "DISCLOSURE DOCUMENTS") DESCRIBING THE VARIOUS
FEATURES AND OPERATIONS OF THE SWEEP ACCOUNT. THE DISCLOSURE DOCUMENTS SHOULD
BE REVIEWED IN CONJUNCTION WITH THIS PROSPECTUS.
PORTFOLIO SECURITIES HELD BY BOTH FUNDS HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND. PORTFOLIO
SECURITIES WHICH HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY A FUND
WITHIN THIRTEEN MONTHS (AS WELL AS CERTAIN U.S. GOVERNMENT
OBLIGATIONS WITH FLOATING OR VARIABLE INTEREST RATES) AND SECURITIES HELD AS
COLLATERAL FOR REPURCHASE AGREEMENTS MAY HAVE LONGER MATURITIES.
SHARES OF BOTH FUNDS MAY
<PAGE> 392
BE PURCHASED OR REDEEMED AT ANY TIME WITHOUT CHARGE OR PENALTY IMPOSED BY THE
FUNDS.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"), SAN
FRANCISCO, CALIFORNIA, ACTS AS INVESTMENT ADVISER TO THE
COMPANY. CONCORD FINANCIAL GROUP, INC. SPONSORS THE FUNDS AND ACTS AS THEIR
DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS THEIR
ADMINISTRATOR, NEITHER OF WHICH IS AFFILIATED WITH BANK OF AMERICA.
This Prospectus briefly sets forth certain information about the Funds
described herein that you should know before investing. It should be
read and retained for future reference. A Statement of Additional Information
dated __________, 1996 (as it may, from time to time be
revised), is incorporated by reference herein and discusses certain subjects in
this Prospectus further as well as other matters which may be
of interest to investors. A free copy of the Statement of Additional
Information may be obtained by calling 800-332-3863.
________________________________________________________________________________
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not
federally insured by, guaranteed by, or obligations of or otherwise supported
by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental agency. Both
Funds seek to maintain a net asset value per share at $1.00 for
purposes of purchases and redemptions, although there can be no assurance that
they will be able to do so on a continuous basis. Investment in
the Funds involves investment risk, including the possible loss of principal
amount invested.
________________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________________________________________________________________________________
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus and in the
Statement of Additional Information, in connection with the offering of the
Funds' shares and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or its distributor. This prospectus does not constitute an
offer by the Funds or by the distributor to sell, or a solicitation of any
offer to buy, any of the securities offered hereby in any
jurisdiction to any
<PAGE> 393
person to whom it is unlawful for the Funds or the distributor to make such
offer in such jurisdiction.
________________________________________________________________________________
<PAGE> 394
CONTENTS
<TABLE>
<S> <C>
Expense Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . 7
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Purchases of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Additional Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . 20
Description of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
</TABLE>
<PAGE> 395
EXPENSE SUMMARY
The following table sets forth certain information regarding the shareholder
transaction expenses imposed by the Prime Fund and Treasury Fund
and the annual operating expenses expected to be incurred by the Prime Fund and
Treasury Fund for the next twelve months with respect to its X
Shares. Actual expenses may vary. Hypothetical examples based on the table
are also shown.
<TABLE>
<CAPTION>
PRIME TREASURY
FUND FUND
---- ----
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) . . . . . . None None
Sales Load Imposed on Reinvested Dividends . . . None None
Sales Load Imposed on Redemptions (1) . . . . . . None None
Redemption Fees . . . . . . . . . . . . . . . . . None None
Exchange Fees . . . . . . . . . . . . . . . . . . None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees . . . . . . . . . . . . . . . . 0. % 0. %
----- -----
Rule 12b-1 and
Shareholder Service Fees (2) . . . . . . . . . . 0.55% 0.55%
----- -----
All Other Expenses . . . . . . . . . . . . . . . 0. % 0. %
----- -----
Administration Fees . . . . . . . . . . . . . . 0. % 0. %
---- ----
Other Expenses . . . . . . . . . . . . . . . . 0. % 0. %
---- ----
Total Fund Operating Expenses (3) . . . . . . . . % %
===== =====
</TABLE>
_______________________________
(1) The Company reserves the right to impose a charge for wiring
redemption proceeds.
(2) Includes distribution fees payable at the annual rate of 0.30% of the
average daily net assets of the respective Fund's Class X Shares
and shareholder service fees payable at the annual rate of 0.25% of
the average daily net assets of each Fund's Class X Shares.
Because of the Distribution Plan Payments paid by the Funds as shown
in the above table, long-term Class X shareholders may pay more than
the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities, Dealers, Inc.
(3) Additional fees charged by BAIS or Service Organizations related to
the Sweep Account are not included in this table. For additional
information with respect to Sweep Account fees and charges, including
a description of the services available to Sweep Account holders,
you should refer to the Disclosure Documents.
______________________________________________________________________________
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and
(2) redemption at the end of each time period:
Prime Fund . . . . . . . . . . . . . . . . . . . $ $
Treasury Fund . . . . . . . . . . . . . . . . . . $ $
</TABLE>
______________________________________________________________________________
-2-
<PAGE> 396
The foregoing Expense Summary and Example are intended to assist investors in X
Shares in understanding the various shareholder transaction and
operating expenses that investors bear either directly or indirectly. From
time to time, the investment adviser and administrator may
prospectively waive a portion of their respective fees and/or assume certain
expenses of the Funds. For a further description of both Funds'
operating expenses, see "Management of the Funds" in this Prospectus.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RETURN AND OPERATING EXPENSES. ACTUAL
INVESTMENT RETURN AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-3-
<PAGE> 397
FINANCIAL HIGHLIGHTS
On March 30, 1984, the Company commenced its public sale of shares (Pacific
Horizon Shares) in each of the Prime Fund and Treasury Fund, which
were originally called "Money Market Portfolio" and "Government Money Market
Portfolio," respectively. On January 19, 1990, the Company began
offering Horizon Shares and Horizon Service Shares in the Prime and Treasury
Funds. As of the date of this Prospectus: the Company began its
public offering of Class X Shares and S Shares of the Prime and Treasury Fund.
S Shares are offered through another prospectus. The shares of
each class in a Fund represent equal pro rata interests in such Fund, except
that they bear different expenses which reflect the difference in
the range of services provided to them. Class X Shares bear the expense of a
distribution and services plan (the "Distribution and Services
Plan") at an annual rate not to exceed 0.55% of the average daily net asset
value on such Fund's outstanding Class X Shares. See "Description
of Shares" below.
The tables below set forth certain information concerning the investment
results of Pacific Horizon Shares of the Prime Fund and Treasury Fund
for the periods indicated. The tables are presented for informational purposes
only. Actual investment results of the Class X Shares of the
Prime and Treasury Funds may be different. The information contained in the
Financial Highlights insofar as it pertains to each of the six
fiscal years in the six year period ended February 29, 1996 has been audited by
____________________, independent accountants for these two
Funds, whose unqualified report on the financial statements containing such
information, is incorporated by reference in the Statement of
Additional Information, which may be obtained upon request. The information
contained in the Financial Highlights for each of the four years
in the period ended February 28, 1989 was audited by other independent
accountants whose report thereon dated April 20, 1989 expressed an
unqualified opinion on the statements containing such information. The
Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants which are incorporated by reference in the Statement of
Additional Information. See "Description of Shares" below for certain
differences among the Pacific Horizon Shares, Horizon Shares, Horizon
Service Shares, Class S Shares and Class X Shares, including differences
relating to expenses.
-4-
<PAGE> 398
Selected Data for a Pacific Horizon Share Outstanding throughout Each of the
Periods Indicated:
________________________________________________________________________________
<TABLE>
<CAPTION>
Prime Fund Year Ended
--------------------------------------------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996+ 1995+ 1994+ 1993+ 1992 1991 1990 1989 1988
-------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.0 $ 1.00
Income from Investment Operations:
Net investment income 0.0424 0.0287 0.0340 0.0558 0.0762 0.0855 0.0738 0.0643
Net realized gain (loss) on
securities . . . . . . . . . (0.0227) (0.0016) 0.0000 0.0005 (0.0001) 0.0001 (0.0002) 0.0003
Total income from investment
operations . . . . . . . . . . . . 0.0197 0.0271 0.0340 0.0563 0.0761 0.0856 0.0736 0.0646
----------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.0422) (0.0287) (0.0341) (0.0557) (0.0762) (0.0855) (0.0738) (0.0643)
Increase due to voluntary capital
contribution from investment adviser 0.0233 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
----------------------------------------------------------------------
Net change in net asset value
per share . . . . . . . . . . . . . . . 0.0008 0.0016 (0.0001) 0.0006 (0.0001) 0.0001 (0.0002) 0.0003
----------------------------------------------------------------------
Net asset value per share,
end of year . . . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.0
========================================================================
Total return . . . . . . . . . . . . 4.30%** 2.91% 3.45% 5.72% 7.89% 8.90% 7.63%++ 6.62%++
Ratio/Supplemental Data:
Net assets, end of year (millions). . $ 1,129 $ 1,216 $ 992 $ 1,413 $ 1,086 $ 890 $ 921 $ 957
Ratio of expenses to average net
assets. . . . . . . . . . . . . . . 0.51%* 0.52%* 0.55% 0.56% 0.56% 0.63% 0.63% 0.58%
Ratio of net investment income to
net assets . . . . . . . . . . . . 4.19%* 2.86%* 3.42% 5.51% 7.61% 8.52% 7.38% 6.42%
Prime Fund Year Ended
----------------------
Feb. 28, Feb. 28,
1987 1986
<S> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income 0.0606 0.0768
Net realized gain (loss) on
securities . . . . . . . . . (0.0001) (0.0003)
Total income from investment
operations . . . . . . . . . . . . 0.0605 0.0765
Less Distributions:
Dividends from net investment income (0.0606) (0.0768)
Increase due to voluntary capital
contribution from investment adviser 0.0000 0.0000
Net change in net asset value
per share . . . . . . . . . . . . . . . (0.0001) (0.0003)
Net asset value per share,
end of year . . . . . . . . . . . . . $ 1.00 $ 1.00
Total return . . . . . . . . . . . . 6.23%++ 7.96%++
Ratio/Supplemental Data:
Net assets, end of year (millions). . $ 484 $ 464
Ratio of expenses to average net
assets. . . . . . . . . . . . . . . 0.57% 0.57%
Ratio of net investment income to
net assets . . . . . . . . . . . . 6.02% 7.74%
- ---------------------
</TABLE>
* Net of fee waived and expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ration of net investment income to average net assets by ____%, 0.05% and
0.01% for the years ended February 29, 1996, February 28, 1995 and
February 28, 1994, respectively.
** Total return includes the effect of a voluntary capital contribution from
the investment adviser. Without the capital contribution, the total return
would have been lower.
*** Annualized.
+ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
++ Unaudited.
x Not Annualized.
-5-
<PAGE> 399
Selected Data for a Pacific Horizon Share Outstanding throughout Each of the
Periods Indicated:
____________________________________________________________________________
<TABLE>
<CAPTION>
Treasury Fund Year Ended
--------------------------------------------------------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income . . . 0.0405 0.0262 0.0309 0.0512 0.0731 0.0833 0.0712 0.0587 0.0604 0.0745
Net realized gain (loss)
on securities . . . . . . 0.0001 (0.0002) 0.0000 0.0002 0.0006 0.0004 (0.0005) (0.0003) (0.0000) (0.0008)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income from
investment operations . . 0.0406 0.0260 0.0309 0.0514 0.0737 0.0837 0.0707 0.0584 0.0604 0.0737
Less Dividends and
Distributions:
Dividends from net
investment income . . . . (0.0405) (0.0262) (0.0311) (0.0513) (0.0733) (0.0830) (0.0709) (0.0587) (0.0604) (0.0745)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net change in net asset
value per share . . . . . 0.0001 (0.0002) (0.0002) 0.0001 0.0004 0.0007 (0.0002) 0.0003 0.0000 (0.0008)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value per share,
end of year . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total return . . . . . . . 4.13%** 2.65% 3.15% 5.25% 7.58% 8.62% 7.33%++ 6.08%++ 6.21%++ 7.91%++
Ratio/Supplemental Data:
Net assets, end of year
(millions) . . . . . . . $ 1,132 $ 1,577 $ 1,746 $ 2,300 $ 1,663 $ 1,144 $ 1,048 $ 947 $ 1,317 $ 835
Ratio of expenses to
average net assets . . . 0.55% 0.55% 0.56% 0.56% 0.55% 0.55% 0.54% 0.56% 0.55% 0.56%
Ratio of net investment
income to net assets . . 3.99% 2.62% 3.11% 5.07% 7.29% 8.33% 7.14% 5.90% 5.99% 7.41%
- ---------------------
+ Security Pacific National Bank served as investment adviser through
April 21 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
++ Unaudited.
+++ Annualized.
x Not Annualized.
</TABLE>
-6-
<PAGE> 400
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objective and policies of each Fund.
Assets of the Funds will be invested in dollar-denominated debt securities with
remaining maturities of thirteen months or less as defined by the Securities
and Exchange Commission, and the dollar-weighted average portfolio maturity of
each Fund will not exceed 90 days. All securities acquired by the Funds will
be determined by the investment adviser, under guidelines established by the
Company's Board of Directors, to present minimal credit risks and will be U.S.
Government securities or other "First Tier Securities" (as defined by the
Securities and Exchange Commission) of the types described below. First Tier
Securities consist of instruments that are either rated at the time of purchase
in the top rating category by one (if rated by only one) or more unaffiliated
nationally recognized statistical rating organizations ("NRSROs") including
Standard and Poor's Ratings Group, Division of McGraw Hill ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co.
("Duff & Phelps") or Fitch Investors Service, Inc. ("Fitch") or issued by
issuers with such ratings. The Appendix to the Statement of Additional
Information includes a description of applicable NRSRO ratings. Unrated
instruments (including instruments with long-term but no short-term ratings)
purchased by a Fund will be of comparable quality as determined by the Funds'
investment adviser pursuant to guidelines approved by the Board of Directors.
PRIME FUND. The Prime Fund's investment objective is to seek high current
income and stability of principal. The Fund invests substantially all of its
assets in a diversified portfolio of U.S. dollar-denominated money market
instruments. Portfolio securities held by the Fund have remaining maturities
of thirteen months or less from the date of purchase by the Fund. (Portfolio
securities which are subject to repurchase agreements or have certain put or
demand features exercisable by the Fund within thirteen months, as well as
certain U.S. Government obligations with floating or variable interest rates,
may have longer maturities.)
In pursuing its investment objective, the Prime Fund invests in a broad range
of government, bank and commercial obligations that may be available in the
money markets. The money market instruments in which the Fund invests will
generally have neither as much risk nor as high a return as longer-term or
lower-rated instruments. In accordance with current regulations of the
Securities and Exchange Commission, the Fund intends to limit its investments
in the securities of any single issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) to not
more than 5% of the Fund's total assets at the time of purchase, provided that
the Fund may
-7-
<PAGE> 401
invest up to 25% of its total assets in the securities of any one issuer for a
period of up to three business days.
The Prime Fund may purchase bank obligations such as certificates of deposit
and bankers' acceptances issued or supported by the credit of domestic banks,
foreign branches of domestic banks ("Euro CDs"), domestic branches of foreign
banks ("Yankee CDs" and "Yankee BAs") or foreign branches of foreign banks
("Yankee Euros"). Such banks must have total assets at the time of purchase in
excess of $2.5 billion. No more than 25% of the Prime Fund's total assets at
the time of purchase may be invested in Yankee CDs and BAs, Euro CDs and Yankee
Euros. The Fund may also make interest-bearing savings deposits in such
commercial banks in amounts not in excess of 5% of the Fund's total assets.
The Prime Fund may be subject to additional investment risks because the Fund
may hold securities issued by foreign branches of domestic banks, domestic
branches of foreign banks and foreign branches of foreign banks (and, as
described below, commercial paper issued by foreign issuers). These risks are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. Such risks include future political
and economic developments, the possible imposition of withholding taxes on
interest income payable on the securities by the particular country in which
the branch is located, the possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the
payment of principal and interest on these securities. In addition, foreign
branches of domestic banks, domestic branches of foreign banks and foreign
branches of foreign banks are not necessarily subject to the same regulatory
requirements that apply to domestic branches of domestic banks (such as reserve
requirements, loan limitations, examinations, accounting, auditing and
recordkeeping requirements, and public availability of information) and the
Fund may experience difficulties in obtaining or enforcing a judgment against
the issuing bank.
The Prime Fund may purchase commercial paper, short-term notes and corporate
bonds that meet the Fund's maturity limitations. Commercial paper purchased by
the Fund may include instruments issued by foreign issuers, such as Canadian
Commercial Paper ("CCP"), which is U.S. dollar-denominated commercial paper
issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and Europaper, which is U.S. dollar-denominated commercial paper
of a foreign issuer.
The Prime Fund may also invest in commercial paper issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper
is restricted as
-8-
<PAGE> 402
to disposition under the Federal securities laws and generally is sold to
institutional investors such as the Fund that agree that they are purchasing
the paper for investment and not with a view to public distribution. Any
resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Prime Fund through
or with the assistance of the issuer or investment dealers that make a market
in Section 4(2) paper. Section 4(2) paper will not be subject to the Fund's
10% limitation on illiquid securities set forth below where the Board of
Directors or Bank of America (pursuant to guidelines adopted by the Board)
determines that a liquid trading market exists.
TREASURY FUND. The Treasury Fund's investment objective is to seek high
current income and stability of principal. The Fund invests solely in
obligations issued by the U.S. Treasury and repurchase agreements relating to
such Treasury obligations. Portfolio securities which are subject to
repurchase agreements may have remaining maturities of longer than thirteen
months.
Examples of the types of U.S. Treasury obligations that may be held by the
Treasury Fund include U.S. Treasury bills and notes. Under normal market
conditions 100% of the total assets of the Fund will be invested in direct
obligations of the U.S. Treasury and repurchase agreements relating to such
Treasury obligations. Securities issued by the U.S. Government have
historically involved little risk of loss of principal if held to maturity and,
in general, the instruments held by the Fund will have neither as much risk nor
as high a return as longer term or non-U.S. Government obligations.
INVESTMENT POLICIES OF THE PRIME FUND
GOVERNMENT OBLIGATIONS. The Prime Fund may purchase obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government, such as the Small Business Administration, are backed by
the full faith and credit of the United States. Others are backed by the right
of the issuer to borrow from the U.S. Treasury (such as obligations of the
Federal Home Loan Bank), by the discretionary authority of the U.S. Government
to purchase the agency's obligations (such as obligations of the Federal
National Mortgage Association), or only by the credit of the agency or
instrumentality issuing the obligation (such as the Student Loan Marketing
Association). Securities issued or guaranteed by the U.S. Government and its
agencies and instrumentalities have historically involved little risk of loss
of principal if held to maturity. However, no assurance can be given that the
U.S. Government would provide financial support to any agency or
instrumentality if it is not obligated to do so by law.
-9-
<PAGE> 403
Certain securities issued or guaranteed by all governmental agencies may be
prepaid by the issuer without penalty. Thus, when prevailing interest rates
decline, the value of these securities is not likely to rise on a comparable
basis with other debt securities that are not so prepayable. The proceeds of
prepayments and scheduled payments of principal of these securities will be
reinvested by a Fund at then-prevailing interest rates, which may be lower than
the rate of interest on the securities on which these payments were received.
COMMON INVESTMENT POLICIES
"STRIPPED" SECURITIES. Each Fund may invest in "stripped" securities,
which are U.S. Treasury bonds and notes the unmatured interest coupons of which
have been separated from the underlying obligation. Stripped securities are
zero coupon obligations that are normally issued at a discount to their "face
value," and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The Treasury Fund may only invest in stripped securities issued by
the U.S. Treasury and recorded in the Federal Reserve book-entry record-keeping
system.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase securities
from financial institutions such as banks and broker-dealers, as are deemed
creditworthy by the Company's investment adviser under guidelines approved by
the Board of Directors, subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Although the
securities subject to a repurchase agreement may bear maturities exceeding
thirteen months, each Fund intends only to enter into repurchase agreements
having maturities not exceeding 60 days. Securities subject to repurchase
agreements are held either by the Company's custodian or sub-custodian, or in
the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement at not less than the repurchase price, and such value will be
continuously monitored by the investment adviser on an ongoing basis. Default
by the seller would, however, expose a Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. Repurchase agreements are considered to be loans under the
Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow monies for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such agreements,
a Fund would sell portfolio securities to banks and other financial
institutions, and agree to repurchase them at an agreed upon date and price.
At the time a Fund enters into a reverse repurchase agreement, it will place in
a segregated custodian account liquid assets or
-10-
<PAGE> 404
high grade debt securities having a value equal to or greater than the
repurchase price, and the Company's investment adviser will continuously
monitor the account to insure that the value is maintained. A Fund would only
enter into reverse repurchase agreements to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. Reverse repurchase
agreements involve the risk that the market value of the portfolio securities
sold by a Fund may decline below the price of the securities such Fund is
obligated to repurchase. Interest paid by a Fund in connection with a reverse
repurchase agreement will reduce the net investment income of such Fund.
Reverse repurchase agreements are considered to be borrowings under the
Investment Company Act of 1940.
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the
Funds may include variable and floating rate instruments, which may have a
stated maturity in excess of the Funds' maturity limitations but which will,
except for certain U.S. Government obligations, permit a Fund to demand payment
of the principal of the instrument at least once every thirteen months upon not
more than thirty days' notice. Variable and floating rate instruments may
include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. There may be no active secondary market with respect to a
particular variable or floating rate instrument. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value to a Fund
will approximate their par value. Illiquid variable and floating rate
instruments (instruments which are not payable upon seven days notice and do
not have an active trading market) that are acquired by the Funds are subject
to a Fund's percentage limitations regarding securities that are illiquid or
not readily marketable. The Funds' investment adviser will continuously
monitor the creditworthiness of issuers of variable and floating rate
instruments in which the Funds invest, and their ability to repay principal and
interest.
Variable and floating rate instruments purchased by a Fund may include
participation certificates issued by trusts or financial institutions in
variable and floating rate obligations owned by such issuers or affiliated
organizations. A participation certificate gives a Fund a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
participation interest from the institution upon a specified number of days'
notice. If the credit of the obligor is of minimal credit risk, no credit
support from a bank or other financial institution will be necessary. In other
circumstances, the participation certificate will be backed by an irrevocable
letter of credit or guarantee of a bank, or will be insured by an insurer, that
the Funds' investment adviser has determined meets the quality standards for
the Fund involved. If an interest is
-11-
<PAGE> 405
backed by an irrevocable letter of credit or guarantee of a bank or is insured
as described above, a Fund will usually have the right to sell the interest
back to the institution or draw on the letter of credit or insurance policy on
demand after a specified notice period, for all or any part of the principal
amount of the interest plus accrued interest. Although a participation
interest may be sold by a Fund, under normal circumstances they will be held
until maturity.
A Fund may also invest in obligations which provide for a variable or floating
interest rate which is determined through a periodic "auction process." From
time to time, holders of the obligations have the right to tender any such
obligations to a remarketing agent which then remarkets the obligations which
have been tendered and thereby determines a new interest rate for the following
period.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
Each Fund may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed settlement" basis.
When-issued securities are securities purchased for delivery beyond the normal
settlement date at a stated price and yield. When-issued and forward
commitment transactions, which involve a commitment by a Fund to purchase or
sell particular securities with payment and delivery taking place at a future
date (perhaps one or two months later), permit the Fund to lock in a price or
yield on a security it owns or intends to purchase or sell, regardless of
changes in interest rates. Delayed settlement describes a securities
transaction in a secondary market for which settlement will occur sometime in
the future. When-issued, forward commitment and delayed settlement
transactions involve the risk, however, that the yield or price obtained in a
transaction may be less favorable than the yield or price available in the
market when the securities delivery takes place. The Funds' forward
commitments, when-issued purchases and delayed settlements are not expected to
exceed 25% of the value of the total assets of a particular Fund absent unusual
market conditions. A Fund's liquidity and the ability of its investment
adviser to manage its portfolio may be adversely affected in the event a Fund's
forward commitments, commitments to purchase when-issued securities and delayed
settlements ever exceed 25% of the value of its total assets. Neither Fund
intends to engage in these transactions for speculative purposes but only in
furtherance of their investment objectives.
INVESTMENT LIMITATIONS. The investment objectives of each Fund are fundamental
policies that may not be changed without a vote of the holders of a majority of
the particular Fund's outstanding shares (as defined in the Investment Company
Act of 1940). A Fund's policies may be changed by the Company's Board of
Directors without the affirmative vote of the holders of a
-12-
<PAGE> 406
majority of such Fund's outstanding shares, except that the investment
limitations set forth below may not be changed without such a vote of
shareholders. A description of certain other fundamental investment
limitations is contained in the Statement of Additional Information.
PRIME FUND. The Prime Fund may not:
1. Purchase any securities which would cause 25% or more of the Fund's
total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities or domestic bank certificates of
deposit, bankers' acceptances and repurchase agreements secured by
instruments of domestic branches of U.S. banks or obligations of the
U.S. Government, its agencies or instrumentalities; (b) wholly-owned
finance companies will be considered to be in the industries of their
parents if their activities are primarily related to financing the
activities of the parents; and (c) the industry classification of
utilities will be determined according to their service. For example,
gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry.
PRIME FUND AND TREASURY FUND. Neither the Prime Fund nor the Treasury
Fund may:
1. Borrow money or issue senior securities, except that each Fund may
borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amount
borrowed or 10% of its total assets at the time of such borrowing; or
purchase securities at any time after such borrowings (including
reverse repurchase agreements) have been entered into and before they
are repaid.
2. Purchase securities without available market quotations which cannot
be sold without registration or the filing of a notification under
federal or state securities laws, enter into repurchase agreements
providing for settlement more than seven days after notice, or
purchase any other securities deemed illiquid by the Directors if, as
a result, such securities and repurchase agreements would exceed 10%
of the Fund's total assets.
-13-
<PAGE> 407
The Prime Fund intends that, except as stated above under "Common Investment
Policies--Variable and Floating Rate Instruments," variable amount master
demand notes with maturities of nine months or less, as well as investments in
securities that are not registered under the Securities Act of 1933 but that
may be purchased by institutional buyers under Rule 144A and for which a liquid
trading market exists as determined by the Board of Directors or Bank of
America (pursuant to guidelines adopted by the Board) will not be subject to
the 10% limitation on illiquid securities set forth in Investment Limitation
No. 2 above.
INVESTMENT DECISIONS. Investment decisions for each Fund are made
independently from those for other portfolios of the Company and other
investment companies and common trust funds managed by Bank of America and its
affiliated entities. Such other investment companies and common trust funds
may also invest in the same securities as a Fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of a Fund
and another portfolio, investment company or common trust fund, available
investments or opportunities for sales will be allocated in a manner which Bank
of America believes to be equitable. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by a Fund.
In addition, in allocating purchase and sale orders for portfolio securities
(involving the payment of brokerage commissions or dealer concessions), Bank of
America may take into account the sale of shares of a Fund by broker-dealers
and other financial institutions (including affiliates of Bank of America and
the Distributor), provided Bank of America believes that the quality of the
transaction and the amount of the commission are not less favorable than what
they would be with any other unaffiliated qualified firm.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS. The business of the Company is managed under the direction
of its Board of Directors. Information about the Directors and Officers of the
Company is included in the Statement of Additional Information.
INVESTMENT ADVISER. Bank of America serves as the Funds' investment adviser.
Bank of America, which has principal offices at 555 California Street, San
Francisco, California 94104, is a national banking association formed in 1904
which provides commercial banking and trust business through an extensive
system of branches across the western United States. Bank of America's
principal banking affiliates operate branches in ten U.S. states as well as
corporate banking, business credit and thrift offices in major U.S. cities and
branches, corporate offices and representative offices in 37 countries. Bank
of America is the
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successor by merger to Security Pacific National Bank ("Security Pacific"),
which previously served as investment adviser to the Company since it commenced
operations in 1984. Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
As investment adviser Bank of America manages the investments of the Funds and
is responsible for all purchases and sales of the Funds' portfolio securities.
For its investment advisory services, Bank of America is entitled to receive a
fee accrued daily and payable monthly at the following annual rates: .10% of
the first $3 billion of each Fund's net assets, plus .09% of the next $2
billion of each Fund's net assets, plus .08% of each Fund's net assets over $5
billion. For the fiscal year ended February 28, 1995, the Prime Fund and
Treasury Fund paid Bank of America advisory fees at the effective annual rates
of .07% and .10% of such Fund's respective net assets, and Bank of America
waived advisory fees at the effective annual rate of .03% and .00% of such
Fund's respective net assets.
In addition, Bank of America or Service Organizations may receive fees charged
directly to its customers' accounts in connection with investments in Fund
shares.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator") serves as the
Company's administrator and assists generally in supervising the Funds'
operations. The Administrator is a wholly-owned subsidiary of The BISYS Group,
Inc. Its offices are located at 3435 Stelzer Road, Columbus, OH 43219.
Under its Special Management Services Agreement for the Funds, the
Administrator has agreed to provide facilities, equipment and personnel to
carry out administrative services that are for the benefit of all series of
shares in the Funds, including coordination of reports to shareholders and the
Securities and Exchange Commission; calculation of the net asset value of Fund
shares and dividends and capital gains distributions to shareholders; payment
of the costs of maintaining the Funds' offices; preparation of tax returns;
provision of internal legal and accounting compliance services; maintenance (or
oversight of the maintenance by others approved by the Board of Directors) of
the Funds' books and records; and the provision of various services for
shareholders who have made a minimum initial investment of at least $500,000,
including the provision of a facility to receive purchase and redemption orders
for the accounts of such shareholders.
For these administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7
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<PAGE> 409
billion of each Fund's net assets, plus .09% of the next $3 billion of each
Fund's net assets, plus .08% of each Fund's net assets over $10 billion. For
the fiscal year ended February 28, 1995, the Prime Fund and Treasury Fund paid
the Administrator administration fees at the effective annual rates of .07% and
.10% of such Fund's respective net assets, and the Administrator waived
administration fees at the effective annual rate of .03% and .00% of such
Fund's respective net assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above--e.g. calculating
the net asset value of Fund shares and dividends to shareholders and
maintaining the Funds' books and records. Both Funds bear all fees and
expenses charged by the bank for these services.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the
principal underwriter and distributor of shares of the Funds. The Distributor
is a wholly-owned subsidiary of the Administrator organized to distribute
shares of mutual funds to institutional and retail investors. Its offices are
located at 3435 Stelzer Road, Columbus, OH 43219.
The Distributor makes a continuous offering of the Funds' shares and bears the
costs and expenses of printing and distributing to selected dealers and
prospective investors copies of any prospectuses, statements of additional
information and annual and interim reports of the Funds (after such items have
been prepared and set in type by the Funds) that are used in connection with
the offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it
for use by selected dealers in connection with the offering of the Funds'
shares for sale to the public.
CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90 Washington
Street, New York, New York 10286, serves as custodian for the Funds and Bank of
America serves as the Prime and Treasury Funds' sub-custodian. BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, OH 43219-3035 (the "Transfer
Agent"), serves as the Funds' transfer agent and dividend disbursing agent.
The Company has also entered into a Cash Management and Related Services
Agreement with The Bank of New York pursuant to which The Bank of New York
receives and disburses funds in connection with the purchase and redemption of
and the payment of dividends and other distributions with respect to the Funds'
shares. Other services are provided for in the Cash Management Agreement with
United Missouri Bank of Kansas City, N.A.
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<PAGE> 410
DISTRIBUTION AND SERVICES PLAN
Under the Distribution and Services Plan, each Fund pays the Distributor for
distribution expenses primarily intended to result in the sale of such Fund's
Class X shares and for shareholder servicing expenses. Such distribution
expenses include expenses incurred in connection with advertising and marketing
each Fund's Class X shares; payments to Service Organizations for assistance in
connection with the distribution of Class X shares; and expenses incurred in
connection with preparing, printing and distributing prospectuses for the Funds
(except those used for regulatory purposes or for distribution to existing
shareholders of the Funds) and in implementing and operating the Distribution
and Services Plan. Shareholder servicing expenses include expenses incurred in
connection with shareholder services provided by the Distributor and payments
to Service Organizations for the provision of support services with respect to
the beneficial owners of Class X shares, such as establishing and maintaining
accounts and records relating to their clients who invest in Class X shares,
assisting clients in processing exchange and redemption requests, developing,
maintaining and supporting systems necessary to support Sweep Accounts and in
changing dividend options and account descriptions and responding to client
inquiries concerning their investments.
Under the Distribution and Services Plan, payments by a Fund for distribution
expenses may not exceed 0.30% (annualized) of the average daily net assets of
such Fund's Class X shares and payments for shareholder servicing expenses may
not exceed 0.25% (annualized) of the average daily net assets of such Fund's
Class X shares. These amounts may be reduced pursuant to undertakings by the
Distributor. Payments for distribution expenses under the Distribution and
Services Plan are subject to Rule 12b-1 under the 1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and the Distributor) that they are or will be licensed as
dealers as required by applicable law or will not engage in activities which
would require them to be so licensed.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of
Additional Information, the Funds' service contractors bear all expenses in
connection with the performance of their services and the Funds bear the
expenses incurred in their operations. From time to time during the course of
the Funds' fiscal year, the Administrator and/or Bank of America may
prospectively waive payment of fees and/or assume certain expenses of a Fund as
a result of competitive pressures and in order to protect the business and
reputation of the Administrator and Bank of America. This will have the effect
of increasing
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<PAGE> 411
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.
PURCHASES OF SHARES
OPENING AN ACCOUNT. Class X Shares of the Funds are offered by this Prospectus
to customers of BAIS or Service Organizations that establish a Sweep Account
with BAIS or a Service Organization. Each Sweep Account combines a Transaction
Account with a periodic sweep of balances to or from the Funds. Investors may
open a Sweep Account by completing and signing the Disclosure Documents. The
Disclosure Documents contain important information about the various features
and operations of the Sweep Account and should be reviewed in conjunction with
this Prospectus.
Class X Shares may be purchased by making a deposit into your Transaction
Account. On each day that both the Fund's custodian and the New York Stock
Exchange (the "Exchange") are open for business (a "Business Day") and that
BAIS or a Service Organization is open for business, BAIS or a Service
Organization computes the net amount of all deposits, withdrawals, charges and
credits made to and from a Transaction Account in accordance with their Sweep
Account procedures (the "Net Sweep Amount"). If deposits and credits exceed
withdrawals and charges, you authorize BAIS or a Service Organization, on your
behalf, to transmit a purchase order to the Fund designated in your Sweep
Account in the amount of that day's Net Sweep Amount in accordance with the
Sweep Account procedures of Bank of America or a Service Organization. Your
purchase order will be made effective and full and fractional Shares will be
purchased at the net asset value per share next determined after receipt by the
Transfer Agent. It is the responsibility of BAIS or a Service Organization to
transmit orders for the purchases of shares by its customers to the Transfer
Agent and deliver required funds on a timely basis, in accordance with the
procedures stated above. Share purchases and redemptions executed through BAIS
or a Service Organization are executed only on Business Days that BAIS or a
Service Organization, respectively, is open for business. Contact BAIS or your
Service Organization for additional information about BAIS's or the Service
Organization's Sweep Account procedures.
SHARE PRICE. The net asset value per share of the Prime Fund and Treasury Fund
is the value of all securities and other assets owned by the Fund that are
allocable to X Shares, less the liabilities charged to X Shares, divided by the
number of outstanding Class X Shares.
Shares of the Funds may be purchased on any Business Day that BAIS or the
particular Service Organization, as applicable, is
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<PAGE> 412
open for business. The net asset value of the Prime and Treasury Fund is
determined on each Business Day as of 2:30 p.m. Eastern time and the close of
regular trading hours on the Exchange (or 4:00 p.m. Eastern time if the
Exchange is closed). All transaction orders are processed by the Company at
the net asset value next determined after the order is received by the Company.
In computing net asset value, each Fund uses the amortized cost method of
valuation as described in the Statement of Additional Information under
"Additional Purchase and Redemption Information--Valuation." The net asset
value per share for purposes of pricing purchase and redemption orders for each
Fund is determined independently of that for other portfolios of the Company.
For voice recorded price and yield information call (800) 227-1545.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account. See the Fund's
Sweep Account Application for further information about this requirement.
REDEMPTION OF SHARES
If, on any Business Day that BAIS or the particular Service Organization is
open for business, withdrawals from and charges to your Sweep Account,
including without limitation check transactions, exceed deposits and credits,
BAIS or the particular Service Organization, as applicable, will transmit a
redemption order on your behalf to the Fund in the dollar amount of that day's
Net Sweep Amount. If your Sweep Account with BAIS or a Service Organization,
as applicable, is closed as described in the Disclosure Documents, BAIS or the
Service Organization, as applicable, transmits a redemption request on your
behalf to the Fund for the balance of the Class X Shares of the Fund held
through your Sweep Account. Redemptions are effected by the Company on a
Business Day at the net asset value per share next determined after receipt of
the redemption order by the Transfer Agent. The Funds will make payment for
all shares redeemed after receipt by the Transfer Agent of a request in proper
form, except as provided by the rules of the Securities and Exchange
Commission. During the period prior to the time the shares are redeemed,
dividends on such shares will accrue and be payable, and an investor will be
entitled to exercise all other rights of beneficial ownership. The Funds
impose no charge when shares are redeemed. It is the responsibility of BAIS or
the particular Service Organization to transmit the redemption order and credit
its customer's Transaction Account with the redemption proceeds on a timely
basis. BAIS or the Service Organization may withhold redemption proceeds
pending check collection or processing or for other reasons all as set forth
more fully in the Disclosure Documents.
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<PAGE> 413
ADDITIONAL SHAREHOLDER SERVICES
Certain optional services available to persons who invest directly in Pacific
Horizon, Horizon, and Horizon Service Shares of the Funds, including but not
limited to certain exchange privileges which allow shareholders to exchange
their Fund shares for shares of other funds in the Company; an automatic
investment program; automatic withdrawal program; and direct deposit program;
are not available to persons who invest in Class S and Class X Shares of the
Prime Fund and Treasury Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The shareholders of a Fund are entitled to
dividends and distributions arising from the net income and realized gains, if
any, earned on investments held by the Fund involved. Each Fund's net income
is declared daily as a dividend. Shares begin accruing dividends on the day
the purchase order for the shares is executed and continue to accrue dividends
through and including the day before the redemption order for the shares is
executed. Dividends are paid within five business days after the end of each
month. Although the Funds do not expect to realize net long-term capital
gains, any such capital gains as may be realized will be distributed no more
than twice a year after reduction for any available capital loss carryforward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the net asset
value of such shares on the payment date.
FEDERAL TAXES. Management of the Company believes that each Fund qualified
separately for its last taxable year as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code") and it is intended
that each Fund will continue to qualify as a regulated investment company in
future years as long as such qualification is in the best interest of its
shareholders. Such qualification generally relieves a Fund of liability for
federal income taxes to the extent its earnings are distributed in accordance
with the Code.
In connection with such tax qualification, each Fund contemplates declaring as
dividends at least 90% of its investment company taxable income for each
taxable year. An investor of any Fund who receives a dividend derived from net
investment company taxable income (including any excess of net short- term
capital gain over net long-term capital loss) treats it as ordinary income in
the computation of his gross income, whether such dividend is paid in the form
of cash or additional shares of a Fund. Because all of the net investment
income of the Funds is expected to be derived from earned interest, it is
anticipated
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that all dividends paid by the Funds will be taxable as ordinary income to
shareholders who are not exempt from federal income taxes and that no part of
any distribution paid by the Funds will be eligible for the dividends received
deduction for corporations.
Although the Funds anticipate that they will not have net long-term capital
gain, any distribution of a Fund's excess of net long-term capital gain over
its net short-term capital loss will be taxable to shareholders of that Fund as
long-term capital gain regardless of how long the shareholder has held shares
of the Fund.
Dividends declared in December of any year payable to shareholders of record on
a specified date in December will be deemed for federal tax purposes to have
been paid by the Funds and received by the shareholders on December 31, if such
dividends are paid during January of the following year.
The foregoing is only a brief summary of some of the important federal income
tax considerations generally affecting the Funds and their shareholders, and is
based on federal tax laws and regulations which are in effect as of the date of
this Prospectus. Such laws and regulations may be changed by legislative or
administrative actions. Potential investors in the Funds should consult their
tax advisers with specific reference to their own tax situation. Shareholders
will be advised at least annually as to the federal income tax consequences of
distributions made each year.
STATE AND LOCAL TAXES. Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation. On
March 30, 1984, the Company commenced its public sale of shares (Pacific
Horizon Shares) in each of the Prime Fund and Treasury Fund, which were
originally called "Money Market Portfolio" and "Government Money Market
Portfolio," respectively. On January 19, 1990, the Prime Fund and Treasury Fund
of The Horizon Funds, a Massachusetts business trust, were combined with the
Money Market Portfolio and Government Money Market Portfolio of the Company;
the Company changed the names of its resulting portfolios to "Prime Fund" and
"Treasury Fund;" and, in addition to continuing its offering of Pacific Horizon
Shares in such Funds, the Company began offering Horizon Shares and Horizon
Service Shares in the Prime and Treasury Funds. (Horizon Shares and Horizon
Service Shares are sold to institutions and may not be purchased by individuals
directly.) As of the date of this
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<PAGE> 415
Prospectus: the Company began its public offering of Class X and Class S
Shares of the Prime and Treasury Funds. Class S Shares are offered through
another prospectus.
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify
and reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class
of shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the issuance
of the following series of shares representing interests in the Funds, each of
which is classified as a diversified company under the Investment Company Act
of 1940: ten billion X Shares; ten billion S Shares; ten billion Pacific
Horizon Shares, eighteen billion Horizon Shares and ten billion Horizon Service
Shares representing interests in the Prime Fund; and four billion, four hundred
million X shares, ten billion S Shares, ten billion Pacific Horizon Shares, ten
billion Horizon Shares and ten billion Horizon Service Shares representing
interests in the Treasury Fund. S Shares, Pacific Horizon Shares, Horizon
Shares and Horizon Service Shares of the Funds are described in separate
Prospectuses available from the Distributor at the telephone number on the
cover of this Prospectus. The Board of Directors has also authorized the
issuance of additional classes of shares representing interests in other
investment portfolios of the Company, which are likewise described in separate
Prospectuses available from the Distributor. This Prospectus relates primarily
to the X Shares of the Funds and describes only the investment objectives and
policies, operations, contracts and other matters relating to such Shares.
Each X Share, S Share, Pacific Horizon Share, Horizon Share and Horizon Service
Share in a Fund has a par value of $.001, and, except as noted below, is
entitled to participate equally in the dividends and distributions declared by
the Board of Directors with respect to such Fund and in the net distributable
assets of such Fund on liquidation. Holders of a Fund's X Shares bear the fees
described in this Prospectus that are paid to the Distributor and Service
Organizations by the Fund under the Company's Distribution and Services Plan.
The fees paid under the Distribution and Services Plan are for distribution and
shareholder services paid to Shareholder Organizations in connection with S and
X Shares. Holders of a Fund's S Shares bear the fees described in the
Prospectus for such shares that are paid to the Distributor and Service
Organizations by the Fund under the Company's Distribution and Services Plan.
Similarly, holders of Horizon Service Shares bear the fees described in the
Prospectus for such shares that are paid to Shareholder Organizations by the
Fund under the Company's
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<PAGE> 416
Shareholder Services Plan and holders of Pacific Horizon Shares bear the fees
described in the Prospectus for such shares that are paid to Shareholder
Organizations by the Fund under the Company's Special Management Services
Agreement. The fees paid under the Shareholder Services Plan and Special
Management Services Agreement are for services provided by Shareholder
Organizations to their customers in connection with Horizon Service and Pacific
Horizon Shares, respectively, and Shareholder Organizations do not receive
similar fees with respect to the Funds' Horizon Shares. As a result of the
different fees borne by the series of shares in a Fund, at any given time, the
net yield on a Fund's X Shares generally will be approximately 0.23% lower than
the yield on that Fund's Pacific Horizon Shares; 0.30% lower than the yield on
that Fund's Horizon Service Shares; 0.55% lower than the yield on the same
Fund's Horizon Shares and 0.45% higher than the yield on the same Fund's S
Shares. Standardized yield quotations will be computed separately for each
series of Shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class or series except as otherwise required by law or when class voting is
permitted by the Board of Directors. It is contemplated that all shareholders
of a Fund will vote together as a single class on matters relating to the
Fund's investment advisory agreement and on any change in its fundamental
investment limitations. Only holders of Pacific Horizon Shares of a Fund will
be entitled to vote on matters submitted to a vote of shareholders pertaining
to the Fund's Special Management Services Agreement. Only holders of Horizon
Service Shares will be entitled to vote on matters submitted to a vote of
Shareholders pertaining to the Funds' Shareholder Services Plan. Only holders
of particular S and X Shares, if affected by changes to such Plan, will be
entitled to vote on matters submitted to a vote of shareholders pertaining to a
Fund's Distribution and Services Plan relating to the particular series.
Shares have no preemptive rights and only such conversion and exchange rights
as the Board may grant at its discretion. When issued for payment as described
in this Prospectus, shares will be fully paid and non-assessable. Certificates
for shares will not be issued.
The Company does not presently intend to hold annual meetings of shareholders
for the election of directors and other business unless and until such time as
less than a majority of the directors holding office have been elected by the
shareholders of the Company, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested by the holders of record of 10% or more of the
Company's outstanding
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<PAGE> 417
shares of common stock. To the extent required by law and the Company's
undertaking with the Securities and Exchange Commission, the Company will
assist in shareholder communications in such matters. Shares have cumulative
voting rights to the extent that may be required by applicable law.
PERFORMANCE CALCULATIONS
From time to time the "yield" or "effective yield" of a Fund may be quoted in
advertisements or reports to shareholders. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of a Fund refers to the income generated by an investment in the Fund
over a seven-day period (which period will be stated in the advertisement or
report). This income is then "annualized"--that is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
Additionally, the yields of each Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Funds' yields may be compared to Donoghue's Money Fund Averages, which are
averages compiled by Donoghue's Money Fund Report. Yield data as reported in
national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature, may also be used in comparing the yields of the Funds. A
complete listing of the indices, rankings and publications discussed above is
contained in the Statement of Additional Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the shares of a Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
yield is generally a function of the kind and quality of the instruments held
in a portfolio, portfolio maturity, operating expenses and market conditions.
Any fees charged by Bank of America or other institutional investors directly
to their customers in connection with investments in shares of the Funds (which
fees may include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income) will
not be included in the Funds' calculations of yield.
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-----------------------
Shareholder inquiries should be addressed to the Distributor at the address or
telephone numbers stated on the inside cover of this Prospectus.
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<PAGE> 419
X SHARES
OF THE
PRIME FUND AND
TREASURY FUND
PROSPECTUS
____________, 1996
NOT FDIC INSURED
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<PAGE> 420
PACIFIC HORIZON FUNDS, INC.
X Shares of the Prime Fund and Treasury Fund
Cross Reference Sheet
_________________________________
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C> <C>
10. Cover Page . . . . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . . . Table of Contents
12. General Information and History . . . . The Company
13. Investment Objectives and Policies . . . Investment Objectives and
Policies
14. Management of the Fund . . . . . . . . . Management of the Funds
15. Control Persons and Principal Holders of Management of the Funds;
Securities Miscellaneous
16. Investment Advisory and Other Services . Management of the Funds;
Investment Adviser;
Administrator; Distributor;
Custodian and Transfer Agent
17. Brokerage Allocation and Other Practices Portfolio Transactions
18. Capital Stock and Other Securities . . . General Information;
Description of Shares
19. Purchase, Redemption and Pricing of . . Additional Purchase and
Securities Being Offered Redemption Information
20. Tax Status . . . . . . . . . . . . . . . Additional Information
Concerning Taxes
21. Underwriters . . . . . . . . . . . . . . Management of the Funds;
Distributor
22. Calculation of Performance Data . . . . Additional Performance
Information
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate Item,
so numbered in Part C to this Registration Statement.
<PAGE> 421
PACIFIC HORIZON FUNDS, INC.
X SHARES
OF THE
PRIME FUND AND TREASURY FUND
(INVESTMENT PORTFOLIOS OF
PACIFIC HORIZON FUNDS, INC.)
STATEMENT OF ADDITIONAL INFORMATION
______________, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . 2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . 13
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . 16
MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . 19
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 36
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
This Statement of Additional Information, which applies to the
X Shares of the Prime Fund and Treasury Fund (individually, a "Fund" and
collectively, the "Funds") of Pacific Horizon Funds, Inc. ("Pacific Horizon" or
the "Company"), is meant to be read in conjunction with the prospectus dated
_______________, 1996 with respect to the X Shares of the Funds, as may from
time to time be revised, describing the particular Fund of the Company in which
the investor is interested and is incorporated by reference in its entirety
into such Prospectus. Because the Statement of Additional Information is not
itself a prospectus, no investment in shares of any Fund should be made solely
upon the information contained herein. Copies of the Prospectus relating to
the Company's X Shares may be obtained by calling Concord Financial Group, Inc.
at 800-332-3863. Capitalized terms used but not defined herein have the same
meaning as in the Prospectus.
<PAGE> 422
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. On March 30, 1984, the Company commenced its public sale of
shares (Pacific Horizon Shares) in each of the Prime Fund and Treasury Fund,
which were originally called "Money Market Portfolio" and "Government Money
Market Portfolio," respectively. On January 19, 1990, the Prime Fund and
Treasury Fund of The Horizon Funds, a Massachusetts business trust (sometimes
called the "Predecessor Prime Fund" and "Predecessor Treasury Fund"), were
combined with the Money Market Portfolio and Government Money Market Portfolio,
respectively, of the Company; the Company changed the names of its resulting
portfolios to "Prime Fund" and "Treasury Fund"; and, in addition to continuing
its offering of Pacific Horizon Shares in such Funds, the Company began
offering Horizon Shares and Horizon Service Shares in the Prime and Treasury
Funds. As of the date of this Statement of Additional Information: the
Company began its public offering of Class X Shares of the Prime and Treasury
Funds.
The Company offers other classes and series of shares,
including S Shares, Pacific Horizon Shares, Horizon Shares and Horizon Service
Shares, in the aforementioned funds and in other investment portfolios which
are described in separate Prospectuses and Statements of Additional
Information. For information concerning these other shares, contact the
Distributor at the telephone number stated on the cover page of this statement
of additional information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Prime Fund and Treasury Fund describes
the investment objective of the Fund to which it applies. The following
information supplements and should be read in conjunction with the descriptions
of the investment objective and policies in the Prospectus for such Funds.
PORTFOLIO TRANSACTIONS
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Subject to the general control of the Company's Board of
Directors, Bank of America National Trust and Savings Association ("Bank of
America") is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities for each Fund. Securities
purchased and sold by each Fund are generally traded in the over-the-counter
market on a net basis (I.E., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. During their
last three fiscal periods, the Funds did not pay any brokerage commissions.
The cost of securities purchased by the Funds from underwriters
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generally include an underwriting commission or concession, and the prices at
which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down.
In executing portfolio transactions and selecting brokers or
dealers, it is the Company's policy to seek the best overall terms available.
The investment advisory agreement between the Company and Bank of America
provides that, in assessing the best overall terms available for any
transaction, Bank of America shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, the investment advisory agreement
authorizes Bank of America, subject to the approval of the Company's Board of
Directors, to cause the Company to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that such commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of Bank of America to the
particular Fund and the Company. Brokerage and research services may include:
(1) advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities and (2) analyses and reports concerning
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts.
The Directors will periodically review the commissions paid by
the Company to consider whether the commissions, if any, paid over
representative periods of time appear to be reasonable in relation to the
benefits inuring to the Company. It is possible that certain of the brokerage
or research services received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Company or any given Fund may be the primary
beneficiary of the brokerage or research services received as a result of
portfolio transactions effected for such other accounts or investment
companies.
Brokerage or research services so received are in addition to
and not in lieu of services required to be performed by Bank of America and do
not reduce the advisory fee payable to Bank of America by the Company. Such
services may be useful to Bank of America in serving both the Company and other
clients and, conversely, services obtained by the placement of business of
other clients may be useful to Bank of America in carrying out its obligations
to the Company. The Company will not acquire certificates of deposit or other
securities issued by Bank of
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America or its affiliates, and will give no preference to certificates of
deposit or other securities issued by Service Organizations. In addition,
portfolio securities in general will be purchased from and sold to Bank of
America, Concord Financial Group, Inc. (the "Distributor") and their affiliates
acting as principal underwriter, syndicate member, market-maker, dealer, broker
or in any other similar capacity during the life of the syndicate, provided
such purchase, sale or dealing is permitted under the Investment Company Act of
1940 and the rules thereunder.
A Fund's annual portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the Fund's portfolio securities. The
calculation excludes all securities the maturities of which at the time of
acquisition were thirteen months or less. The annual portfolio turnover rate
is expected to be zero for regulatory reporting purposes for all Funds.
A Fund may participate, if and when practicable, in bidding
for the purchase of securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
Any such Fund will engage in this practice only when Bank of America, in its
sole discretion, subject to guidelines adopted by the Board of Directors,
believes such practice to be in the Fund's interest.
Subsequent to its purchase by a Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The Board of Directors or Bank of America,
pursuant to guidelines established by the Board, will promptly consider such an
event in determining whether the Fund involved should continue to hold the
obligation but will continue to hold the obligation only if retention is in
accordance with the interests of the Fund and applicable regulations of the
Securities and Exchange Commission. In addition, it is possible that
unregistered securities purchased by a Fund in reliance upon Rule 144A under
the Securities Act of 1933 could have the effect of increasing the level of the
Fund's illiquidity to the extent that qualified institutional buyers become,
for a period, uninterested in purchasing these securities.
To the extent permitted by law, Bank of America may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under
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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 29, 1996:
PORTFOLIO INSTRUMENTS
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CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, COMMERCIAL
PAPER AND SHORT-TERM NOTES. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specific return. Bankers' acceptances are
negotiable deposits or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank
(meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument at maturity). Certificates of deposit and bankers'
acceptances acquired by a Fund will be dollar-denominated obligations of
domestic or foreign banks having total assets at the time of purchase in excess
of $2.5 billion (including assets of both domestic and foreign branches).
Commercial paper consists of unsecured promissory notes issued by corporations.
Short-term notes acquired by a Fund may be issued by commercial or investment
banking firms, financing companies or industrial or manufacturing concerns.
Commercial paper and short-term notes, except for variable and floating rate
instruments, will normally have maturities of nine months or less, although
such instruments may have maturities of up to thirteen months. Commercial
paper and short-term notes will consist of issues which are "First Tier
Securities" as defined by the Securities and Exchange Commission. First Tier
Securities consist of instruments that are either rated at the time of purchase
in the top rating category by one (if rated by only one) or more unaffiliated
nationally recognized statistical rating organizations ("NRSROs") or issued by
issuers with such ratings. See the Appendix to this Statement of Additional
Information for a description of the applicable NRSRO ratings. Unrated
instruments (including instruments with long-term but no short-term ratings)
purchased by a Fund will be of comparable quality as determined by Bank of
America pursuant to guidelines approved by the Board of Directors and Bank of
America.
A Fund holding Yankee Euros, Euro CDs, Yankee CDs, Yankee BAs
or commercial paper of foreign issuers may be subject to investment risks that
are different in some respects from those incurred by a Fund which invests only
in obligations of domestic branches of U.S. banks. Such risks include future
political and economic developments, the possible imposition of withholding
taxes by the particular country in which the issuer is located on interest
income payable on the securities, the possible seizure or nationalization of
foreign deposits, the possible establishment of exchange controls or the
adoption of
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other foreign governmental restrictions which might adversely affect the
payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which
may be made and interest rates which may be charged. In addition, the
profitability of the banking industry is dependent largely upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well
as exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels
of reserves, limited in the amount which they can loan to a single borrower and
subject to other regulations designed to promote financial soundness. However,
such laws and regulations do not necessarily apply to the Yankee Euros, Euro
CDs, Yankee CDs and Yankee BAs that a Fund may acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S.
Government and its agencies and instrumentalities include Treasury bills,
certificates of indebtedness, notes and bonds, Treasury Strips, and issues of
such entities as the Federal Home Loan Banks, Federal Land Banks, Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Resolution Funding Corporation,
Maritime Administration, Tennessee Valley Authority and Federal National
Mortgage Association. The Prime Fund and Treasury Fund will not acquire
obligations issued by the International Bank for Reconstruction and
Development, the Asian Development Bank or the Inter-American Development Bank.
Government National Mortgage Association ("GNMA") certificates
are U.S. Government agency mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans, issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations, are
either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. A "pool" or group of such mortgages is assembled and,
after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal
on each mortgage is guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. GNMA certificates differ from bonds in that
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principal is paid back monthly by the borrower over the term of the loan rather
than returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
In addition to GNMA certificates, mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC") may also be acquired. Securities issued and
guaranteed by FNMA and FHLMC are not backed by the full faith and credit of the
United States. If either fixed or variable rate pass-through securities issued
by the U.S. Government or its agencies or instrumentalities are developed in
the future, the Prime Fund reserves the right to invest in them, after making
appropriate disclosure to investors. Certain securities issued by all
governmental agencies may be prepaid. Prepayment of mortgages underlying most
mortgage-backed securities may reduce their current yield and total return.
During periods of declining interest rates, such prepayments can be expected to
accelerate and the Fund would be required to reinvest the proceeds at the lower
interest rates then available.
COMMON PORTFOLIO INSTRUMENTS
- ----------------------------
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Fund may acquire
variable and floating rate instruments as described in the Prospectus.
Variable and floating rate instruments are frequently not rated by credit
rating agencies; however, unrated variable and floating rate instruments
purchased by a Fund will be determined by the investment adviser under
guidelines established by the Company's Board of Directors to be of comparable
quality at the time of purchase to rated instruments eligible for purchase by
such Fund. In making such determinations, the investment adviser will consider
the earning power, cash flows and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
There may not be an active secondary market with respect to a particular
variable or floating rate instrument purchased by a Fund. The absence of such
an active secondary market could make it difficult for a Fund to dispose of the
variable or floating rate instrument involved. In the event the issuer of the
instrument defaulted on its payment obligations, a Fund involved could, for
this or other reasons, suffer a loss to the extent of the default. Variable
and floating rate instruments may be secured by bank letters of credit and may
have maturities of more than thirteen months. In determining a Fund's average
weighted maturity and whether a variable or floating rate instrument has a
remaining maturity of thirteen months or less, each variable rate instrument
having a demand feature that entitles the Fund to receive the principal amount
thereof at any time, or at specified intervals not
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exceeding thirteen months, in each case on not more than thirty days' notice,
shall be deemed by the Company to have a maturity equal to the longer of the
period remaining until its next interest rate adjustment or the period
remaining until the principal amount can be recovered through demand; each
variable rate instrument not having such a demand feature but having a stated
maturity of thirteen months or less or issued or guaranteed by the U.S.
Government or its agencies will be deemed to have a maturity equal to the
period remaining until the next interest rate adjustment; each floating rate
instrument having a demand feature that entitles the Fund to receive the
principal amount thereof at any time, or at specified intervals not exceeding
thirteen months, in each case on not more than thirty days' notice, shall be
deemed to have a maturity equal to the period of time remaining until the
principal amount owed can be recovered through demand. Variable and floating
rate instruments which are not payable upon seven days' notice and which do not
have an active trading market are considered illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch
Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA
Limited and IBCA Inc. ("IBCA") represent their opinions as to the quality of
debt securities. However, ratings are general and are not absolute standards
of quality, and debt securities with the same maturity, interest rate and
rating may have different yields while debt securities of the same maturity and
interest rate with different ratings may have the same yield.
An issuer's obligations under its debt securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code and laws which
may be enacted by federal or state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or, in the case of governmental entities, upon
the ability of such entities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on, and principal of, its
debt securities may be materially adversely affected by litigation or other
conditions.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase
agreements with respect to its portfolio securities as indicated in the
Prospectus. Pursuant to such agreements, a Fund purchases securities from
financial institutions such as banks and broker-dealers which are deemed to be
creditworthy by the investment adviser under guidelines approved by the Board
of Directors, subject to the seller's agreement to repurchase and
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the Fund's agreement to resell such securities at a specified date and price.
Neither Fund will enter into repurchase agreements with Bank of America or Bank
of America's affiliates, nor will either Fund give preference to repurchase
agreements with Service Organizations. The repurchase price generally equals
the price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the underlying
portfolio security). Securities subject to repurchase agreements will be held
by the Funds' custodian or a sub-custodian or in the Federal Reserve/Treasury
book-entry system, and a Fund will make payment for such securities only upon
receipt of evidence of physical delivery of the securities or of such book
entry. The seller under a repurchase agreement will be required to deliver
instruments the value of which is 102% of the repurchase price (excluding
accrued interest), provided that notwithstanding such requirement, the advisor
shall require that the value of the collateral, after transaction costs
(including loss of interest reasonably expected to be incurred on a default),
shall be equal to or greater than the resale price (including interest)
provided in the agreement. If the seller defaulted on its repurchase
obligation, the Fund holding the repurchase agreement would suffer a loss to
the extent that the proceeds from a sale of the underlying securities were less
than the repurchase price under the agreement. Bankruptcy or insolvency of
such a defaulting seller may cause the particular Fund's rights with respect to
such securities to be delayed or limited. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. Each Fund may also enter into
reverse repurchase agreements with respect to their securities. Whenever a
Fund enters into a reverse repurchase agreement, it will place in a segregated
account maintained with the Fund's custodian cash, U.S. Government securities
and other liquid high grade debt securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account for maintenance of such equivalent value. Reverse repurchase
agreements are considered to be borrowings by a Fund under the Investment
Company Act of 1940.
INVESTMENT PRACTICES
- --------------------
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. Each Fund may purchase securities on a "when-issued," "forward
commitment" or "delayed settlement" basis (I.E., for delivery beyond the normal
settlement date at a stated price and yield). When a Fund agrees to purchase
securities on a when-issued, forward commitment or delayed settlement basis,
its custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account.
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Normally the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets (cash or liquid securities) in the separate account so
that the value of the account remains equal to the amount of such Fund's
commitment. The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid investments to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the investment adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 25% of the value of its assets.
A Fund will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing
the transaction. If deemed advisable as a matter of investment strategy,
however, a Fund may dispose of or renegotiate a commitment after it is entered
into, and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In these cases
the Fund may realize a taxable capital gain or loss.
When a Fund engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Fund's incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued
purchase, a forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations on their market value is taken into account
when determining the market value of a Fund starting on the day the Fund agrees
to purchase the securities. The Fund does not earn interest on the securities
it has committed to purchase until they are paid for and delivered on the
settlement date.
LOANS OF SECURITIES. The Prime Fund may lend its securities
to brokers, dealers and financial institutions, provided (1) the loan is
secured continuously by collateral consisting of U.S. Government securities or
cash or letters of credit which is marked to the market daily to ensure that
each loan is fully collateralized at all times; (2) the Fund may at any time
call the loan and obtain the return of the securities loaned within five
business days; (3) the Fund will receive any interest or dividends paid on the
securities loaned; and (4) the aggregate market value of securities loaned will
not at any time exceed 30% of the total assets of the Fund.
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The Fund will earn income for lending its securities because
cash collateral pursuant to these loans will be invested in short term money
market instruments. In connection with lending securities, the Fund may pay
reasonable finders, administrative and custodial fees. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral.
INVESTMENT LIMITATIONS
- ----------------------
The Prospectus for both Funds sets forth certain fundamental
policies that may not be changed with respect to each Fund without the
affirmative vote of the holders of the majority of the Fund's outstanding
shares (as defined below under "General Information - Miscellaneous").
Similarly, the following enumerated additional fundamental policies may not be
changed with respect to each Fund without such a vote of shareholders.
A. The Prime Fund and Treasury Fund may not:
1. Purchase or sell real estate (however, a Fund may, to
the extent appropriate to its investment objective, purchase securities issued
by companies investing in real estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of
exercising control.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets.
6. Make loans, except that a Fund: (i) may purchase or
hold debt instruments and enter into repurchase agreements pursuant to its
investment objective and policies, and (ii) may lend portfolio securities.
B. The Prime Fund may not:
1. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to
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25% of the Fund's total assets may be invested without regard to this
limitation).
* * *
INTERPRETATIONS: If a percentage restriction is satisfied at
the time of investment, a later increase or decrease in such percentage
resulting from a change in asset value will not constitute a violation of such
restriction.
For purposes of Investment Limitation No. 1 relating to the
Prime Fund, the Fund treats, in accordance with the current views of the
Securities and Exchange Commission and as a matter of non-fundamental policy
that may be changed without a vote of shareholders, all supranational
organizations as a single industry and each foreign government (and all of its
agencies) as a separate industry.
For purposes of Investment Limitation No. 1 of Paragraph B
above, a security is considered to be issued by the governmental entity (or
entities) whose assets and revenues back the security, or, with respect to a
private activity bond that is backed only by the assets and revenues of a
non-governmental user, such non-governmental user. In certain circumstances,
the guarantor of a guaranteed security may also be considered to be an issuer
in connection with such guarantee. In addition, in accordance with current
regulations of the Securities and Exchange Commission, the Prime Fund presently
intends to limit its investments in the securities of any single issuer (other
than securities issued by the U.S. Government, its agencies or
instrumentalities) to not more than 5% of the Fund's total assets at the time
of purchase, provided that the Fund may invest up to 25% of its total assets in
the securities of any one issuer for a period that does not exceed three
business days. For purposes of Investment Limitation No. 6 of Paragraph A, the
Prime Fund may hold debt instruments whether such instruments are part of a
public offering or privately negotiated.
In order to permit the sale of shares in certain states, a
Fund may make commitments more restrictive than the investment policies and
limitations described above. To permit the sale of shares of the Funds in
Texas, the Company has agreed to the following addition restrictions:
1. Such Funds will not invest in oil, gas or mineral
leases.
2. Such Funds will not invest more than 5% of their net
assets in warrants (valued at the lower of cost or market), of which not more
than 2% may be warrants which are not listed on the New York or American Stock
Exchanges.
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Should a Fund determine that these commitments or any other
commitments are no longer in the best interests of the Fund, it will revoke
such commitments by terminating sales of its shares in the state involved.
The policies and practices stated in this sub-section are not
fundamental policies of the Funds.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Company shares, and
how such shares are priced, is included in the Prospectus. Additional
information is contained below.
NET ASSET VALUE
- ---------------
IN GENERAL. Each Fund's net asset value per share is
calculated by dividing the total value of the assets belonging to the Fund,
less the value of any liabilities applicable to the Fund, by the total number
of outstanding shares of that Fund. Each Fund's net asset value is calculated
separately from each other of the Company's Fund's net asset value. "Assets
belonging to" a Fund consist of the consideration received upon the issuance of
shares representing interests in the Fund together with all income, earnings,
profits and proceeds derived from the investment thereof, any proceeds from the
sale, exchange or liquidation of such investments, any funds or payments
derived from any re-investment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular Fund. Each Fund is charged
with the direct expenses of that Fund and with a share of the general expenses
of the Company. The determinations by the Board of Directors as to direct and
allocable expenses and the allocable portion of general assets with respect to
the various portfolios are conclusive. The expenses that are charged to a Fund
are borne equally by each share of the Fund except for payments to Shareholder
Organizations and Rule 12b-1 fees that are borne solely by X and S Shares of
the Funds, certain payments that are borne solely by Pacific Horizon Shares of
the Funds, and payments to Shareholder Organizations that are borne solely by
Horizon Service Shares of the Funds as described in the Prospectuses for such
Shares.
AMORTIZED COST METHOD. Each Fund uses the amortized cost
method of valuation in computing the net asset value of their shares for
purposes of sales and redemptions. Under this method a Fund values each of its
portfolio securities at cost on the date of purchase and thereafter assumes a
constant proportionate amortization of any discount or premium until maturity
of the security. As a result the value of a portfolio
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security for purposes of determining net asset value normally does not change
in response to fluctuating interest rates. While the amortized cost method
seems to provide certainty in portfolio valuation it may result in periods
during which values, as determined by amortized cost, are higher or lower than
the amount such Fund would receive if it sold its portfolio securities. The
market value of the securities in the Funds can be expected to vary inversely
with changes in prevailing interest rates. Thus, if interest rates have
increased from the time a security was purchased, such security, if sold, might
be sold at a price less than its amortized cost. Similarly, if interest rates
have declined from the time a security was purchased, such security, if sold,
might be sold at a price greater than its amortized cost. In either instance,
if the security is held to maturity, no gain or loss will be realized.
In connection with their use of amortized cost valuation, the
Funds limit the dollar-weighted average maturity of their portfolios to not
more than 90 days and do not purchase any instrument with a remaining maturity
of greater than 397 calendar days. The Company's Board of Directors has also
established, pursuant to rules promulgated by the Securities and Exchange
Commission, procedures that are intended to stabilize each Fund's net asset
value per share for purposes of sales and redemptions at $1.00. Such
procedures include the determination, at such intervals as the Board deems
appropriate, of the extent, if any, to which a Fund's net asset value per share
calculated by using available market quotations deviates from $1.00 per share.
In the event such deviation exceeds 1/2 of 1% the Board will promptly consider
what action, if any, should be initiated. If the Board believes that the
amount of any deviation may result in material dilution or other unfair results
to investors or existing shareholders, it will take such steps as it considers
appropriate to eliminate or reduce to the extent reasonably practicable any
such dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity, shortening a Fund's average portfolio maturity,
withholding or reducing dividends, reducing the number of a Fund's outstanding
shares without monetary consideration or determining net asset value per share
by using available market quotations. If a Fund reduces the number of its
outstanding shares without monetary consideration it will mail written notice
to shareholders at least three business days before the redemption and in the
notice will state the reason for the redemption and the fact that the
redemption may result in a capital loss to shareholders.
The Funds' administrator, Concord Holding Corporation (the
"Administrator"), may use a pricing service to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing a Fund's securities the pricing service would
normally take into
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consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely on quoted prices. The methods used by
the pricing service and the valuations so established will be utilized under
the general supervision of the Company's Board of Directors. Additionally, in
determining market-based net asset value per share, all portfolio securities
for which market quotations (or appropriate substitutes that reflect current
market conditions) are not readily available, shall be valued at their fair
value as determined by the valuation committee in accordance with procedures
established by the Board of Directors.
X SHARES
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Persons wishing to establish a Sweep Account at BAIS or
certain other Service Organizations should contact BAIS or a Service
Organization directly for appropriate instructions. Depending on the terms of
the Sweep Account, BAIS, its affiliates and Service Organizations also may
charge its customers fees for 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. BAIS or the particular Service Organization is responsible
for providing information concerning these services and any charges to any
customers who must authorize the purchase of shares prior to such purchase.
MISCELLANEOUS. Certificates for shares will not be issued.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent at its Columbus office is a day
on which both the Funds' custodian and the New York Stock Exchange are open for
trading, except a "business day" does not include Martin Luther King, Jr. Day,
Columbus Day or Veteran's Day. In 1996, the holidays on which the New York
Stock Exchange is closed are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
Securities and Exchange Commission; (b) the New York Stock Exchange is closed
for other than customary weekend and holiday closings; (c) the Securities and
Exchange Commission has by order permitted such suspension; or (d) an emergency
exists as determined by the Securities and
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<PAGE> 436
Exchange Commission. (The Company may also suspend or postpone the recordation
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does
not increase such balance to $500 or more upon 60 days' notice. The Company
will not require a shareholder to redeem shares of a Fund if the balance held
of record by the shareholder is less than $500 solely because of a decline in
the net asset value of the shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the Investment Company Act of 1940.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in readily
marketable securities or other property. In such an event, a shareholder would
incur transaction costs in selling the securities or other property. The
Company has committed that it will pay all redemption requests by a shareholder
of record in cash, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of $250,000 or 1% of the net asset value at
the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional
considerations generally affecting the Funds and their shareholders that are
not described in the Prospectus for the Funds. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their shareholders,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Investors are advised to consult their tax advisers
with specific reference to their own tax situations.
FEDERAL - BOTH FUNDS
- --------------------
Each Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, each
Fund expects to eliminate or reduce to a nominal amount the federal income
taxes to which it may be subject. If for any taxable year a Fund of the
Company does not qualify for the special federal tax treatment afforded
regulated investment companies, all of the Fund's taxable income would be
subject to tax at regular
-16-
<PAGE> 437
corporate rates (without any deduction for distributions to shareholders). In
such event, the Fund's dividend distributions to shareholders would be taxable
as ordinary income to the extent of the current and accumulated earnings and
profits of the particular Fund and would be eligible for the dividends received
deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income (if any) and 90% of its tax-exempt income (if any) net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. A Fund will be
taxed on its undistributed investment company taxable income, if any.
A Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months (the "short-short
test"). Interest (including original issue and accrued market discount)
received by a Fund upon maturity or disposition of a security held for less
than three months will not be treated as gross income derived from the sale or
other disposition of such security within the meaning of this requirement.
However, any other income that is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of
securities for this purpose.
Any distribution of the excess of net long-term capital gains
over net short-term capital losses is taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held the distributing
Fund's shares and whether such gains are received in cash or additional Fund
shares. The Fund will designate such a distribution as a capital gains
dividend in a written notice mailed to shareholders after the close of the
Fund's taxable year.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%; however, because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum nominal
effective marginal rate of tax for some taxpayers may be higher. An
individual's long-term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long-term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35% (or at a maximum
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<PAGE> 438
effective marginal rate of 39% in the case of corporations having taxable
income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income for each calendar year and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year
to avoid liability for this excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders who (i) have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends, or (iii) who have
failed to certify to the Company that they are not subject to backup
withholding when required to do so or that they are "exempt recipients."
At February 29, 1996, the Prime Fund and Treasury Fund had
unused capital loss carryovers of approximately:
OTHER INFORMATION
- -----------------
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located, or in which it is otherwise deemed to be
conducting business, a Fund may be subject to the tax laws of such states or
localities.
Exempt-interest dividends will generally be exempt from state
and local taxes as well. However, in some situations income distributions may
be taxable to shareholders of the Funds under state or local law as dividend
income even though all or a portion of such distributions may be derived from
interest on tax-exempt obligations or U.S. Government obligations which, if
realized directly, would be exempt from such income taxes. Shareholders are
advised to consult their tax advisers concerning the application of state and
local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action.
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<PAGE> 439
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
- ----------------------
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust, Series
I (registered
investment company)
(since 1993); former
Director, Bunker Hill Income
Securities, Inc. (registered
investment company) through
1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated,
Newport Beach, CA 92660-2629 (registered investment
adviser) 1991 to date;
Partner, 1991 Newport
Partners (private venture
capital firm), 1981 to
date; Chairman of the
Board and Chief Executive
Officer, First Pacific
Advisors, Inc. (registered
investment adviser) and
seven investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust); Trustee
and former Vice Chairman
of the Board, Claremont
McKenna College; Chartered
Financial Analyst.
</TABLE>
-19-
<PAGE> 440
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett Packard
Company from 1979 to 1991; Trustee, Master
Investment Trust, Series I (since 1993);
Director, Morgan Grenfell Small Cap Fund (since
1986); former Director, Bunker Hill Income
Securities, Inc. (since 1989) (registered
investment companies); former Trustee,
SunAmerica Fund Group (previously Equitec
Siebel Fund Group) from 1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988, Pacific Rim Bankers
Program (a non- profit educational
institution); Dean Emeritus, 1981 to date,
Dean, 1964-81, Graduate School of Business
Administration, University of Washington;
Director, Washington Federal Savings & Loan
Association; Trustee, Seafirst Retirement Funds
(since 1993) (registered investment company).
</TABLE>
-20-
<PAGE> 441
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic Affairs, 1981 to January
1993, University of Southern California;
Trustee, Master Investment Trust, Series I
(since 1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of Finance and Business
Economics of the Graduate School of Business of
the University of Southern California; former
Director, Metro Goldwyn Mayer, Inc.; Director,
Fremont General Corporation (insurance and
financial services holding company); Director,
Source Capital, Inc. (closed-end investment
company); Director of three open-end investment
companies managed by First Pacific Advisors,
Inc.; formerly Chairman of the Board of
Directors (or Trustees) of nineteen investment
companies managed by American Capital Asset
Management, Inc.
</TABLE>
-21-
<PAGE> 442
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Richard E. Stierwalt Executive Chairman of the Board
125 W. 55th Street 40 Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto Senior Director, Managing
Director and Chief Executive Officer of the
Administrator and Distributor, February 1987 to
July 1993; President, Master Investment Trust,
Series I, and Seafirst Retirement Funds (since
1993); First Vice President, Trust Operation
Administration, Security Pacific National Bank,
1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and Distributor, February
1987 to July 1993; Executive Vice President,
Seafirst Retirement Funds (since 1993); Senior
Vice President, Shearson Lehman Brothers,
1978-1987.
Irimga McKay 35 Vice Senior Vice President,
1230 Columbia Street President July 1993 to date, prior
5th Floor thereto First Vice
San Diego, CA 92101 President of the
Administrator and Distributor, November 1988 to
July 1993; Vice President, 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.
</TABLE>
-22-
<PAGE> 443
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Limited partnership),
May 1986 to June 1987.
Stephanie L. Blaha 36 Assistant Vice Manager of Client Services of the
BISYS Fund Services President Administrator, March 1995 to date,
First and Market Building prior thereto Assistant Vice President
100 First Avenue of the Administrator and Distributor,
Suite 300 October 1991 to March 1995;
Pittsburgh, PA 15222 Assistant Vice President, Master
Investment Trust, Series II (since
1996); Vice President, Seafirst
Retirement Funds and Master Investment Trust,
Series I (since 1996);
Account Manager, AT&T American
Transtech, Mutual Fund Division,
July 1989 to October 1991.
Mark E. Nagle 36 Treasurer Senior Vice President, Fund Accounting
BISYS Fund Services Services, The BISYS Group, Inc.
3435 Stelzer Road September 1995 to Present;
Columbus, OH 43219 Treasurer, Seafirst Retirement Funds
(Since 1996) Senior Vice President
Fidelity Institutional Retirement
Services (1993 to September 1995);
Fidelity Accounting and Custody Services
(1981 to 1993).
Martin R. Dean 31 Assistant Manager of Fund Accounting of BISYS
BISYS Fund Services Treasurer Fund Services, May 1994 to Present;
3435 Stelzer Road Assistant Treasurer, Master Investment
Columbus, OH 43219 Trust, Series II and Seafirst
</TABLE>
-23-
<PAGE> 444
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C>
Retirement Funds (since 1996);
Senior Manager at KPMG Peat
Marwick previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm of
1345 Chestnut Street Drinker Biddle & Reath.
Philadelphia National Bank Secretary, Master Investment Trust,
Building, Suite 1100 Series I, Master Investment Trust,
Philadelphia, PA 19107 Series II and Seafirst Retirement
Funds.
George O. Martinez 35 Assistant Senior Vice President and Director
3435 Stelzer Road Secretary of Legal and Compliance Services
Columbus, OH 43219 of the Administrator since April 1995;
Assistant Secretary, Master Investment
Trust, Series II and Seafirst Retirement
Funds (since 1995); prior thereto, Vice
President and Associate General Counsel,
Alliance Capital Management, L.P.
- -----------------------------
</TABLE>
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
The Audit Committee of the Board is comprised of all directors
and is chaired by Dr. Trefftzs. The Board does not have an Executive
Committee.
Each director is entitled to receive an annual fee of $25,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $20,000 per annum for his
services as President; Mr. Collins, in consideration of his years of service as
President and Chairman of the Board, receives an additional $40,000 per annum
in recognition of his years of service to the Company until February 28, 1997;
each member of a Committee of the Board is entitled to receive $1,000 for each
Committee meeting they participate in (whether or not held on the same day as a
Board meeting); and each Chairman of a Committee of the Board shall be entitled
to receive an annual retainer of $1,000 for his services as Chairman of the
Committee. The Funds, and each other Fund of the Company, pays its
proportionate share of these amounts based on relative net asset values.
-24-
<PAGE> 445
For the fiscal year ended February 29, 1996, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $___________; of this total amount, the following amounts
of directors' compensation were allocated to the following Funds: Treasury Fund
- - $_____________ and Prime Fund - $____________. Each director is also
reimbursed for out-of-pocket expenses incurred as a director. Drinker Biddle &
Reath, of which Mr. McConnel is a partner, receives legal fees as counsel to
the Company. As of the date of this Statement of Additional Information, the
directors and officers of the Company, as a group, own less than 1% of the
outstanding shares of each of the Company's investment portfolios.
Under a retirement plan approved by the Board of Directors,
including a majority of its directors who are not "interested persons" of the
Company, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer
then in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director provided as Chairman of the
Board.
Years of service for purposes of calculating the benefit
described above are based upon service as a director or Chairman after February
28, 1994. Retirement benefits in which a director has become vested may not be
reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer
payable to directors thereafter), and (ii) using the interest rate in effect as
of the date of the director's death or resignation by the Pension Benefit
Guaranty Corporation (or any successor thereto) for valuing immediate annuities
under terminating defined benefit pension plans. A
-25-
<PAGE> 446
director's election to receive a single sum must be made in writing within the
30 calendar days after the date the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before
March 1, 1994 as a director and possibly as Chairman, authorize the Company to
pay a retirement benefit following the director's death or resignation (unless
the director has vested benefits as a result of completing nine years of
service). Any such action shall be approved by the Board and by a majority of
the directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former
director is neither secured nor funded by the Company but shall be binding upon
its successors in interest. The payment of benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information about the
director/trustee fees of the Company as of February 29, 1996.
<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 $ $ $ $
Director+
Douglas B. Fletcher $ $ $ $
Vice Chairman of the Board
Robert E. Greeley** $ $ $ $
Director
Kermit O. Hanson $ $ $ $
Director
</TABLE>
-26-
<PAGE> 447
<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>
Cornelius J. Pings $ $ $ $
President and Chairman of
the Board
Kenneth L. Trefftzs $ $ $ $
Director
- ------------------------------
<FN>
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I and Master Investment Trust,
Series II. As of _________, 1996, Master Investment Trust, Series II
ceased operations.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Collins was President and Chairman of the Board of the Company
until August 31, 1995
</TABLE>
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to each of the Funds, since the commencement of their operations. In
the investment advisory agreement, Bank of America has agreed to provide
investment advisory services as described in the 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 Company. In rendering its
advisory services, Bank of America may utilize Bank officers from one or more
of the departments of the Bank which are authorized to exercise the fiduciary
powers of Bank of America with respect to the investment of trust assets. In
some cases, these officers may also serve as officers, and utilize the
facilities, of wholly-owned subsidiaries or other affiliates of Bank of America
or its parent corporation. For the services provided and expenses assumed
pursuant to the investment advisory agreement, the Company has agreed to pay
Bank of America fees, accrued daily and payable monthly, at the following
annual rates: .10% of the first $3 billion of each Fund's net assets, plus
.09% of the next $2 billion of each Fund's net assets, plus .08% of each Fund's
net assets over $5 billion. From time to time, Bank of America may waive fees
or reimburse the Company for expenses voluntarily or as required by certain
state securities laws.
-27-
<PAGE> 448
For the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996, Bank of America (Security Pacific prior to April
22, 1992) was paid, pursuant to the investment advisory agreements then in
effect, advisory fees net of fee waivers by the Prime Fund of $11,293,545,
$2,330,203 and $____________, respectively; and by the Treasury Fund of
$2,717,321, $2,140,125 and $____________, respectively. For the fiscal years
indicated, Bank of America (Security Pacific prior to April 22, 1992) did not
effect any fee waivers or expense reimbursements with respect to the Treasury
Fund. For the fiscal years ended February 28, 1994, February 28, 1995 and
February 29, 1996, aggregate fee waivers and expense reimbursements for the
Prime Fund were $367,233, $920,627 and $____________, respectively.
The Company's investment advisory agreement for the Funds
provides that Bank of America shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company in connection with the
performance of the investment advisory agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or negligence
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in INVESTMENT COMPANY INSTITUTE V. CAMP that the
Glass-Steagall Act prohibits a bank from operating a fund for the collective
investment of managing agency accounts. Subsequently, the Board of Governors
of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
-28-
<PAGE> 449
investment advisers to registered closed-end investment companies.
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may perform the services
for the Company contemplated by the investment advisory agreement, the
Prospectuses, and this Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a bank
may perform services comparable to those performed by Bank of America and
future changes in either federal or state statutes and regulations relating to
permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
Bank of America from continuing to perform such services for the Company or
from continuing to purchase Company shares for the accounts of its customers.
On the other hand, as described herein, the Funds are
currently distributed by the Distributor, and the Administrator, its parent,
provides the Company with administrative services. If current restrictions
under the Glass-Steagall Act preventing a bank from sponsoring, organizing,
controlling or distributing shares of an investment company were relaxed, the
Company expects that Bank of America would consider the possibility of offering
to perform some or all of the services now provided by the Administrator or the
Distributor. From time to time, legislation modifying such restriction has
been introduced in Congress which, if enacted, would permit a bank holding
company to establish a non-bank subsidiary having the authority to organize,
sponsor and distribute shares of an investment company. If this or similar
legislation were enacted, the Company expects that Bank of America's parent
bank holding company would consider the possibility of one of its non-bank
subsidiaries offering to perform some or all of the services now provided by
the Administrator or the Distributor. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by the Company's Board of Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with
principal offices at 125 West 55th Street, 11th Floor, New York, New York 10019
and 3435 Stelzer Road, Columbus, Ohio 43219, is a wholly-owned subsidiary of
The BISYS Group, Inc. The
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<PAGE> 450
Administrator also serves as administrator to several other investment
companies.
The Administrator provides administrative services for the
Funds as described in their Prospectus pursuant to a Basic Administrative
Services Agreement. The agreement will continue in effect with respect to each
Fund until October 31, 1996 and thereafter will be extended with respect to
each Fund for successive periods of one year, provided that each such extension
is specifically approved (a) by vote of a majority of those members of the
Company's Board of Directors who are not interested persons of any party to the
agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) the Company's Board of Directors or by vote of a majority of
the outstanding voting securities of such Fund. The agreement is terminable at
any time without penalty by the Company's Board of Directors or by a vote of a
majority of a Fund's outstanding shares upon 60 days' notice to the
Administrator, or by the Administrator upon 90 days' notice to the Company.
For its services under the Basic Administrative Services
Agreement, the Administrator is entitled to receive an administration fee,
accrued daily and payable monthly, at the following annual rates: .10% of the
first $7 billion of each Fund's net assets, plus .09% of the next $3 billion of
each Fund's net assets, plus .08% of each Fund's net assets over $10 billion.
From time to time, the Administrator may waive fees or reimburse the Company
for expenses, either voluntarily or as required by certain state securities
laws.
For the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996, the Administrator earned, net of fees waived
pursuant to the administration agreements then in effect, administration fees
of $12,158,419, $2,366,035 and $__________, respectively, from the Prime Fund;
and $2,717,606, $2,140,125 and $___________, respectively, from the Treasury
Fund. For the years indicated, the Administrator did not effect any fee
waivers or expense reimbursements with respect to the Treasury Fund. For the
years ended February 28, 1994, February 28, 1995 and $__________, the
Administrator waived fees of $381,513, $949,233 and $__________, respectively,
with respect to the Prime Fund.
The Administrator will bear all expenses in connection with
the performance of its services under its Basic Administrative Services
Agreement for the Funds with the exception of fees charged by The Bank of New
York for certain fund accounting services which are borne by the Funds. See
"Custodian and Transfer Agent" below. Expenses borne by the Company include
taxes, interest, brokerage fees and commissions,
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if any, fees of directors who are not officers, directors, partners, employees
or holders of 5% or more of the outstanding voting securities of Bank of
America or the Administrator or any of their affiliates, Securities and
Exchange Commission fees and state securities qualification fees, advisory
fees, fees payable under the Basic Administrative Services Agreement, charges
of custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, outside auditing and legal expenses, costs of maintaining corporate
existence, costs attributable to investor services, including without
limitation telephone and personnel expenses, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes,
cost of shareholders' reports and corporate meetings and any extraordinary
expenses.
The Basic Administrative Services Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law
or any loss suffered by any Fund in connection with the matters to which the
agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence in the performance of the Administrator's duties or from the
reckless disregard by the Administrator of its obligations and duties
thereunder.
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
If total expenses borne by either Fund in any fiscal year
exceed the expense limitations imposed by applicable state securities
regulations, the Company may deduct from the payments to be made with respect
to such Fund to Bank of America and the Administrator, respectively, or Bank of
America and the Administrator each will bear, the amount of such excess to the
extent required by such regulations. Such amount, if any, will be estimated
and accrued daily and paid on a monthly basis. As of the date of this
Statement of Additional Information, the most restrictive expense limitation
that may be applicable to the Company limits aggregate annual expenses with
respect to a Fund, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2-1/2%
of the first $30 million of its average daily net assets, 2% of the next $70
million, and 1-1/2% of its remaining average daily net assets. During the
course of the Company's fiscal year, the Administrator and Bank of America may
prospectively waive payment of fees and/or assume certain expenses of one or
more of the Company's Funds, as a result of competitive pressures and in order
to preserve and protect the business and reputation of the Administrator and
Bank of America. This will have the
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effect of increasing yield to investors at the time such fees are not received
or amounts are assumed and decreasing yield when such fees or amounts are
reimbursed.
DISTRIBUTOR
The Distributor acts as the exclusive distributor of the
shares of both of the Funds pursuant to a distribution agreement with the
Company. Shares are sold on a continuous basis by the Distributor as agent,
although the Distributor is not obliged to sell any particular amount of
shares. The distribution agreement shall continue in effect with respect to
each Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement shall continue automatically for successive terms of one
year, provided that such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Directors of the
Company who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Directors of the Company or
by vote of a "majority of the outstanding voting securities" of the Funds as to
which the distribution agreement is effective; PROVIDED, HOWEVER, that the
distribution agreement may be terminated by the Company at any time, without
the payment of any penalty, by vote of a majority of the entire Board of
Directors of the Company or by a vote of a "majority of the outstanding voting
securities" of such Funds on 60 days' written notice to the Distributor, or by
the Distributor at any time, without the payment of any penalty, on 90 days'
written notice to the Company. This Agreement will automatically and
immediately terminate in the event of its "assignment."
THE DISTRIBUTION AND SERVICES PLAN. The Distributor is also
entitled to payment from the Company for distribution and service fees pursuant
to the Distribution and Services Plan (the "12b-1 Plan") adopted on behalf of
the Class X shares. Under the 12b-1 Plan, the Company may pay the Distributor
for: (a) direct out-of-pocket promotional expenses incurred by the Distributor
in advertising and marketing Class X shares; (b) expenses incurred in
connection with preparing, printing, mailing, and distributing or publishing
advertisements and sales literature for Class X shares; (c) expenses incurred
in connection with printing and mailing Prospectuses and Statements of
Additional Information to other than current Class X shareholders; (d) periodic
payments or commissions to one or more securities dealers, brokers, financial
institutions or other industry professionals, such as investment advisors,
accountants, and estate planning firms (severally, "a Distribution
Organization") with respect to a Fund's Class X shares beneficially owned by
customers for whom the Distribution
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<PAGE> 453
Organization is the Distribution Organization of record or holder of record of
such Class X shares; (e) the direct or indirect cost of financing the payments
or expenses included in (a) and (d) above; or (f) for such other services as
may be construed, by any court or governmental agency or commission, including
the Securities and Exchange Commission, to constitute distribution services
under the 1940 Act or rules and regulations thereunder.
Pursuant to the 12b-1 Plan, the Company may also pay
Distribution Organizations for administrative support services provided with
respect to its Clients Class X shares. Administrative services provided may
include some or all of the following: (i) processing dividend and distribution
payments from a Fund on behalf of its Clients; (ii) providing information
periodically to its Clients showing their positions in Class X shares; (iii)
arranging for bank wires; (iv) responding to routine Client inquiries
concerning their investment in Class X shares; (v) providing the information to
the Funds necessary for accounting or sub-accounting; (vi) if required by law,
forwarding shareholder communications from a Fund (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to its Clients; (vii) aggregating and processing purchase and
redemption requests from its Clients and placing net purchase and redemption
orders for its Clients; (viii) establishing and maintaining accounts and
records relating to Clients that invest in Class X shares; (ix) assisting
Clients in changing dividend options, account designations and addresses; (x)
developing, maintaining and operating systems necessary to support Sweep
Accounts; or (xi) other similar services if requested by the Company.
The 12b-1 Plan for Class X shares provides that the
Distributor is entitled to receive payments on a monthly basis at an annual
rate not exceeding 0.55% of the average daily net assets during such month of
the outstanding Class X shares to which such 12b-1 Plan relates. Not more than
0.25% of such net assets will be used to compensate Service Organizations for
personal services provided to Class X shareholders and/or the maintenance of
such shareholders' accounts and not more than 0.30% of such net assets will be
used for promotional and other primary distribution activities.
Payments made out of or charged against the assets of a
particular class of shares of a particular Fund must be in payment for expenses
incurred on behalf of that class.
Payments for distribution expenses under the 12b-1 Plan are
subject to Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of [Company] shares." The Rule provides, among
other things, that
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an investment company may bear such expenses only pursuant to a plan adopted in
accordance with the Rule. In accordance with the Rule, the 12b-1 Plan provides
that a written report of the amounts expended under the 12b-1 Plan, and the
purposes for which such expenditures were incurred, will be made to the Board
of Directors for its review at least quarterly. In addition, the 12b-1 Plan
provides that it may not be amended to increase materially the costs which a
Fund may bear for distribution pursuant to the 12b-1 Plan without shareholder
approval and that other material amendments of the 12b-1 Plan must be approved
by a majority of the Board of Directors, and by a majority of the directors who
are neither "interested persons" (as defined in the 1940 Act) of the Company
nor have any direct or indirect financial interest in the operation of the
12b-1 Plan, or in any agreements entered into in connection with the 12b-1
Plan, by vote cast in person at a meeting called for the purpose of considering
such amendments (the "Non-Interested Plan Directors"). The selection and
nomination of the directors of the Company who are not "interested persons" of
the Company have been committed to the discretion of the Non-Interested Plan
Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan will benefit the Funds and their
Class X shareholders. The 12b-1 Plan is subject to annual reapproval by a
majority of the Company's Board of Directors, including a majority of the
Non-Interested Plan Directors and is terminable without penalty at any time
with respect to any Fund by a vote of a majority of the Non-Interested Plan
Directors or by vote of the holders of a majority of the outstanding Class S
shares of the Fund involved. Any agreement entered into pursuant to the 12b-1
Plan with a Service Organization is terminable with respect to any Fund without
penalty, at any time, by vote of a majority of the Non-Interested Plan
Directors, by vote of the holders of a majority of the outstanding Class S
shares of such Fund, or by the Service Organization. Each agreement will also
terminate automatically in the event of its assignment.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York
10286, has been appointed by the Company as custodian for the Funds.
Additionally, BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035, has been appointed as transfer and dividend disbursing agent. The
Bank of New York also provides the Company with certain accounting,
bookkeeping, pricing, and dividend and distribution calculation services
pursuant to a fund accounting services agreement with the Administrator. The
monthly fees charged by the bank under the fund accounting agreement are borne
by the Funds. The Company
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and The Bank of New York have appointed Bank of America to act as sub-custodian
for the Funds pursuant to a Sub-Custodian Agreement. As sub-custodian of the
Company's assets, Bank of America (i) maintains a separate account or accounts
in the name of the Company, (ii) holds and disburses portfolio securities on
account of the Company, (iii) makes receipts and disbursements of money on
behalf of the Company, (iv) collects and receives all income and other payments
and distributions on account of the Company's portfolio securities held by Bank
of America, (v) responds to correspondence from security brokers and others
relating to its duties and (vi) makes periodic reports to the Company's Board
of Directors concerning its duties thereunder. Under the Sub-Custodian
Agreement, the Company will reimburse Bank of America for its costs and
expenses in providing services thereunder. Bank of America is the successor to
Security Pacific under the Sub-Custodian Agreement. For the fiscal years ended
February 28, 1994, February 28, 1995 and February 29, 1996, Bank of America
(and Security Pacific prior to April 22, 1992) in their capacity as
sub-custodian, did not hold any of the Company's assets and, accordingly,
received no fees.
ADDITIONAL PERFORMANCE INFORMATION
The "yields" and "effective yields" of both Funds are
calculated according to formulas prescribed by the Securities and Exchange
Commission. The standardized seven-day yield for each Fund's series of shares
is computed separately for each series by determining the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account in the
particular Fund involved having a balance of one share at the beginning of the
period, dividing the net change in account value by the value of the account at
the beginning of the base period to obtain the base period return, and
multiplying the base period return by (365/7). The net change in the value of
an account in a Fund includes the value of additional shares purchased with
dividends from the original share, and dividends declared on both the original
share and any such additional shares, net of all fees, other than nonrecurring
account or sales charges, that are charged to all shareholder accounts in
proportion to the length of the base period and the Fund's average account
size. The capital changes to be excluded from the calculation of the net
change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. The effective
annualized yields for each Fund are computed by compounding a particular Fund's
unannualized base period returns (calculated as above) by adding 1 to the base
period returns, raising the sums to a power equal to 365 divided by 7, and
subtracting 1 from the results. The fees which may be imposed by institutional
investors directly on their customers for cash management services are not
reflected in the Funds' calculations
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of yields. The current yields for both of the Funds may be obtained by calling
(800) 227-1545.
From time to time, the yields of the Funds may be quoted in
and compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders.
The Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income of a Fund would increase the value of the Fund investment more quickly
than if dividends or other distributions had been paid in cash. The Funds may
also include discussions or illustrations of the potential investment goals of
a prospective investor (including but not limited to tax and/or retirement
planning), investment management techniques, policies or investment suitability
of a Fund, economic conditions, legislative developments (including pending
legislation), the effects of inflation and historical performance of various
asset classes. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well
as the views of the investment adviser as to current market, economic, trade
and interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a
Fund. The Funds may also include in advertisements charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles. In addition, advertisements or shareholder communications
may include a discussion of certain attributes or benefits to be derived by an
investment in a Fund and may include testimonials as to the investment
adviser's capabilities by clients. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, a
Fund may reprint articles (or excerpts) written regarding the Fund and provide
them to prospective shareholders. Performance information with respect to the
Funds is generally available by calling (800) 346-2087.
In addition to the publications listed in the Funds'
Prospectus, yield data as reported in the following publications may be used in
comparing the yields of the Funds to those of other mutual funds with similar
investment objectives: BUSINESS WEEK, INVESTOR'S BUSINESS DAILY, KIPLINGER,
U.S. NEWS, FINANCIAL
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WORLD, USA TODAY, MORNINGSTAR, MUTUAL FUND MONITOR, AND AMERICAN BANKER.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. The Fund's Charter
authorizes the Board of Directors to issue up to two hundred billion full and
fractional shares of capital stock. The Board of Directors has authorized the
issuance of twenty-two classes of stock - Classes A through W Common Stock,
representing interests in twenty-two separate investment portfolios. Each
share of capital stock has a par value of $.001. This Statement of Additional
Information describes the X Shares of the Prime and Treasury Funds.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in its Prospectuses, the Company's shares will be fully
paid and non-assessable. For information concerning possible restrictions upon
the transferability of the Company's shares and redemption provisions with
respect to such shares, see "Additional Purchase and Redemption Information" in
this Statement of Additional Information.
The Funds' S Shares, Pacific Horizon, Horizon Shares and
Horizon Service Shares differ from X Shares in the following respects. Only X
Shares bear the fees payable under the 12b-1 Plan that has been adopted for X
Shares, which are payable at the rate of up to 0.55% (on an annualized basis)
of the average daily net asset value of the X Shares that are outstanding from
time to time. S Shares bear the fees payable under the distribution and
services plan that has been adopted for S Shares which are payable at the rate
of up to 1.00% (on an annualized basis) of the average daily net asset value of
the S Shares that are outstanding from time to time. Pacific Horizon Shares
and Horizon Service Shares bear the fees payable under the Special Management
Services Agreement and Shareholder Services Plan, respectively, that have been
adopted for Pacific Horizon Shares and Horizon Service Shares, which are
payable at the rate of .32% and .25%, respectively (on an annualized basis), of
the average daily net asset value of the respective Pacific Horizon and Horizon
Service Shares that are outstanding from time to time as described in the
Prospectuses for such Shares. As a result, at any given time, the net yield on
a Fund's X Shares will be approximately 0.23% lower than the yield on a Fund's
Pacific Horizon Shares, 0.55% lower than the yield on a Fund's Horizon
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Shares; 0.30% lower than the yield on a Fund's Horizon Service Shares and 0.45%
higher than the yield on a Fund's S Shares. Standardized yield quotations will
be computed separately for each series of Shares.
Holders of the outstanding shares of a particular Fund will
vote together in the aggregate and not by class on all matters, except that
only X and S Shares of a Fund will be entitled to vote on matters submitted to
a vote of shareholders pertaining to their respective 12b-1 Plans. Pacific
Horizon Shares of a Fund will be entitled to vote on matters submitted to a
vote of shareholders pertaining to the expenses that are borne exclusively by
such shares. Further, only Horizon Service Shares of a Fund will be entitled
to vote on matters submitted to a vote of shareholders pertaining to its
respective Shareholder Services Plan. Further, shareholders of both Funds, as
well as those of any other investment portfolio now or hereafter offered by the
Company, will vote together in the aggregate and not separately on a
Fund-by-Fund basis, except as otherwise required by law or when permitted by
the Board of Directors. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it
is clear that the interests of each Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by shareholders of the Company
voting in the aggregate without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of a Fund voting
separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2 discussed above) or by
the Company's Charter, the Company may take or authorize such action upon the
favorable vote of the holders of more than 50% of the outstanding common stock
of the Company voting without regard to class.
REPORTS
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<PAGE> 459
Shareholders will be sent unaudited semi-annual reports
describing the Funds' investment operations and annual financial statements
together with a report of independent accountants.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of the Company, is a partner), 1345 Chestnut Street, Philadelphia
National Bank Building, Philadelphia, Pennsylvania 19107, serves as counsel to
the Company and will pass upon the legality of the shares offered hereby.
INDEPENDENT ACCOUNTANTS
______________________, independent accountants, with offices
at __________________________________________, has been selected as independent
accountants of the Company for the fiscal year ending February 28, 1997.
MISCELLANEOUS
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund or a
particular series means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or such series, or (b) 67% of the shares of the Fund or
series present at a meeting at which more than 50% of the outstanding shares of
the Fund or series are represented in person or by proxy.
At April 18, 1996, 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: BA Investment Services, Inc., For
the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 103,513,191.16 shares (41.74%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 15,918,652 shares
(6.42%); and BA Securities, Inc., 185 Berry Street, Third floor, San Francisco,
CA 94107, 87,503,156.79 shares (35.29%)
At April 18, 1996, 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: 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,
41,166,250.41 shares (33.41%); Comcare, Inc., 4001 North Third Street, Suite
120, Phoenix, AZ, 18,095,338.05 shares (14.69%); and Comcare, Inc., 4001 North
Third Street, Suite 120, Phoenix, AZ, 17,386,230.27 shares (14.11%).
At April 18, 1996, 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 and
Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New York, NY
10286, 134,710,270.030 shares (14.14%); BA Investment Services, Inc., For the
Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 191,421,422.65 shares (20.09%); and VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 548,133,382 shares
(57.53%).
At April 18, 1996, 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 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,
218,907,053.62 shares (18.89%); 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,
325,646,595.56 shares (28.10%).
At April 18, 1996, 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: BA Investment Services, Inc., For the
Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 100,129,783.70 shares (39.87%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 41,190,467 shares
(16.40%); BA Securities, Inc., 185 Berry Street, Third floor, San Francisco, CA
94107, 45,530,054.82 shares (18.13%); and Bank of America National Trust and
Savings Association and Private Bank, Attn: ACI Unit 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 28,206,277.29 shares (11.23%).
At April 18, 1996, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Government Fund were as follows: Toasty, Ltd., Leslie L. Alexander, One
Greenway Plaza, Suite 645, Houston, TX 77046, 20,070,021.75 shares (9.79%);
Rocket Ball, Ltd., One Greenway Plaza, Suite 645, Houston, TX 77046,
20,903,317.14 shares (10.19%); 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,
39,405,934.93 shares (19.21%); Good Health Plan of Washington, Attn: Linda Lam
Ha, 1501 4th Avenue, Suite 500, Seattle, WA 98101, 12,854,471.02 shares
(6.27%); and Providence Health Care, Attn: Linda Lam Ha, 1501 4th Avenue,
Suite 500, Seattle, WA 98101-1621, 13,256,010.36 shares (6.46%).
At April 18, 1996, 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: BA Securities, Inc., 185 Berry Street, Third
floor, San Francisco, CA 94107, 171,703,966.02 shares (7.98%); Hare & Co., Bank
of New York, and Short Term Investment Funds, Attn: Bimal Saha, One Wall
Street, New York, NY 10286, 142,985,602.500 shares (6.64%); and BA Investment
Services, Inc., For the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 -
Bob Santilli, San Francisco, CA 94120, 1,508,792,962.99 shares (70.10%).
At April 18, 1996, 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,
267,651,623.98 shares (16.80%); 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,
572,679,889.38 shares (35.95%).
At April 18, 1996, 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 Fund were as follows: BA Investment Services, Inc., For
the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 39,343,026.66 shares (73.17%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 9,920,747 shares
(18.45%); and BA Securities, Inc., 185 Berry Street, Third floor, San
Francisco, CA 94107, 2,781,908.01 shares (5.17%)
At April 18, 1996, 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 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, 2,249,858.53 shares (6.62%); 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, 22,470,327.24 shares (66.12%).
At April 18, 1996, 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: BA Securities,
Inc., 185 Berry Street, Third floor, San Francisco, CA 94107, 201,240,826.46
shares (38.17%); BA Investment Services, Inc., For the Benefit of Clients, P.O.
Box 7042, Attn: Unit #7852 - Bob Santilli, San Francisco, CA 94120,
209,179,155.47 shares (39.67%); and Bank of America National Trust and Savings
Association and Private Bank, Attn: Common Trust Funds Unit 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 74,935,409.28 shares (14.21%).
At April 18, 1996, 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,
17,704,983.07 shares (10.39%); and BISYS Fund Services, FBO Sweep Customers,
Attn: Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 83,095,222.95 shares (48.76%).
At April 18, 1996, the name, address and share ownership of
the entities which held more than 5% of the outstanding Class A Shares of the
Corporate Bond Fund were as follows: Smith Barney Inc. Custodian, 388
Greenwich, 16th Floor, New York, NY 10013-2391 122,420.435 shares (6.17%); and
Dean Witter Reynolds, Inc. Stock Record Department, 5 World Trade Center, New
York, NY 10048, Attn: Al Dimino, 114,691 shares (5.78%).
At such dates, no other person was known by the Company to
hold of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year or
periods ended February 29, 1996 and the Semi-Annual Report for the period ended
August 31, 1995 (the "Annual Reports" and "Semi-Annual Reports" respectively)
accompanies this Statement of Additional Information. The financial statements
and notes thereto in each Annual Report and Semi-Annual Report are incorporated
in this Statement of Additional Information by reference. The financial
statements and notes in each Annual Report have been audited by
____________________, whose report thereon also appears in each Annual Report
and is also incorporated herein by reference. Such financial statements have
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been incorporated herein in reliance on the report of ______________________,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE> 461
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
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"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
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year or less which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
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"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB- " rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
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<PAGE> 466
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are
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<PAGE> 467
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes
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<PAGE> 468
occur in the legal documents or the underlying credit quality of the
bonds.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally 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
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<PAGE> 469
developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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<PAGE> 470
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
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<PAGE> 471
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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PACIFIC HORIZON FUNDS, INC.
National Municipal Bond Fund, California Tax-Exempt Bond Fund,
Aggressive Growth Fund, U.S. Government Securities Fund,
Capital Income Fund, Flexible Bond Fund, Blue Chip Fund, Asset Allocation
Fund, Corporate Bond Fund, International Equity Fund
Cross Reference Sheet
_________________________________
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C> <C>
10. Cover Page . . . . . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . . . . Table of Contents
12. General Information and History . . . . . The Company
13. Investment Objectives and Policies . . . . Investment Objectives and
Policies
14. Management of the Fund . . . . . . . . . . Management
15. Control Persons and Principal Holders of Management; Miscellaneous
Securities
16. Investment Advisory and Other Services . . Management; Investment
Adviser; Administrator;
Distributor; Custodian;
Accounting Agent and
Transfer Agent
17. Brokerage Allocation and Other Practices Portfolio Transactions
18. Capital Stock and Other Securities . . . . General Information;
Description of Shares
19. Purchase, Redemption and Pricing of . . . Additional Purchase and
Securities Being Offered Redemption Information
20. Tax Status . . . . . . . . . . . . . . . . Additional Information
Concerning Taxes
21. Underwriters . . . . . . . . . . . . . . . Management; Distributor
22. Calculation of Performance Data . . . . . Yield, Tax-Equivalent
Yield and Total Return
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate Item,
so numbered in Part C to this Registration Statement.
<PAGE> 474
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
STATEMENT OF ADDITIONAL INFORMATION
FOR
NATIONAL MUNICIPAL BOND FUND
CALIFORNIA TAX-EXEMPT BOND FUND
AGGRESSIVE GROWTH FUND
U.S. GOVERNMENT SECURITIES FUND
CAPITAL INCOME FUND
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
CORPORATE BOND FUND
INTERNATIONAL EQUITY FUND
_______ 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE COMPANY............................................................................................ 3
INVESTMENT OBJECTIVES AND POLICIES..................................................................... 4
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................................... 63
ADDITIONAL INFORMATION CONCERNING TAXES................................................................ 75
MANAGEMENT............................................................................................. 82
GENERAL INFORMATION....................................................................................126
Appendix A.............................................................................................A-1
Appendix B.............................................................................................B-1
</TABLE>
This Statement of Additional Information applies to the A and B shares
of the Pacific Horizon National Municipal Bond Fund and Pacific Horizon
California Tax-Exempt Bond Fund and A, B and K shares of the Pacific Horizon
Aggressive Growth Fund, Pacific Horizon U.S. Government Securities Fund,
Pacific Horizon Capital Income Fund, (collectively, the "Non-Feeder Funds"),
Pacific Horizon Intermediate Bond Fund, Pacific Horizon Blue Chip Fund, Pacific
Horizon Asset Allocation Fund, and Pacific Horizon Corporate Bond Fund (the
"Feeder Funds" and, collectively with the Non-Feeder Funds, the "Funds") of
Pacific Horizon Funds, Inc. The Master Portfolios corresponding to the
Intermediate Bond Fund, Blue Chip Fund, Asset Allocation Fund, Corporate Bond
Fund and International Equity Fund are referred to individually as the
"Intermediate Bond Master Portfolio" "Blue Chip Master Portfolio," "Asset
Allocation Master Portfolio," "Corporate Bond Master Portfolio," and
"International Equity Master Portfolio" respectively, collectively as the
"Master Portfolios," and collectively with the Non-Feeder Funds, the
"Portfolios." The Company and Master Investment Trust, Series I ("Master Trust
I"), are collectively referred to herein as the "Companies." This Statement of
<PAGE> 475
Additional Information is meant to be read in conjunction with the Prospectuses
dated __________, 1996, as they may from time to time be revised (individually,
a "Prospectus" and collectively, the "Prospectuses"), which describe the
particular Fund of the Company in which the investor is interested. This
Statement of Additional Information is incorporated by reference in its
entirety into each such Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in either A, B or K
shares of any Fund should be made solely upon the information contained herein.
Copies of the Prospectuses relating to Pacific Horizon's Funds to which this
Statement of Additional Information relates may be obtained by calling Concord
Financial Group, Inc. at 800- 332-3863. Capitalized terms used but not defined
herein have the same meaning as in the Prospectuses.
-2-
<PAGE> 476
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The NATIONAL MUNICIPAL BOND FUND, AGGRESSIVE GROWTH FUND,
INTERMEDIATE BOND FUND (FORMERLY, FLEXIBLE BOND FUND), BLUE CHIP FUND, ASSET
ALLOCATION FUND AND INTERNATIONAL EQUITY FUND commenced operations on January
28, 1994, March 30, 1984, January 24, 1994, January 13, 1994, January 18, 1994
and ____________, 1996, respectively. The California Tax-Exempt Bond Fund
originally commenced operations on March 30, 1984 as a separate portfolio of
Pacific Horizon Tax-Exempt Funds, Inc., which subsequently changed its name to
Pacific Horizon California Tax-Exempt Bond Portfolio, Inc. (the "Predecessor
California Tax-Exempt Bond Fund"). The Capital Income Fund originally commenced
operations on September 25, 1987 as The Total Return Fund (the "Predecessor
Capital Income Fund"), a separate portfolio of a Massachusetts business trust
named The Horizon Capital Funds. The U.S. Government Securities Fund commenced
operations on January 7, 1988, also as a separate portfolio of The Horizon
Capital Funds, under the name GNMA Extra Fund (the "Predecessor GNMA Fund" or
the "Predecessor U.S. Government Securities Fund"). On January 1, 1989 the
Predecessor Capital Income Fund and the Predecessor GNMA Fund changed their
names to the Pacific Horizon Convertible Securities Fund and the Pacific
Horizon GNMA Extra Fund. In January 1990 these three Predecessor Funds were
reorganized as portfolios of Pacific Horizon. On June 28, 1991, the GNMA Extra
Fund changed its name to the U.S. Government Securities Fund and on September
16, 1991 the Convertible Securities Fund changed its name to the Capital Income
Fund. The Corporate Bond Fund originally commenced operations in 1973 as a
diversified, closed-end management investment company (that is, as an
investment company with non-redeemable shares) known as Bunker Hill Income
Securities, Inc. (the "Corporate Predecessor Fund"). On April 25, 1994 the
Corporate Predecessor Fund was reorganized as a separate portfolio of the
Company and all of the assets and liabilities of the Corporate Predecessor Fund
were transferred to the Corporate Bond Fund. The Feeder Funds seek to achieve
their respective investment objectives by investing substantially all of their
assets in diversified investment portfolios of an open-end, management
investment company having the same investment objective as these Funds. Prior
to ____________, 1996, the National Municipal Bond Fund operated as part of a
master-feeder structure and invested all of its assets in a master portfolio
which had identical investment objectives. On ____________, 1996, the National
Municipal Bond Fund withdrew its assets from the master portfolio and invested
them directly in municipal securities. As of the date of this Statement of
Additional Information, no B or K shares were offered or outstanding.
-3-
<PAGE> 477
The Company also offers other investment portfolios which are
described in separate Prospectuses and Statements of Additional Information.
For information concerning these other portfolios contact the Distributor at
the telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment
objective of the Fund to which it applies. Because the investment
characteristics of each Feeder Fund will correspond with its respective Master
Portfolio, the following is a discussion of the various investments and
techniques employed by each Master Portfolio. The following information
supplements and should be read in conjunction with the descriptions of the
investment objective and policies in the Prospectus for each Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in each Prospectus is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities at the time of acquisition
were one year or less. Portfolio turnover may vary greatly from year to year as
well as within a particular year, and may also be affected by cash requirements
for redemptions of shares and by requirements which enable the Company to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. The portfolio turnover rate for
the Aggressive Growth Fund, U.S. Government Securities Fund and Capital Income
Fund may be particularly high.
For the fiscal years or periods indicated, the portfolio
turnover rates for the National Municipal Bond Fund, U.S. Government Securities
Fund, California Tax-Exempt Bond Fund, Capital Income Fund, Aggressive Growth
Fund, Intermediate Bond Master Portfolio, Blue Chip Master Portfolio, Asset
Allocation Master Portfolio and International Equity Master Portfolio were as
follows:
<TABLE>
<CAPTION>
Year Ended Year or Period Ended
February 29, 1996 February 28, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Municipal Bond Fund* % 6.19%
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund % 189%
- --------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund % 20%
- --------------------------------------------------------------------------------------------------------------------------
Capital Income Fund ___% 94%
</TABLE>
-4-
<PAGE> 478
<TABLE>
<S> <C> <C>
Aggressive Growth Fund % 92%
- --------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master Portfolio % 240%
- --------------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio % 44%
- --------------------------------------------------------------------------------------------------------------------------
Asset Allocation Master Portfolio % 142%
- --------------------------------------------------------------------------------------------------------------------------
International Equity Master Portfolio** N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* Until _________, 1996, the National Municipal Bond Fund invested all
of its assets in the National Municipal Bond Portfolio of Master
Investment Trust, Series II (the "Municipal Master Portfolio").
Information contained in the chart above relates to the Municipal
Master Portfolio.
** The International Equity Master Portfolio commenced operations on
____________, 1996.
For the fiscal year and periods indicated, the portfolio
turnover rates for the Corporate Bond Master Portfolio and the Predecessor
Corporate Bond Fund were as follows:
<TABLE>
<CAPTION>
Period April 25,
1994 (the date
the Predecessor
Corporate Bond
Fund was
reorganized into
Period October 1, the Corporate Period October 1,
1993 through Fund) through 1994 through Year Ended
April 24, 1994 September 30, 1994 February 28, 1995 February 29, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bond
Master Portfolio N/A 51% 1 124% 1,2 ___%
- -------------------------------------------------------------------------------------------------------------------------------
Predecessor
Corporate Bond 16%1 N/A N/A N/A
Fund
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
- --------------------
1 Unannualized
2 The increase in portfolio turnover was attributable to volatility in
the market and good trading opportunities which resulted in the
increased opportunity to improve the relative value of the Corporate
Bond Master Portfolio
</TABLE>
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<PAGE> 479
Subject to the general control of the Company's Board of
Directors, and the Master Portfolios' Trustees, Bank of America National Trust
and Savings Association ("Bank of America" or the "investment adviser") is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for each Portfolio.
Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. There is generally no stated commission in
the case of securities traded in the over-the-counter market, but the price
includes an undisclosed commission or mark-up. The cost of securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down. Purchases and sales of fixed income securities
are normally principal transactions without brokerage commissions.
For the fiscal years or periods indicated, the Aggressive
Growth Fund, Capital Income Fund, Blue Chip Master Portfolio, Asset Allocation
Master Portfolio, California Tax-Exempt Bond Fund, U.S. Government Securities
Fund, Intermediate Bond Master Portfolio, National Municipal Bond Fund and
International Equity Master Portfolio paid the following brokerage commissions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year or Period* Ended
February 29, 1996 February 28, 1995 February 28, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ $631,200 $267,276
- -------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $207,310 $110,588
- -------------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $ $202,817 $270,323
- -------------------------------------------------------------------------------------------------------------------------
Asset Allocation Master $ $152,778 $ 21,798
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond $0 $0 $0
Fund
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities $0 $0 $0
Fund
- -------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master $0 $0 $0
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
National Municipal Bond $0 $0 $0
Fund+
- -------------------------------------------------------------------------------------------------------------------------
International Equity Master N/A N/A N/A
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE> 480
- --------------------
* The Intermediate Bond, Blue Chip and Asset Allocation Master
Portfolios commenced operations on December 6, 1993. The Municipal
Master Portfolio commenced operations on January 28, 1994. The
International Equity Master Portfolio commenced operations on
____________, 1996.
+ Until ________, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. Information contained in
the chart above relates to the Municipal Master Portfolio.
During the fiscal years ended September 30, 1994, February
28, 1995 and February 29, 1996, neither the Corporate Bond Fund nor the
Corporate Predecessor Fund paid any brokerage commissions.
In executing portfolio transactions and selecting brokers or
dealers, it is the Portfolios' policy to seek the best overall terms available.
The Investment Advisory Agreements between the particular Company and Bank of
America provide that, in assessing the best overall terms available for any
transaction, Bank of America shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, the Investment Advisory Agreements
authorize Bank of America, subject to the approval of the particular Board, to
cause a Portfolio to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that such commission
is deemed reasonable in terms of either that particular transaction or the
overall responsibilities of Bank of America to the particular Company or
Portfolio. Brokerage and research services may include: (1) advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or purchasers or sellers of
securities; and (2) analyses and reports concerning industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
It is possible that certain of the brokerage and research
services received will primarily benefit one or more other investment companies
or other accounts for which investment discretion is exercised. Conversely, a
particular Company or any given Portfolio may be the primary beneficiary of the
brokerage or research services received as a result of portfolio transactions
effected for such other accounts or investment companies.
Brokerage and research services so received are in addition
to and not in lieu of services required to be performed
-7-
<PAGE> 481
by Bank of America and do not reduce the advisory fee payable to Bank of
America. Such services may be useful to Bank of America in serving both the
Companies, the Portfolios and other clients and, conversely, services obtained
by the placement of business of other clients may be useful to Bank of America
in carrying out its obligations to the Companies and the Portfolios. In
connection with its investment management services with respect to the
Portfolios, Bank of America will not acquire certificates of deposit or other
securities issued by it or its affiliates, and will give no preference to
certificates of deposit or other securities issued by Service Organizations. In
addition, portfolio securities in general will be purchased from and sold to
affiliates of the Companies, the Portfolios, Bank of America, the Distributor
and their affiliates acting as principal, underwriter, syndicate member,
market-maker, dealer, broker or in any similar capacity, provided such
purchase, sale or dealing is permitted under the Investment Company Act of 1940
(the "1940 Act") and the rules thereunder.
A Portfolio may participate, if and when practicable, in
bidding for the purchase of securities of the U.S. Government and its agencies
and instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Portfolio will
engage in this practice only when Bank of America, in its sole discretion
subject to guidelines adopted by the particular Board, believes such practice
to be in the interest of the Portfolio.
To the extent permitted by law, Bank of America may aggregate
the securities to be sold or purchased on behalf of the Portfolios with those
to be sold or purchased for other investment companies or common trust funds in
order to obtain best execution.
The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act or
their parents held by Pacific Horizon as of the close of its most recent fiscal
year. As of February 29, 1996:
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns
Co., Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc.,
Dean Witter Reynolds, Inc. and Paine Webber are considered to be regular
brokers and dealers of the Company.
It is possible that unregistered securities purchased by a
Non-Feeder Fund and the Corporate Bond Master Portfolio in reliance upon Rule
144A under the Securities Act of 1933 (the "1933 Act") could have the effect of
increasing the level of a Non-Feeder Fund's or the Corporate Bond Master
Portfolio's illiquidity to the extent that qualified institutional buyers
-8-
<PAGE> 482
become, for a period, uninterested in purchasing these securities.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT
INFORMATION
The following discussion supplements the descriptions of such
investments in the Prospectuses.
BANK CERTIFICATES OF DEPOSIT, BANKERS ACCEPTANCES AND TIME
DEPOSITS. Except for the U.S. Government Securities Fund (and the National
Municipal Bond Fund with respect to time deposits), certificates of deposit,
bankers' acceptances and time deposits are eligible investments for each
Portfolio as described in the Funds' Prospectuses. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' Acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Certificates of Deposit and Bankers Acceptances
may only be purchased from domestic or foreign banks and financial institutions
having total assets at the time of purchase in excess of $2.5 billion
(including assets of both domestic and foreign branches). Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate. Obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank are not permissible investments for
the Intermediate Bond, Blue Chip and Asset Allocation Master Portfolios.
Instruments issued by foreign banks or financial institutions
may be subject to investment risks that are different in some respects than the
risks associated with instruments issued by those U.S. domestic issuers. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer
is located on interest income payable on the securities, the possible seizure
or nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which
may be made and interest rates which may be charged. In addition, the
profitability of the banking industry is dependent largely upon the
availability and cost of funds for
-9-
<PAGE> 483
the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important
part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels
of reserves, limited in the amount which they can loan to a single borrower,
and subject to other regulations designed to promote financial soundness.
However, such laws and regulations do not necessarily apply to foreign bank
obligations.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The investment
policies of the Portfolios permit investment in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Except as noted below with respect to variable and floating rate
instruments, issues of commercial paper and short-term notes will normally have
maturities of less than 9 months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues
rated at the time of purchase A-2 or higher by Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors
Service, Inc. ("Moody's"), or similarly rated by another nationally recognized
statistical rating organization ("NRSRO") in the case of purchases by each
Portfolio other than the Capital Income and U.S. Government Securities Funds,
and A-1 or better by S&P, Prime-1 by Moody's or similarly rated by another
NRSRO in the case of purchases by the Capital Income and U.S. Government
Securities Funds; or if unrated, will be determined by Bank of America to be of
comparable quality under procedures established by the particular Board.
OTHER INVESTMENT COMPANIES. The Intermediate Bond, Blue Chip
and Asset Allocation Master Portfolios and the U.S. Government Securities Fund
may under certain circumstances invest a portion of their assets in certain
money market Funds. The Aggressive Growth Fund may acquire shares of closed-end
investment companies, including companies that invest in foreign issuers, but
only in furtherance of its investment objective. The International Equity
Master Portfolio may acquire shares of open and closed-end investment
companies. The 1940 Act generally prohibits each Portfolio from investing more
than 5% of the value of its total assets in any one investment company, or more
than 10% of the value of its total assets in investment companies as a group,
and also restricts its investment in any investment company to 3% of the voting
securities of such investment company. In addition, no more than 10% of the
outstanding voting stock of any one investment company may be owned in the
aggregate
-10-
<PAGE> 484
by the Portfolios and any other investment company advised by the investment
adviser. Investment in other investment companies will involve payment of the
Portfolio's pro rata share of advisory and administration fees charged by such
fund, in addition to those paid by the Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio is permitted to enter
into repurchase agreements with respect to its portfolio securities. Pursuant
to such agreements, a Portfolio acquires securities from financial institutions
such as banks and broker-dealers as are deemed to be creditworthy subject to
the seller's agreement to repurchase and the agreement of the Portfolio to
resell such securities at a mutually agreed upon date and price. Although
securities subject to a repurchase agreement may bear maturities exceeding ten
years, the Aggressive Growth, California Tax-Exempt Bond, U.S. Government
Securities and Capital Income Funds and the Corporate Bond and International
Equity Master Portfolio intend to only enter into repurchase agreements having
maturities not exceeding 60 days. Repurchase agreements maturing in more than
seven days will not exceed 10% of the value of the total assets of the
Aggressive Growth, California Tax-Exempt Bond, U.S. Government Securities or
Capital Income Funds or the Intermediate Bond, Blue Chip and Asset Allocation
Master Portfolios, or 15% of the total assets of the International Equity
Master Portfolio or National Municipal Bond Fund. The Portfolios are not
permitted to enter into repurchase agreements with Bank of America or its
affiliates, and will give no preference to repurchase agreements with Service
Organizations. The repurchase price generally equals the price paid by a
Portfolio plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by a custodian or
sub-custodian of the Portfolio or in the Federal Reserve/Treasury Book-Entry
System. The seller under a repurchase agreement will be required to deliver
instruments the value of which is 102% of the repurchase price (excluding
accrued interest), provided that notwithstanding such requirement, the adviser
shall require that the value of the collateral, after transaction costs
(including loss of interest) reasonably expected to be incurred on a default,
shall be equal to or greater than the resale price (including interest)
provided in the agreement. If the seller defaulted on its repurchase
obligation, a Portfolio would suffer a loss because of adverse market action or
to the extent that the proceeds from a sale of the underlying securities were
less than the repurchase price under the agreement. Bankruptcy or insolvency of
such a defaulting seller may cause the particular Portfolio's rights with
respect to such securities to be delayed or limited. Repurchase agreements are
considered to be loans by a Portfolio under the 1940 Act.
-11-
<PAGE> 485
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio is permitted to
make investments in U.S. Government obligations. Such obligations include
Treasury bills, certificates of indebtedness, notes and bonds, and issues of
such entities as the Government National Mortgage Association, Export-Import
Bank of the United States, Tennessee Valley Authority, Resolution Funding
Corporation, Farmers Home Administration, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land Banks,
Federal Housing Administration, Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, and the Student Loan Marketing Association.
Treasury bills have maturities of one year or less, Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
more than ten years. Some of these obligations, such as those of the Government
National Mortgage Association, are supported by the full faith and credit of
the U.S. Treasury; others, such as those of the Export-Import Bank of the
United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government sponsored instrumentalities if it is not obligated
to do so by law.
VARIABLE AND FLOATING RATE INSTRUMENTS. As described in their
Prospectuses, the Aggressive Growth Fund, National Municipal Bond Fund,
California Tax-Exempt Bond Fund, Intermediate Bond Master Portfolio, Blue Chip
Master Portfolio, Asset Allocation Master Portfolio, Corporate Bond Master
Portfolio and International Equity Master Portfolio may acquire variable and
floating rate instruments. The U.S. Government Securities Fund may invest in
variable rate GNMA certificates, which are backed by pools of variable rate
mortgages and also in GNMA REMICs. The actual yield on variable and floating
rate instruments varies not only as a result of variations in the lives of the
underlying securities, but also as a result of changes in prevailing interest
rates. Such instruments are frequently not rated by credit rating agencies.
However, in determining the creditworthiness of unrated variable and floating
rate instruments and their eligibility for purchase by a Portfolio, Bank of
America will consider the earning power, cash flow and other liquidity ratios
of the issuers of such instruments (which include financial, merchandising,
bank holding and other companies) and will continuously monitor their financial
condition. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by a Portfolio. The absence of
such an active secondary market could make it difficult to dispose of a
variable
-12-
<PAGE> 486
or floating rate instrument in the event the issuer of the instrument defaulted
on its payment obligation or during periods that the Portfolio is not entitled
to exercise its demand rights, and the Portfolio could, for these or other
reasons, suffer a loss to the extent of the default. Investments in illiquid
variable and floating rate instruments (instruments which are not payable upon
seven days' notice and do not have active trading markets) are subject to a 15%
limitation on illiquid securities. Variable and floating rate instruments may
be secured by bank letters of credit.
MUNICIPAL SECURITIES. The California Tax-Exempt Bond Fund and
National Municipal Bond Fund currently intend that under ordinary market
conditions 65% and 80% of their respective total assets will be invested in
Municipal Securities. This is not, however, a fundamental investment policy. As
a matter of fundamental policy, under normal market conditions at least 80% of
the California Tax-Exempt Bond Fund's assets will be invested in California
Municipal Securities. The California Tax-Exempt Bond Fund's average weighted
maturity will vary in response to variations in comparative yields of differing
maturities of instruments, in accordance with such Fund's investment objective.
The Intermediate Bond Master and Asset Allocation Master Portfolios may also
invest in Municipal Securities. The two principal classifications of Municipal
Securities are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuers pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue service such as the user of the
facility being financed.
Municipal Securities are debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range
of public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions
and facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular federal income tax.
The California Tax-Exempt Bond Fund and National Municipal
Bond Fund and the Intermediate Bond and Asset Allocation Master Portfolios may
purchase short-term Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes and other forms of short-term tax-exempt loans. Such notes
are issued with a short-term maturity in anticipation of the
-13-
<PAGE> 487
receipt of tax funds, the proceeds of bond placements or other revenues. Those
Portfolios may also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue. The ratings of Moody's, S&P, Fitch Investor's Service, Inc. ("Fitch")
and Duff & Phelps Credit Rating Co. ("D&P") represent their opinions as to the
quality of Municipal Securities. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and Municipal Securities
with the same maturity, interest rate and rating may have different yields
while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a
Portfolio, an issue of Municipal Securities may cease to be rated or its rating
may be reduced. The investment adviser will consider such an event in
determining whether a Portfolio should continue to hold the obligation.
An issuer's obligations under its Municipal Securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors, such as the federal Bankruptcy Code, and
laws, if any, which may be enacted by federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations. The power or ability of an
issuer to meet its obligations for the payment of interest on, and principal
of, its Municipal Securities may be materially adversely affected by litigation
or other conditions. Further, it should also be noted with respect to all
Municipal Securities issued after August 15, 1986 (August 31, 1986 in the case
of certain bonds), the issuer must comply with certain rules formerly
applicable only to "industrial development bonds" which, if the issuer fails to
observe them, could cause interest on the Municipal Securities to become
taxable retroactive to the date of issue.
Information about the financial condition of issuers of
Municipal Securities may be less available than about corporations, a class of
whose securities is registered under the Securities Exchange Act of 1934.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to
federal tax legislation
-14-
<PAGE> 488
passed in 1986, interest on certain private activity bonds must be included in
an investor's federal alternative minimum taxable income, and corporate
investors must include all tax-exempt interest in their federal alternative
minimum taxable income. (See the Fund's Prospectus under "Tax Information.")
Proposals to further restrict or eliminate the tax benefits of municipal
securities, while pending or if enacted, might materially adversely affect the
availability of Municipal Securities for investment by the particular Portfolio
and the liquidity and value of the Portfolio. In such an event, the particular
Portfolio would re-evaluate its investment objective and policies and consider
changes in its structure or possible dissolution. Moreover, with respect to
Municipal Securities issued by the State of California, Pacific Horizon cannot
predict what legislation, if any, may be proposed in California.
STAND-BY COMMITMENTS. The California Tax-Exempt Bond Fund and
National Municipal Bond Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in their respective portfolios. Under a "stand-by
commitment," a dealer agrees to purchase from the particular Portfolio, at the
Portfolio's option, specified Municipal Securities at a specified price.
"Stand-by commitments" acquired by a Portfolio may also be referred to in this
Statement of Additional Information as "put" options.
The amount payable to the particular Portfolio upon its
exercise of a "stand-by commitment" is normally (i) the Portfolio's acquisition
cost of the Municipal Securities (excluding any accrued interest which the
Portfolio paid on their acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Portfolio
owned the securities, plus (ii) all interest accrued on the securities since
the last interest payment date during that period. A "stand-by commitment" may
be sold, transferred or assigned by the Portfolio only with the instrument
involved.
The Portfolios expect that "stand-by commitments" will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Portfolios may pay for a
"stand-by commitment" either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus
reducing the yield to maturity otherwise available for the same securities).
The total amount paid in either manner for outstanding "stand-by commitments"
held by a Portfolio will not exceed 1/2 of 1% of the value of its total assets
calculated immediately after each "stand-by commitment" is acquired.
Each Portfolio intends to obtain "stand-by commitments" only
from dealers, banks and broker-dealers which, in the investment adviser's
opinion, present minimal credit risks. A
-15-
<PAGE> 489
Portfolio's reliance upon the credit of these dealers, banks and broker-dealers
is secured by the value of the underlying Municipal Securities that are subject
to a commitment.
Each Portfolio would acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a "stand-by commitment"
would not affect the valuation or assumed maturity of the underlying Municipal
Securities, which would continue to be valued in accordance with the ordinary
method of valuation employed by the Portfolio. "Stand-by commitments" which
would be acquired by a Portfolio would be valued at zero in determining net
asset value. Where a Portfolio paid any consideration directly or indirectly
for a "stand-by commitment," its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio.
CONVERTIBLE SECURITIES. The Capital Income Fund, Corporate
Bond Master Portfolio and International Equity Master Portfolio may invest in
convertible securities. Convertible securities entitle the holder to receive
interest paid or accrued on debt or the dividend paid on preferred stock until
the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of
income with generally higher yields than those of common stock of the same or
similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure and therefore generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
In selecting convertible securities for a Portfolio, the
investment adviser will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the underlying stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Portfolio as to issuers; and whether the
securities are rated by Moody's, S&P, D&P or Fitch and, if so, the ratings
assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion
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value (their worth, at market value, if converted into the underlying stock).
The investment value of convertible securities is influenced by changes in
interest rates, with investment value declining as interest rates increases and
increasing as interest rates decline, and by the credit standing of the issuer
and other factors. The conversion value of convertible securities is determined
by the market price of the underlying stock. If the conversion value is low
relative to the 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.
The Portfolios may convert Convertible Securities during
periods when market conditions are unfavorable for their disposition or as a
result of developments such as the issuer's call or a decline in the market
liquidity for such Convertible Securities. The securities obtained upon the
conversion may be retained for temporary periods of not greater than two months
after conversion, and during such periods such securities will be considered to
be Convertible Securities for purposes of complying with this policy.
Conversions may also occur when necessary to permit orderly disposition of the
investment (for example, where a more substantial market exists for the
underlying security than for a relatively thinly traded Convertible Security)
or when a Convertible Security reaches maturity or has been called for
redemption.
ASSET-BACKED SECURITIES. The Corporate Bond Master Portfolio
may invest in asset-backed securities, including mortgage-backed securities
representing an undivided ownership interest in a pool of mortgages, such as
certificates of the Government National Mortgage Association ("GNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). These certificates are in
most cases pass-through instruments, through which the holder receives a share
of all interest and principal payments from the mortgages underlying the
certificate, net of certain fees. The average life of a mortgage-backed
security varies with the underlying mortgage instruments, which have maximum
maturities of 40 years. The average life is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as
the result of prepayments, mortgage refinancings or foreclosure. Mortgage
prepayment rates are affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions. Such prepayments are passed through to the
registered holder with the regular monthly payments of
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principal and interest and have the effect of reducing future payments.
The Corporate BOND Master Portfolio may also invest in
non-mortgage backed securities including interests in pools of receivables,
such as motor vehicle installment purchase obligations and credit card
receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities may also be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Non-mortgage backed securities are not
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; however, the payment of principal and interest on such
obligations may be guaranteed up to certain amounts and for a certain time
period by a letter of credit issued by a financial institution (such as a bank
or insurance company) unaffiliated with the issuers of such securities.
The purchase of non-mortgage backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in the respective obligations only by filing a financing statement
and by having the servicer of the obligations, which is usually the originator,
take custody thereof. In such circumstances, if the servicer were to sell the
same obligations to another party, in violation of its duty not to do so, there
is a risk that such party could acquire an interest in the obligations superior
to that of the holders of the asset-backed securities. Also, although most of
the obligations grant a security interest in the motor vehicle being financed,
in most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on those securities. In addition, various state and federal
laws give the motor vehicle owner the right to assert against the holder of the
owner's obligation certain defenses such owner would have against the seller of
the motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and
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federal consumer credit laws, many of which give such holders the right to set
off certain amounts against balances owed on the credit card, thereby reducing
the amounts paid on such receivables. In addition, unlike most other
asset-backed securities, credit card receivables are unsecured obligations of
the cardholder.
The development of non-mortgage backed securities is at an
early stage compared to mortgage backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for
mortgage backed securities issued by certain private organizations and
non-mortgage backed securities is not as well developed as that for mortgage
backed securities guaranteed by government agencies or instrumentalities. Bank
of America intends to limit its purchases for the Corporate BOND Master
Portfolio of mortgage backed securities issued by certain private organizations
and non-mortgage backed securities to securities that are readily marketable at
the time of purchase.
ZERO COUPON SECURITIES. The California Tax-Exempt Bond Fund
and National Municipal Bond Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the purchase price and
their value at maturity.
The discount varies, depending on the time remaining until
maturity or cash payment date, prevailing interests rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. The market prices of
zero coupon and delayed interest securities are generally more volatile and
more likely to respond to changes in interest rates than the market prices of
securities having similar maturities and credit quality that pay interest
periodically. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on such security (other than tax-exempt original issue discount from a
zero coupon security) that accrues that year, even though the holder receives
no cash payments of interest during the year. Zero coupon securities are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest (cash).
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, each Portfolio is permitted to borrow funds for temporary
purposes by entering into reverse repurchase agreements with such financial
institutions as banks and broker-dealers in accordance with the investment
limitations described therein.
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Whenever a Fund or Portfolio enters into a reverse repurchase agreement, it
will place in a segregated account maintained with its custodian liquid assets
such as cash, U.S. Government securities or other liquid high grade debt
securities having a value equal to the repurchase price (including accrued
interest) and Bank of America will subsequently continuously monitor the
account for maintenance of such equivalent value. Each Portfolio intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
OPTIONS TRADING. A Portfolio may, under certain circumstances
and in accordance with investment limitations described in its prospectus,
engage in options trading. Such options may relate to U.S. and foreign
securities or to various stock indices. In addition, a Portfolio may acquire
options relating to foreign currencies in order to hedge against changes in
exchange rates. Such options may be traded on U.S. exchanges, over-the-counter,
and on foreign exchanges to the extent permitted by law.
Options trading is a highly specialized activity which
entails greater than ordinary investment risks. Regardless of how much the
market price of the underlying security, index or currency increases or
decreases, the option buyer's risk is limited to the amount of the original
premium paid for the purchase of the option. However, options may be more
volatile than the underlying instruments, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. A listed call option for a
particular security or amount of currency gives the purchaser of the option the
right to buy from a clearing corporation, and a writer has the obligation to
sell to the clearing corporation the underlying security or currency amount at
the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security or currency. The premium paid to
the writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security or amount of currency at the
stated exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security or currency. In contrast to an
option on a particular security, an option on a stock index provides the holder
with the right to make or receive a cash settlement upon exercise of the
option. The amount of this settlement will be equal to the difference between
the closing price of the index at the time of exercise and the exercise price
of the option expressed in dollars, times a specified multiple. Unlisted
options are not subject to the protections afforded purchases
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of options listed by the Options Clearing Corporation, which performs the
obligations of its members who fail to do so in connection with the purchase or
sale of options. Furthermore, it is the position of the staff of the SEC that
over-the-counter options are illiquid. To the extent that a Portfolio invests
in options that are illiquid (including over-the-counter options), such
investment will be subject to the Portfolio's limitations on illiquid
securities.
A Portfolio will continue to receive interest or dividend
income on the securities underlying such puts until they are exercised by the
Portfolio. Any losses realized by a Portfolio in connection with its purchase
of put options will be limited to the premiums paid by the Portfolio for the
options plus any transaction costs. A gain or loss may be wholly or partially
offset by a change in the value of the underlying security which the Fund or
Portfolio owns.
In the case of a call option on a security, the option is
"covered" if a Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Portfolio maintains with
its custodian cash or cash equivalents equal to the contract value. A call
option is also covered if a Portfolio holds a call on the same security or
index as the call written where the exercise price of the call held is (i)
equal to or less than the exercise price of the call written, or (ii) greater
than the exercise price of the call written provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for
the premium, the covered option writer gives up the opportunity for profit from
a price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to an
option, the covered option writer has no control over when it may be required
to sell its securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer.
If a Portfolio desires to sell a particular security it owns
on which it has written an option, the Portfolio will seek to effect a closing
purchase transaction prior to, or
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concurrently with, the sale of the security. In order to close out a covered
call option position, a Portfolio will enter into a "closing purchase
transaction" - the purchase of a call option on a security or stock index with
the same exercise price and expiration date as the call option which it
previously wrote on the same security or index.
When a Portfolio purchases a put or call option, the premium
paid by it is recorded as an asset of the Portfolio. When a Portfolio writes an
option, an amount equal to the net premium (the premium less the commission)
received by the Portfolio is included in the liability section of the statement
of assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option purchased by a Portfolio expires
unexercised, the Portfolio realizes a loss equal to the premium paid. If a Fund
enters into a closing sale transaction on an option purchased by it, the
Portfolio will realize a gain if the premium received by it on the closing
transaction is more than the premium paid to purchase the option, or a loss if
it is less. Moreover, because increases in the market price of an option will
generally reflect (although not necessarily in direct proportion) increases in
the market price of the underlying security any loss resulting from a closing
purchase transaction is likely to be offset in whole or in part by appreciation
of the underlying security if such security is owned by the Portfolio. If an
option written by a Portfolio expires on the stipulated expiration date or if
the Portfolio enters into a closing purchase transaction, it will realize a
gain (or loss if the cost of a closing purchase transaction exceeds the net
premium received when the option is sold) and the deferred credit related to
such option will be eliminated. If an option written by a Portfolio is
exercised, the proceeds of the sale will be increased by the net premium
originally received and the Portfolio will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities, currencies and indices. For example,
there are significant differences between the securities, currencies and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In
addition, a liquid secondary market for particular options, whether traded
over-the-counter or on a national securities exchange ("Exchange") may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to
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particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that Exchange would continue to be exercisable in accordance with their
terms.
A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected events.
FUTURES. With the exception of the International Equity
Master Portfolio, the Portfolios may engage in futures contracts. A futures
contract is a bilateral agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to a specified dollar amount times
the difference between the value of a specified obligation or stock index
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities is normally made. A Portfolio may not purchase or sell futures
contracts and purchase related options unless immediately after any such
transaction the aggregate initial margin that is required to be posted by that
Portfolio under the rules of the exchange on which the futures contract (or
futures option) is traded, plus any premiums paid by the Portfolio on its open
futures options positions, does not exceed 5% of the Portfolio's total assets,
after taking into account any unrealized profits and losses on the Portfolio's
open contracts and excluding the amount that a futures option is "in-the-money"
at the time of purchase. An option to buy a futures contract is "in-the-money"
if the then current purchase price of the contract that is subject to the
option is less than the exercise or strike price; an option to sell a futures
contract is "in-the-money" if the exercise or strike price exceeds the then
current purchase price of the contract that is the subject of the option.
Successful use of futures contracts by a Portfolio is subject
to Bank of America's ability to predict correctly movements in the direction of
the stock market or interest rates. There are several risks in connection with
the use of futures contracts by a Portfolio as a hedging devise. One risk
arises because of the imperfect correlation between movements in the
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price of the futures contract and movements in the price of the securities
which are the subject of THE hedge. The price of the futures contract may move
more than or less than the price of the securities being hedged. If the price
of the futures contract moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, a
Portfolio would be in a better position than if it had not hedged at all. If
the price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the loss on the futures contract. If
the price of the futures contract moves more than the price of the hedged
securities, a Portfolio involved will experience either a loss or gain on the
futures contract which will not be completely offset by movements in the price
of the securities which are the subject of the hedge.
It is also possible that, where a Portfolio has sold futures
contracts to hedge its portfolio against a decline in the market, the market
may advance and the value of securities held in a Portfolio may decline. If
this occurred, a Portfolio would lose money on the futures contract and also
experience a decline in value in its portfolio securities.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures
contract and the securities being hedged, the price of futures contracts may
not correlate perfectly with movement in the cash market due to certain market
distortions. Due to the possibility of price distortion in the futures market,
and because of the imperfect correlation between the movement in the cash
market and movements in the price of futures contracts, a correct forecast of
general market trends or interest rate movements by Bank of America may still
not result in a successful hedging transaction over a short time frame.
Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures
contracts. Although the Portfolios intend to purchase or sell futures contracts
only on exchanges or boards of trade where there appear to be active secondary
markets, there is no assurance that a liquid secondary market on any exchange
or board of trade will exist for any particular contract or at any particular
time. In such event, it may not be possible to close a futures investment
position, and in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin. The
liquidity of a secondary market in a futures contract may in addition be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
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contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions.
For additional information concerning Futures and options
thereon, please see Appendix B to this Statement of Additional Information.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call
options on a futures contract will give a Portfolio the right (but not the
obligation), for a specified price, to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Portfolio obtains the benefit
of the futures position if prices move in a favorable direction but limits its
risk of loss in the event of an unfavorable price movement to the loss of the
premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Portfolio's assets. By writing
a call option, a Portfolio becomes obligated, in exchange for the premium, to
sell a futures contact, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Portfolio intends to purchase. However, the Portfolio becomes obligated to
purchase a futures contact, which may have a value lower than the exercise
price. Thus, the loss incurred by the Portfolio in writing options on futures
is potentially unlimited and may exceed the amount of the premium received. The
Portfolio will incur transaction costs in connection with the writing of
options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on the
same series. There is no guarantee that such closing transactions can be
effected. A Portfolio's ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid market.
INTEREST RATE AND CURRENCY SWAPS. Inasmuch as interest rate
and currency swaps are entered into for hedging purposes or are offset by a
segregated account as described below, the Corporate Bond Master Portfolio and
Bank of America believe that swaps do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Portfolio's borrowing restrictions. The net amount of the excess, if
any, of the Corporate Bond MASTER Portfolio's obligations over its entitlements
with respect to each interest rate or currency swap will be accrued on a daily
basis and an amount of cash or liquid high grade debt securities (i.e.,
securities rated in one of the top three ratings categories by Moody's or
Standard & Poor's), or, if unrated, deemed by Bank of
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America to be of comparable credit quality, having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated
account by the Portfolio's custodian. The Corporate Bond Master Portfolio will
not enter into any interest rate or currency swap unless the credit quality of
the unsecured senior debt or the claims-paying ability of the other party
thereto is considered to be investment grade by Bank of America. If there were
a default by the other party to such a transaction, the Corporate Bond Master
Portfolio would have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and as agents utilizing standard swap documentation. As a result, the swap
market has become relatively liquid in comparison with the markets for other
similar instruments which are traded in the interbank market.
FOREIGN INVESTMENTS. In considering whether to invest in the
securities of a foreign company, Bank of America considers such factors as the
characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within
other countries, and also factors relating to the general economic,
governmental and social conditions of the country or countries where the
company is located.
Portfolios corresponding to the Corporate Bond, Intermediate
Bond, Asset Allocation and International Equity Master Portfolios may invest in
securities of foreign issuers that may or may not be publicly traded in the
United States. The Aggressive Growth Fund may invest up to 20% of its total
assets, either directly, or indirectly through investments in American
Depository Receipts ("ADRs") and closed-end investment companies, in securities
issued by foreign companies wherever organized. The Capital Income Fund may
invest up to 10% of its total assets in Eurodollar Convertible Securities that
are convertible into or exchangeable for foreign equity securities represented
by listed ADRs. Interest and dividends on such Eurodollar securities are
payable in U.S. dollars outside of the United States. Portfolios corresponding
to the Intermediate Bond and Asset Allocation Funds may invest in securities of
foreign issuers that may or may not be publicly traded in the United States.
ADRs are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars;
the underlying security may be denominated in a foreign currency. The
underlying security may be subject to foreign government taxes which would
reduce the yield on such securities. The extent to which a Portfolio will be
invested in foreign companies and ADRs will
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fluctuate from time to time within the limits stated in the Prospectuses
depending on the investment adviser's assessment of prevailing market, economic
and other conditions.
The International Equity Master Portfolio may purchase debt
obligations issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their
agencies, authorities or instrumentalities. The International Equity Master
Portfolio and the Corporate Bond Master Portfolio may purchase debt obligations
issued or guaranteed by supranational entities organized or supported by
several national governments, such as the International Bank for Reconstruction
and Development (the "World Bank"), the Inter-American Development Bank, the
Asian Development Bank and the European Investment Bank. The International
Equity Master Portfolio also may purchase debt obligations of foreign
corporations or financial institutions, such as Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers),
Samurai bonds (yen-denominated bonds sold in Japan by non-Japanese issuers and
Euro bonds (bonds not issued in the country (and possibly currency of the
country) of the issuer). The International Equity Master Portfolio's
investments will be allocated among securities denominated in the currencies of
a number of foreign countries and, within each such country, among different
types of debt securities. The percentage of assets invested in securities of a
particular country or denominated in a particular currency will vary in
accordance with Bank of America's assessment of the Country's gross domestic
product, purchasing power parity and market capitalization and the relationship
of a country's currency to the United States dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by Bank of America in determining whether to increase or decrease
the emphasis placed upon a particular type of security within the International
Equity Master Portfolio.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Portfolios endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct
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such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of the International Equity Master Portfolio is
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
International Equity Master Portfolio to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Portfolios due to subsequent
declines in value of the portfolio securities, or, if the Portfolios have
entered into a contract to sell the securities, could result in possible
liability to the purchaser. Individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth or gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Investments in foreign securities involve certain inherent
risks, such as political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
Foreign brokerage commissions and custodian fees are generally higher than in
the United States. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. All Portfolios may agree to purchase securities on a
"when-issued," and "forward commitment" basis. All Portfolios except for the
Intermediate Bond, Blue Chip and Asset Allocation Master Portfolios may agree
to purchase securities on a "delayed settlement" basis. When a Portfolio agrees
to purchase securities on a "when-issued," "forward commitment" or "delayed
settlement" basis, its custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment. In such a case, a Portfolio may be required subsequently
to place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the commitment. It may be
expected that the net assets of a Portfolio will fluctuate to a greater degree
when it
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sets aside portfolio securities to cover such purchase commitments than when it
sets aside cash. The Portfolios do not intend to engage in these transactions
for speculative purposes but primarily in order to hedge against anticipated
changes in interest rates. Because a Fund will set aside cash or liquid
portfolio securities to satisfy its purchase commitments in the manner
described, its liquidity and the ability of the investment adviser to manage it
may be affected in the event the forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceeded 25% of the value
of a Fund's assets.
A Portfolio will purchase securities on a when-issued,
forward commitment or delayed settlement basis only with the intention of
completing the transaction. If deemed advisable as a matter of investment
strategy, however, a Portfolio may dispose of or renegotiate a commitment after
it is entered into, and may sell securities it has committed to purchase before
those securities are delivered to the Portfolio on the settlement date. In
these cases the Portfolio may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, forward commitment
and delayed settlement transactions, it relies on the other party to consummate
the trade. Failure of such party to do so may result in the Portfolio's
incurring a loss or missing an opportunity to obtain a price considered to be
advantageous.
The market value of the securities underlying a when-issued
purchase, forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account
when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. A Portfolio does not earn interest
on the securities it has committed to purchase until they are paid for and
delivered on the settlement date.
SECURITIES LENDING. The Aggressive Growth, Capital Income,
and U.S. Government Securities Funds and the Corporate Bond and International
Equity Master Portfolios may lend securities as described in their
Prospectuses. Such loans will be secured by cash or securities of the U.S.
Government and its agencies and instrumentalities, and additionally in the case
of the Aggressive Growth Fund by an irrevocable letter of credit issued by a
U.S. commercial bank that is a member of the Federal Reserve System or the
Federal Deposit Insurance Corporation and has total assets in the excess of
$1.5 billion. The collateral must be at all times equal to at least the market
value of the securities loaned. The Portfolio will continue to receive interest
or dividends on the securities it loans, and will also earn interest on the
investment of any cash collateral. In the case of the Capital Income and U.S.
Government Securities Funds,
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cash collateral may be invested in short-term U.S. Government securities, and
in the case of the Aggressive Growth, International Equity Master Portfolio and
Corporate Bond Master Portfolio, cash collateral may be invested in short-term
U.S. Government securities, certificates of deposit, other high-grade,
short-term obligations or interest-bearing cash equivalents. Additionally, the
International Equity Master Portfolio may also invest cash collateral in U.S.
Treasury notes. Although voting rights, or rights to consent, attendant to
securities loaned pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a fund if a material
event affecting the investment is to occur.
ILLIQUID SECURITIES. It is possible that unregistered
securities purchased by the International Equity Master Portfolio in reliance
upon Rule 144A under the 1933 Act could have the effect of increasing the level
of the International Equity Master Portfolio's illiquidity to the extent that
qualified institutional buyers become, for a period, uninterested in purchasing
these securities.
ADDITIONAL INFORMATION - CAPITAL INCOME FUND
In general, investments in high yielding fixed-income
securities are subject to a significant risk of a change in the credit rating
or financial condition of the issuing entity. Investments in high yielding
fixed-income securities of medium or lower quality are also likely to be
subject to greater market fluctuation and to greater risk of loss of income and
principal due to default than investments of higher rated fixed-income
securities. Such high yielding securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities, which react more to fluctuations in the general level of interest
rates. The Fund seeks to reduce risk to the investor by diversification, credit
analysis and attention to current developments in trends of both the economy
and financial markets. However, while diversification reduces the effect on the
Fund of any single investment, it does not reduce the overall risk of investing
in lower rated securities.
In seeking to attain the investment objective of the Fund,
the investment adviser may consider both the relative risks and potential
returns of higher-rated and lower-rated securities. As a result, the Fund may
hold higher-rated fixed-income securities when the differential in return
between lower-rated and higher-rated securities narrows and the investment
adviser believes that the risk of loss of income and principal may be
substantially reduced with only a relatively small reduction in potential
capital appreciation and yield. The relative proportions of the types of
securities in the Fund may vary from
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time to time according to the prevailing and projected market and economic
conditions and other factors.
ADDITIONAL INFORMATION - AGGRESSIVE GROWTH FUND
The selection of investments for the Aggressive Growth Fund
is the result of a continuous study of trends in industries and companies,
earning power, growth features and other investment criteria. Fund holdings
will consist primarily of common stocks of companies that the investment
adviser expects will experience above-average growth in earnings and price.
Most of these companies will be smaller-capitalized organizations that have
limited product lines, markets and financial resources and are dependent upon a
limited management group. Examples of possible investments include emerging
growth companies employing new technology, initial public offerings of
companies offering high growth potential, or other corporations offering good
potential for high growth in market value. The securities of smaller companies
may be subject to more abrupt or erratic market movements than larger, more
established companies both because the securities typically are traded in lower
volume and because the issuers typically are subject to a greater degree to
changes in earnings and prospects. The Aggressive Growth Fund's net asset value
per share is subject to rapid substantial fluctuation because greater risk is
assumed in order to seek maximum growth.
Securities owned by the Aggressive Growth Fund may be traded
only in the over-the-counter market or on a regional securities exchange, may
be listed only in the quotation service commonly known as the "pink sheets,"
and may not be traded every day or in the volume typical of trading on a
national securities exchange. As a result, the disposition by the Aggressive
Growth Fund of portfolio securities, to meet redemptions or otherwise, may
require the Fund to sell these securities at a discount from market prices, to
sell during periods when such disposition is not desirable, or to make many
small sales over a lengthy period of time.
CUSTODIAL RECEIPTS AND PARTICIPATION INTEREST. Securities
acquired by the California Tax-Exempt Bond Fund and National Municipal Bond
Fund may be in the form of custodial receipts evidencing rights to receive a
specific future interest payment, principal payment or both on certain
Municipal Securities. Such obligations are held in custody by a bank on behalf
of holders of the receipts. These custodial receipts are known by various
names, including "Municipal Receipts", "Municipal Certificates of Accrual on
Tax-Exempt Securities" ("M-CATs") and "Municipal Zero-Coupon Receipts."
Participation interests that the California Tax-Exempt Bond Fund and National
Municipal Bond Fund and the Corporate Bond Master Portfolio may acquire give
the Portfolios an undivided interest in the security or securities involved.
Participation interests may have fixed,
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floating or variable rates of interest, and will have remaining maturities of
thirteen months or less as determined in accordance with the regulations of the
SEC (although the securities held by the issuer may have longer maturities). If
a participation interest in unrated, the investment adviser will have
determined that the interest is of comparable quality to those instruments in
which each Portfolio may invest pursuant to guidelines approved by the
particular Board. For certain participation interests, each Portfolio will
have the right to demand payment, on not more than 30 days' notice, for all or
any part of its participation interest, plus accrued interest. As to these
instruments, each Portfolio intends to exercise its right to demand payment as
needed to provide liquidity, to maintain or improve the quality of its
investment portfolio or upon a default (if permitted under the terms of the
instrument).
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL
SECURITIES
This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company has no reason to
believe that the information summarized herein is not correct in all material
respects, this information has not been independently verified for accuracy or
thoroughness by the Company. Rather, the information presented herein has been
culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California, available as of the date of this Statement of Additional
Information. Further, the estimates and projections presented herein should not
be construed as statements of fact. They are based upon assumptions which may
be affected by numerous factors and there can be no assurance that target
levels will be achieved.
ECONOMIC FACTORS. Fiscal Years Prior to 1994-95. The
1989-90 Fiscal Year ended with revenues below estimates, so
that the State's budget reserve, the Special Fund for Economic Uncertainties
(the "Special Fund") was fully depleted by June 30, 1990. A recession began in
mid-1990, which severely affected State General Fund revenues, and increased
expenditures above initial budget appropriations due to greater health and
welfare costs. The State's budget problems in recent years have also been
caused by a structural imbalance in that the largest General Fund Programs --
K-14 education, health, welfare and corrections -- were increasing faster than
the revenue base, driven by the State's rapid population growth. These
pressures are expected to continue as population trends maintain strong demand
for health and welfare services, as the school age population continues to
grow, and as the State's corrections program responds to a "Three Strikes" law
enacted in 1994, which requires mandatory life prison terms for certain
third-time felony offenders.
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As a result of these factors and others, from the late 1980's
until 1992-93, the State experienced a period of budget imbalance. During this
period, expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund approaching $2.8
billion at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and
for each fiscal year thereafter, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance. The
Legislature and Governor agreed on the following principal steps to produce
Budget Acts in the years 1991-92 to 1993-94:
1. Significant cuts in health and welfare program
expenditures;
2. Transfers of program responsibilities and funding
from the State to local governments (referred to as "realignment"), couples
with some reduction in mandates on local government;
3. Transfer of about $3.6 billion in local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools under
Proposition 98;
4. Reduction in growth of support for higher education
programs, coupled with increases in student fees;
5. Revenue increases (particularly in the 1991-92
Fiscal Year budget), most of which were for a short duration;
6. Increased reliance on aid from the federal
government to offset the costs of incarcerating, educating and providing health
and welfare services to illegal immigrants; and
7. Various one-time adjustments and accounting changes.
Despite these budget actions, the effects of the recession
led to large, unanticipated deficits in the Special Fund as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95.
Another consequence of the accumulated budget deficits,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and
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hence not shown in the annual budget, was to significantly reduce the State's
cash resources available to pay its ongoing obligations. When the Legislature
and the Governor failed to adopt a budget for the 1992-93 Fiscal Year by July
1, 1992, which would have allowed the State to carry out its normal annual cash
flow borrowing to replenish its cash reserves, the State Controller issued
registered warrants to pay a variety of obligations representing prior years'
or continuing appropriations, and mandates from court orders. Available funds
were used to make constitutionally-mandated payments, such as debt service on
bonds and warrants. Between July 1 and September 4, 1992 the State Controller
issued a total of approximately $3.8 billion of registered warrants. After that
date, all remaining outstanding registered warrants (about $2.9 billion) were
called for redemption from proceeds of the issuance of 1992 Interim Notes after
the budget was adopted.
In late spring of 1992, the State Controller issued revenue
anticipation warrants maturing in the following fiscal year in order to pay the
State's continuing obligations. The State was forced to rely increasingly on
external debt markets to meet its cash needs, as a succession of notes and
warrants were issued in the period from June 1992 to July 1994, often needed to
pay previously maturing notes or warrants. These borrowings were used also in
part to spread out the repayment of the accumulated budget deficit over the end
of a fiscal year, as noted earlier.
A key feature of the 1993-94 Budget Act was a plan to retire
by December 31, 1994 the $2.8 billion budget deficit which had been accumulated
by June 30, 1993 (the "Deficit Retirement Plan"). This 18-month plan used
existing statutory authority to borrow $2.8 billion externally. The 1993-94
Budget Act provided that $1.6 billion of the deficit elimination loan would be
repaid by December 23, 1993 from a portion of the proceeds of the $2.0 billion
1993 Revenue Anticipation Warrants issued on June 23, 1993. Legislation enacted
with the 1993-94 Budget Act directed the State Controller to issue $1.2 billion
of registered reimbursement warrants in the 1993-94 Fiscal Year to fund the
balance of the accumulated deficit. Pursuant to this directive, the State
issued $1.2 billion of 1994 Revenue Anticipation Warrants, Series A (the
"Series A Warrants") in February 1994, which matured on December 21, 1994. The
law also created in the State Treasury a Deficit Retirement Fund. The State
Controller transferred from the General Fund to the Deficit Retirement Fund the
sum of $1.2 billion in two equal installments on September 15, 1994 and
December 15, 1994, which moneys were used to retire the Series A Warrants.
The Deficit Retirement Plan anticipated a combined program to
balance the budget over the 1993-94 and 1994-95 Fiscal Years, and projected a
General Fund balance of $260 million, on June 30, 1995. Because fiscal
conditions did not improve as
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projected in the 1993-94 Fiscal Year, the revenue assumptions of the Deficit
Retirement Plan could not be met, and the Governor indicated in the June 1994
Revision that the General Fund condition would be about $1 billion worse at
June 30, 1994 than was projected at the start of the year. Accordingly, the
1994-95 Budget Act anticipated deferring retirement of about $1 billion of the
carryover budget deficit to the 1995-96 Fiscal Year, when it is intended to be
fully retired. This 22-month Deficit Reduction Plan relied on existing
statutory authority to borrow $4 billion externally of which approximately $1
billion is the carryover budget deficit. In addition, Chapter 136, Statutes of
1994, created in the State Treasury the Warrant Payment Fund. The State
Controller is directed to transfer from the General Fund to the Warrant Payment
Fund in September 1995, November 1995, January 1996 and April 1996 in four
equal installments the amount necessary to retire the $4.0 billion of revenue
anticipation warrants maturing on April 25, 1996.
1994-95 Fiscal Year. The Government's Budget Proposal for the
1994-95 Fiscal Year, as updated in May and June 1994, recognized that the
accumulated deficit could not be repaid in one year, and proposed a two-year
solution designed to eliminate the accumulated budget deficit, estimated at
about $1.8 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projected General Fund revenues and transfers of $41.9 billion, $2.1
billion more than actual revenues received in 1993- 94, and expenditures of
$40.9 billion, an increase of $1.6 billion from the prior year.
As a result of the improving economy, the Department of
Finance's final estimates for the fiscal year showed revenues and transfers of
$42.7 billion and expenditures of $42.0 billion, reducing the accumulated
budget deficit to about $600 million and reflecting the Administration's
forecast of an improving economy.
The principal features of the 1994-95 Budget Act are as
follows:
1. Receipt of additional federal aid of about $760 million
for costs of refugee assistance and costs of incarceration and medical
care for illegal immigrants. Only about $33 million of this amount was
received, with about another $98 million scheduled to be received in
the 1995-96 Fiscal Year;
2. Reductions of approximately $1.1 billion in health and
welfare costs. A 2.3% reduction in Aid to Family with Dependent
Children payments (equal to about $56 million for the entire fiscal
year) has been temporarily suspended by court order pending appeal;
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3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for
California State University, accompanied by student fee increases for
both the University of California and California State University;
4. Proposition 98 funding for K-14 schools was increased by
$526 million from 1993-94 Fiscal Year levels, representing an increase
for enrollment growth and inflation. Consistent with previous budget
agreements, Proposition 98 funding provided approximately $4,217 per
student for K-12 schools, equal to the level in the prior three years;
and
5. Additional miscellaneous cuts ($500 million), fund
transfers ($255 million), and adjustment to prior years' legislation
concerning property tax shifts for local governments ($300 million).
The 1994-95 Budget Act contained no tax increases. Under
legislation enacted for the 1993-94 Budget Act, the renters' tax credit was
suspended for two years (1993 and 1994). A ballot proposition to permanently
restore the renters' tax credit after this year failed at the June, 1994
election. The Legislature enacted a further one-year suspension of the renters'
tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 Fiscal
Year included the issuance of $4.0 billion of Revenue Anticipation Warrants,
Series C and D, on July 26, 1994, to mature on April 25, 1996, as part of a
two-year plan to retire the accumulated State budget deficit. To assure
repayment of these warrants, the Legislature enacted a backup mechanism which
could result in automatic expenditure cuts if projected revenues did not meet
certain targets (the "Budget Adjustment Law").
The third and last step in the Budget Adjustment Law process
occurred on October 16, 1995, when the State Controller issued a report (the
"October Trigger Report") reviewing the estimated cash condition of the General
Fund for the 1995-96 Fiscal Year. The State Controller estimated that the
General Fund would have at least $1.4 billion of internal cash resources on
June 30, 1996 (i.e., external borrowing would not be needed on June 30, 1996).
As a result of this finding, certain provisions of the Budget Adjustment Law,
which could have ultimately led to automatic, across-the-board cuts in the
General Fund budget, will not have to be implemented. Likewise, an earlier
report issued on November 15, 1994, avoided implementation of any automatic
budget cuts in the 1994-95 fiscal year.
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1995-96 FISCAL YEAR. With strengthening revenues and reduced
caseload growth based on an improving economy, the State entered the 1995-96
Fiscal Year budget negotiations with the smallest nominal "budget gap" to be
closed in many years. Nonetheless, serious policy differences between the
Governor and Legislature prevented timely enactment of the budget. The 1995- 96
Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from the prior year.
Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projected that, after repaying the last of the carryover
budget deficit, there would be a positive balance of $28 million in the budget
reserve, the Special Fund for Economic Uncertainties, at June 30, 1996. The
Budget Act also projected Special Fund revenues of $12.7 billion and
appropriated Special Fund expenditures of $13.0 billion.
The Governor's Budget for the 1996-97 Fiscal Year, released
on January 10, 1996, updated the current year projections, so that revenues and
transfers are estimated to be $45.0 billion, and expenditures to be $44.2
billion. The Special Fund is projected to have a positive balance of about $50
million at June 30, 1996, and on that date available internal borrowable
resources (available cash, after payment of all obligations due) will be about
$2.2 billion. The Administration projects it will issue up to $2.0 billion of
revenue anticipation notes in April, 1996, to mature by June 30, 1996, to
assist in cash flow management for the final two months of the year, after
repayment of the $4.0 billion RAW issue on April 25, 1996.
The following are the principal features of the 1995-96
Budget:
1. Proposition 98 funding for schools and community colleges
was originally budgeted to increase by about $1.0 billion (General
Fund) and $1.2 billion total above revised 1994-95 levels. Because of
higher than projected revenues in 1994-95, an additional $543 million
($91 per K-12 ADA) was appropriated to the 1994-95 Proposition 98
entitlement. A large part of this is a block grant of about $54 per
pupil for any onetime purpose. For the first time in several years, a
full 2.7 percent cost of living allowance was funded. The budget
compromise anticipates a settlement of the CTA v. Gould litigation
(discussed below). The Governor's 1996-97 Budget indicates that, with
revenues even higher than projected, Proposition 98 apportionments
will exceed the amounts originally budgeted, reaching a level of
$4,500 per ADA;
2. Cuts in health and welfare costs totaling about $0.9
billion. Some of these cuts (totaling about $500
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million) require federal legislative or administrative approval, which
was still pending as of January 1996.
3. A 3.5 percent increase in funding for the University
of California ($90 million General Fund) and the California State
University system ($24 million General Fund), with no increases in
student fees;
4. The Budget assumed receipt of $473 million in new
federal aid for costs of illegal immigrants, above commitments already
made by the federal government. In the Governor's 1996-97 Budget, the
Administration revised this figure downward to $278 million; and
5. General Fund support for the Department of Corrections is
increased by about eight percent over the prior year, reflecting
estimates of increased prison population, but funding is less than
proposed in the 1995 Governor's Budget.
1996-97 FISCAL YEAR. On January 10, 1996, the Governor
released his proposed budget for the next fiscal year (the "1996- 97 Budget").
The Governor requested total General Fund appropriations of about $45.2
billion, based on projected revenues and transfers of about $45.6 billion,
which would leave a budget reserve in the Special Fund at June 30, 1997 of
about $400 million. The Governor renewed a proposal, which had been rejected by
the Legislature in 1995, for a 15 percent phased cut in individual and
corporate tax rates over three years (the budget proposal assumes this will be
enacted, reducing revenues in 1996-97 by about $600 million). There was also a
proposal to restructure trial court funding in a way which would result in a
$300 million decrease in General Fund revenues. The Governor requested
legislation to make permanent a moratorium on cost of living increases for
welfare payments, and suspension of a renters tax credit, which otherwise would
go back into effect in the 1996-97 Fiscal Year. He further proposed additional
costs in certain health and welfare programs, and assumed that costs previously
approved by the Legislature will receive federal approval. The Governor's
Budget proposes increases in funding for K-12 schools under Proposition 98, for
State higher education systems (with a second year of no student fee
increases), and for corrections. The Governor's Budget projects external cash
flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange
County, California and its Investment Pool (the "Pool") filed for bankruptcy
under Chapter 9 of the United States Bankruptcy Code. Approximately 187
California public entities, substantially all of which are public agencies
within the County, invested funds in the Pool. Many of the agencies have
various
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bonds, notes or other forms of indebtedness outstanding, in some instances the
proceeds of which were invested in the Pool. Various investment advisors were
employed by the County to restructure the Pool. Such restructuring led to the
sale of substantially all of the Pool's portfolio, resulting in losses
estimated to be approximately $1.7 billion or approximately 22% of amounts
deposited by the Pool investors, including the County. It is anticipated that
such losses may result in delays or failures of the County as well as
investors in the Pool to make scheduled debt service payments. Further, the
County expects substantial budget deficits to occur in Fiscal Year 1995 with
possibly similar effects upon operations of investors in the Pool.
Investor access to monies in the Pool subsequent to the
filing was pursuant to Court order only and severely limited. On May 2, 1995,
the Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i)
established a formula for distribution of all available cash and securities
from the Pool to the Pool investors, including the County, (ii) established
formulas for distribution among certain settling Pool investors of several
tranches of new County obligations to be payable from, and in some instances
secured by, certain designated sources of potential recoveries on Pool related
claims, and (iii) designated certain outstanding short term note obligations of
the County to be senior to or on a parity with certain of the new County
obligations. By order dated May 22, 1995, following distribution of all
available cash and securities from the Pool to the Pool investors, including
the County, the Bankruptcy Court dismissed the bankruptcy filing of the Pool
based upon the Court's finding that the Pool was not eligible for relief under
Chapter 9 of the Bankruptcy Code because it is not a municipality and it has
not been specifically authorized to file under Chapter 9 as required by the
Bankruptcy Code. In negotiations regarding a plan of adjustment for the County,
many municipal investors in the Pool have indicated a willingness to
subordinate their remaining claims against the County to those of other
creditors and to make their further recovery contingent on recovery by the
County in litigation with brokerage houses, investment advisors and other
defendants regarding the Pool's investments. On December 21, 1995, the County
filed a proposed plan based on this premise, pursuant to which most creditors
other than municipal investors would be paid in full or reinstated. On January
19, 1996, the County filed a disclosure statement with regard to this plan. As
of January 22, 1996, no hearing has yet been scheduled on the disclosure
statement.
Following its bankruptcy filing, the County has, with
Bankruptcy Court approval, made payments of scheduled principal and interest on
its outstanding obligations where no alternative source of payment (such as
reserve funds on deposit with
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indenture trustees, letters of credit, municipal bond insurance policies or
other alternative payment sources) was available. The County has not
replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In the proposed plan, the County proposes to cancel
obligations to make such set-asides for certain bonds, and to increase the
applicable interest rates in compensation. In addition, the County has failed
to satisfy its obligation to accept tenders of its $110,200,000 aggregate
principal amount of Taxable Pension Obligation Bonds, Series B, used to finance
County pension obligations. Interest at a rate set pursuant to the bond
documents has been timely paid on such Pension Bonds. The failure to satisfy
the contractual obligations discussed above may constitute defaults under the
documents governing such securities.
To June 30, 1995 there had been no default in payment of
scheduled interest and principal (excluding the tender payment described above
and the Note Debt hereinafter described) to holders of County securities,
although certain securities are scheduled to mature at various times thereafter
and the Fund is unable to predict whether or to what extent such securities
will be timely paid by the County. On June 27, 1995, the Bankruptcy Court
approved a Stipulation and an Extension Agreement that, offered to holders of
certain short term note obligations of the County ("Note Debt") who elected to
be treated thereunder: (i) extension of maturity dates to June 30, 1996; (ii)
payment of monthly interest at a rate below existing contract rates; (iii)
accrual of monthly interest equal to the difference between the amount paid and
the contract rate, plus a settlement adjustment of 0.95%; (iv) waiver of
post-bankruptcy interest recapture or disallowance; (v) waiver of defenses to
repayment of the Note Debt claims based on California limitations on municipal
indebtedness; and (vi) allowance of the Note Debt claims, subject to certain
reserved rights. The holders of in excess of 90% of the outstanding aggregate
principal amount of all Note Debt elected such treatment on July 7, 1995.
Certain of the holders did not approve the agreement and those notes, in the
amount of $2.8 million, were defaulted upon by the County on July 18, 1995.
Both S&P and Moody's have suspended or downgraded ratings on
various debt securities of the County and certain of the investors in the Pool
and, following the defeat of the proposition submitted to the voters on June
27, announced their intention to downgrade the County's debt to default status,
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regardless of whether the Stipulation and Extension Agreement receives approval
by holders of the Note Debt. On July 18, 1995, S&P declared the Note Debt in
default in spite of the approval of the Stipulation and Extension Agreement.
S&P further stated that it had no reason to believe that the County would be
able to fulfill the terms of the Stipulation and Extension Agreement on June
30, 1996. Such suspensions or downgradings could affect both price and
liquidity of the County's securities. The Fund is unable to predict (i) the
occurrence of covenant and/or payment defaults with respect to obligations of
the County and/or investors in the Pool or (ii) the financial impact of any
such defaults or credit rating suspensions or downgradings upon the value or
liquidity of such securities.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain
California constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below.
REVENUE DISTRIBUTION. Certain California Municipal Securities
in the California Tax-Exempt Money Market Fund may be obligations of issuers
which rely in whole or in part on California State revenues for payment of
these obligations. Property tax revenues and a portion of the State's general
fund surplus are distributed to counties, cities and their various taxing
entities and the State assumes certain obligations theretofore paid out of
local funds. Whether and to what extent a portion of the State's general fund
will be distributed in the future to counties, cities and their various
entities is unclear.
SENATE BILL 671. In 1988, California enacted legislation
providing for a water's-edge combined reporting method if an election fee was
paid and other conditions met. On October 6, 1993, the Governor signed Senate
Bill 671 (Alquist) which modifies the unitary tax law by deleting the
requirements that a taxpayer electing to determine its income on a water's-edge
basis pay a fee and file a domestic disclosure spreadsheet and instead
requiring an annual information return. Significantly, the Franchise Tax Board
can no longer disregard a taxpayer's election. The Franchise Tax Board is
reported to have estimated state revenue losses from the Legislation as growing
from $27 million in 1993-94 to $616 million in 1999-2000, but others, including
Assembly Speaker Willie Brown, disagreed with that estimate and asserted that
more revenue will be generated for California, rather than less, because of an
anticipated increase in economic activity and additional revenue generated by
the incentives in the Legislation.
PROPOSITION 13. Certain California Municipal Securities in
the California Tax-Exempt Money Market Fund may be obligations of issuers who
rely in whole or in part on ad valorem
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real property taxes as a source of revenue. On June 6, 1978, California voters
approved an amendment to the California Constitution known as Proposition 13,
which added Article XIIIA to the California Constitution. The effect of Article
XIIIA was to limit ad valorem taxes on real property and to restrict the
ability of taxing entities to increase real property tax revenues. On November
7, 1978, California voters approved Proposition 8, and on June 3, 1986, the
California voters approved Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the
1% limitation does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges on (i) any indebtedness approved by the
voters prior to July 1, 1978, or (ii) any bonded indebtedness for the
acquisition or improvement of real property approved on or after July 1, 1978,
by two-thirds of the votes cast by the voters voting on the proposition.
Section 2 of Article XIIIA defines "full cash value" to mean "the County
Assessor's valuation of real property as shown on the 1975/76 tax bill under
`full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to
implement Article XIIIA (Statutes of 1978, Chapter 292, as amended) provides
that notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to July 1, 1978, and that each county will levy the maximum tax permitted
by Article XIIIA of $4.00 per $100 assessed valuation (based on the former
practice of using 25%, instead of 100%, of full cash value as the assessed
value for tax purposes). The legislation further provided that, for the 1978/79
fiscal year only, the tax levied by each county was to be apportioned among all
taxing agencies within the county in proportion to their average share of taxes
levied in certain previous years. The apportionment of property taxes for
fiscal years after 1978/79 has been revised pursuant to Statutes of 1979,
Chapter 282, which provides relief funds from State moneys beginning in fiscal
year 1979/80 and is designed to provide a permanent system for sharing State
taxes and budget funds with local agencies. Under Chapter
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282, cities and counties receive more of the remaining property tax revenues
collected under Proposition 13 instead of direct State aid. School districts
receive a correspondingly reduced amount of property taxes, but receive
compensation directly from the State and are given additional relief. Chapter
282 does not affect the derivation of the base levy ($4.00 per $100 assessed
valuation) and the bonded debt tax rate.
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be adjusted annually to reflect changes in consumer prices,
population and certain service provided by these entities. Article XIIIB also
provides that if these entities' revenues in any year exceed the amounts
permitted to be spent, the excess is to be returned by revising tax rates or
fee schedules over the subsequent two years.
Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to determine its
applicability to specific situations involving the State and local taxing
authorities. Depending upon the interpretation, Article XIIIB may limit
significantly a governmental entity's ability to budget sufficient funds to
meet debt service on bonds and other obligations.
Proposition 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment and
statute called the "Classroom Instructional Improvement and Accountability
Act." Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit, primarily
by guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
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one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used in
any year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capital
General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percent has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes, since
such redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of
both houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIIIB limit to K-14 schools.
During the recent recession, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. By implementing these actions, per-pupil funding
from Proposition 98 sources stayed almost constant at approximately $4,220 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
As part of the negotiations leading to the 1995-96 Budget Act, an oral
agreement was reached to settle this case.
The oral agreement provides that both the State and K- 14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million, while
schools will repay $825 million. The State share of the repayment will be
reflected as expenditures above the current Proposition 98 base circulation.
The schools' share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the current
base. Repayments are spread over the eight-year period of 1994-95 through
2001-02 to mitigate any adverse fiscal
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impact. Once a court settlement is reached, and the Director of Finance
certifies that such a settlement has occurred, approximately $377 million in
appropriations from the 1995-96 Fiscal Year to schools will be disbursed in
August 1996.
PROPOSITION 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1, on the June 5,
1990 ballot as Proposition 111, was approved by the voters and took effect on
July 1, 1990. Among a number of important provisions, Proposition 111
recalculates spending limits for the State and for local governments, allows
greater annual increases in the limits, allows the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduces the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removes the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts
in the base calculation for the next year, limits the amount of State tax
revenue over the limit which would be transferred to school districts and
community college districts, and exempts increased gasoline taxes and truck
weight fees form the State appropriations limit. Additionally, Proposition 111
exempts from the State appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative
provides the following: (i) requires that any tax for general governmental
purposes imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative body and
by a majority vote of the electorate of the governmental entity, (ii) requires
that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable
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to the tax levied in violation of the initiative, and (viii) permits these
provisions to be amended exclusively by the voters of the State of California.
In September 1988, the California Court of Appeal in CITY OF
WESTMINSTER V. COUNTY OF ORANGE, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
PROPOSITION 87. On November 8, 1988, California voters
approved Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989. It is
impossible to predict whether the California Legislature will enact such a
prohibition nor is it possible to predict the impact of Proposition 87 on
redevelopment agencies and their ability to make payments on outstanding debt
obligations.
HEALTH CARE LEGISLATION. Certain California Municipal
Securities held by the California Tax-Exempt Bond Fund may be obligations which
are payable solely from the revenues of health care institutions. Certain
provisions under California law may adversely affect these revenues and,
consequently, payment on those Municipal Securities.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation.
California law now provides that the State of California shall selectively
contract with hospitals to provide acute inpatient services to Medi-Cal
patients. Medi-Cal contracts currently apply only to acute inpatient services.
Generally, such selective contracting is made on a flat per diem payment basis
for all services to Medi-Cal beneficiaries, and generally such payment has not
increased in relation to inflation, costs or other factors. Other reductions or
limitations may be imposed on
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payment for services rendered to Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of
California, only those hospitals which enter into a Medi-Cal contract with the
State of California will be paid for non-emergency acute inpatient services
rendered to Medi-Cal beneficiaries. The State may also terminate these
contracts without notice under certain circumstances and is obligated to make
contractual payments only to the extent the California legislature appropriates
adequate funding therefor.
California enacted legislation in 1982 that authorizes
private health plans and insurers to contract directly with hospitals for
services to beneficiaries on negotiated terms. Some insurers have introduced
plans known as "preferred provider organizations" ("PPOs"), which offer
financial incentives for subscribers who use only the hospitals which contract
with the plan. Under an exclusive provider plan, which includes most health
maintenance organizations ("HMOs"), private payors limit coverage to those
services provided by selected hospitals. Discounts offered to HMOs and PPOs may
result in payment to the contracting hospital of less than actual cost and the
volume of patients directed to a hospital under an HMO or PPO contract may vary
significantly from projections. Often, HMO or PPO contracts are enforceable for
a stated term, regardless of provider losses or of bankruptcy of the respective
HMO or PPO. It is expected that failure to execute and maintain such PPO and
HMO contracts would reduce a hospital's patient base or gross revenues.
Conversely, participation may maintain or increase the patient base, but may
result in reduced payment and lower net income to the contracting hospitals.
These California Municipal Securities may also be insured by
the State of California pursuant to an insurance program implemented by the
Office of Statewide Health Planning and Development for health facility
construction loans. If a default occurs on insured California Municipal
Securities, the State Treasurer will issue debentures payable out of a reserve
fund established under the insurance program or will pay principal and interest
on an unaccelerated basis from unappropriated State funds. At the request of
the Office of Statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983, to evaluate the adequacy of the reserve fund
established under the insurance program and based on certain formulations and
assumptions found the reserve fund substantially underfunded. In September of
1986, Arthur D. Little, Inc. prepared an update of the study and concluded that
an additional 10% reserve be established for "multi-level" facilities. For the
balance of the reserve fund, the update recommended maintaining the current
reserve calculation method. In March of 1990, Arthur D. Little, Inc. prepared a
further
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review of the study and recommended that separate reserves continue to be
established for "multi-level" facilities at a reserve level consistent with
those that would be required by an insurance company.
MORTGAGES AND DEEDS. Certain California Municipal Securities
in the California Tax-Exempt Money Market Fund may be obligations which are
secured in whole or in part by a mortgage or deed of trust on real property.
California has five principal statutory provisions which limit the remedies of
a creditor secured by a mortgage or deed of trust. Two limit the creditor's
right to obtain a deficiency judgment, one limitation being based on the method
of foreclosure and the other on the type of debt secured. Under the former, a
deficiency judgment is barred when the foreclosure is accomplished by means of
a nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgement may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights
under the power of sale contained in the mortgage or deed of trust are subject
to the constraints imposed by California law upon transfers of title to real
property by private power of sale. During the three-month period beginning with
the filing of a formal notice of default, the debtor is entitled to reinstate
the mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such
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defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold
that the private-right-of-sale proceedings violate the due process requirements
of the Federal or State Constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the California
Tax-Exempt Bond Fund may be obligations which finance the acquisition of single
family home mortgages for low and moderate income mortgagors. These obligations
may be payable solely from revenues derived from the home mortgages, and are
subject to California's statutory limitations described above applicable to
obligations secured by real property. Under California antideficiency
legislation, there is no personal recourse against a mortgagor of a single
family residence purchased with the loan secured by the mortgage, regardless of
whether the creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
OTHER INVESTMENT INFORMATION. The investment adviser believes
that it is likely that sufficient California Municipal Securities will be
available to satisfy the investment objective, policies and limitations of the
California Tax-Exempt Bond Fund, and to enable the Fund to invest at least 50%
of its total assets in California Municipal Securities at the close of each of
its fiscal quarters. In meeting this investment policy the Fund may invest in
Municipal Securities which are private activity bonds (including industrial
development bonds under prior law) the interest on which is subject to the 26%
to 28% federal alternative minimum tax applicable to individuals and the 20%
federal alternative minimum tax and the environmental tax applicable to
corporations. The environmental tax applicable to corporations is imposed at
the rate of .12% on the excess of the
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corporations modified federal alternative minimum taxable income over
$2,000,000. Investments in such securities, however, will not exceed under
normal market conditions 20% of the Fund's total assets when added together
with any taxable investments held by the Fund. Moreover, although the Fund does
not presently intend to do so on a regular basis, it may invest more than 25%
of its assets in Municipal Securities the interest on which is paid solely from
revenues of similar projects if such investment is deemed necessary or
appropriate by the Fund's investment adviser in light of the Fund's investment
objective and policies. To the extent that the Fund's assets are concentrated
in Municipal Securities payable from revenues on similar projects, the Fund
will be subject to the peculiar risks presented by such projects to a greater
extent than it would be if the Fund's assets were not so concentrated.
If Pacific Horizon's Board of Directors, after consultation
with the investment adviser, should for any reason determine that it is
impracticable to invest at least 50% of the Fund's total assets in California
Tax-Exempt Bond Fund at the close of each quarter of the Fund's taxable year,
the Board would re-evaluate the Fund's investment objective and policies and
consider changes in its structure and name or possible dissolution.
OTHER INVESTMENT LIMITATIONS
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A Fund's or Master Portfolio's investment objectives are
fundamental; the prospectus for each Fund or Master Portfolio summarizes
certain other fundamental policies that may not be changed with respect to such
Fund or Master Portfolio without the affirmative vote of the holders of the
majority of the Fund's or Master Portfolio's outstanding shares (as defined
below under "Additional Information - Miscellaneous"). Similarly, the following
enumerated additional fundamental policies, as well as the Fund's or Master
Portfolio's investment objectives, may not be changed with respect to each Fund
or Master Portfolio without such a vote of shareholders.
The National Municipal Bond Fund may not:
1. Invest 25% or more of its total assets in the securities
of one or more issuers conducting their principal business activities in the
same industry, except that this limitation shall not apply to Municipal
Securities or governmental guarantees of the Municipal Securities and that all
of the assets of the Fund may be invested in another investment company.
2. Purchase or sell real estate (However, the National
Municipal Bond Fund may, to the extent appropriate to its investment objective,
purchase securities issued by the U.S.
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Government, its agencies and instrumentalities, purchase Municipal Securities
secured by real estate or interests therein or securities issued by companies
investing in real estate or interests therein).
3. Sell securities short or purchase securities on margin, except such
short-term credits as are necessary for the clearance of transactions. For this
purchase, the deposit or payment by the National Municipal Bond Fund for
initial or maintenance margin in connection with future contracts is not
considered to be the purchase or sale of a security on margin.
4. Underwrite the securities of other issuers except that all of the
assets of the Fund may be invested in another investment company.
5. Purchase securities of companies for the purpose of exercising
control.
6. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs. However, the National Municipal
Bond Fund may, to the extent appropriate to its investment objective, purchase
publicly traded securities of companies engaging in whole or in part in such
activities, but may enter into futures contracts and options thereon in
accordance with its Prospectus.
7. Acquire any other investment company or investment company security
except as provided for in the Investment Company Act of 1940 provided that all
of the assets of the Fund may be invested in another investment company.
8. Write or sell puts, calls, straddles, spreads or combinations
thereof except that the National Municipal Bond Fund may acquire standby
commitments with respect to its Municipal Securities and may enter into futures
contracts and options thereon to the extent disclosed in the Prospectus and
this Statement of Additional Information.
9. Borrow money except from banks or through reverse repurchase
agreements to meet redemptions and other temporary purposes in amounts of up to
25% of its total assets at the time of such borrowing. The National Municipal
Bond Fund will not purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
The International Equity Master Portfolio, and the Corporate Bond and
its Master Portfolio may not:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result more than 5% of
its total assets will be invested in the
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securities of any one issuer, except that up to 25% of its total assets may be
invested without regard to this 5% limitation; provided that all of the assets
of the Funds may be invested in their respective Master Portfolio or another
investment company.
2. Underwrite the securities of other issuers, provided that all of
the assets of the Funds may be invested in their respective Master Portfolio or
another investment company.
3. Purchase or sell real estate, except that each Master Portfolio
may, to the extent appropriate to its investment objective, invest in
securities and instruments guaranteed by agencies or instrumentalities of the
U.S. Government and securities issued by companies which invest in real estate
or interests therein.
4. Purchase securities on margin (except for such short-term credits
as may be necessary for the clearance of transactions), make short sales of
securities or maintain a short position. For this purpose, the deposit or
payment by a Master Portfolio for initial or maintenance margin in connection
with futures contracts is not considered to be the purchase or sale of a
security on margin.
5. Write or sell puts, calls, straddles, spreads or combinations
thereof, except that it may engage in options transactions.
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that: (a) it
may, to the extent appropriate to its investment objective, invest in
securities 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, except that the Corporate Bond Master Portfolio may
purchase securities of other investment companies in connection with a merger,
consolidation, acquisition or reorganization; or as may otherwise be permitted
by the 1940 Act; provided that all of the assets of the Corporate Bond Fund may
be invested in the Corporate Bond Master Portfolio or another investment
company.
8. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same
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industry; provided, however, that (a) there is no limitation with respect to
investments in obligations issued or guaranteed by the federal government and
its agencies and instrumentalities; (b) each utility (such as gas, gas
transmission, electric and telephone service) will be considered a single
industry for purposes of this policy; and (c) wholly-owned finance companies
will be considered to be in the industries of their parents if their activities
are primarily related to financing the activities of their parents.
9. Purchase securities of any issuer if as a result it would
own more than 10% of the voting securities of such issuer; provided that all of
the assets of each Fund may be invested in the respective Master Portfolio or
another investment company.
10. Borrow money for the purpose of obtaining investment
leverage or issue senior securities (as defined in the 1940 Act), provided that
each Fund and the respective Master Portfolio may borrow from banks for
temporary purposes and in an amount not exceeding 10% of the value of the total
assets of each Fund or the respective Master Portfolio; or mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of
the value of its total assets at the time of such borrowing. This restriction
shall not apply to (a) the sale of portfolio securities accompanied by a
simultaneous agreement as to their repurchase, or (b) transactions in currency,
options, futures contracts and options on futures contracts, or forward
commitment transactions.
11. Make loans, except that with respect to the International
Equity Master Portfolio it may invest in debt securities, repurchase agreements
and securities loans and with respect to the Corporate Bond Master Portfolio it
may purchase or hold debt obligations in accordance with its investment
objective, policies and limitations; may enter into repurchase agreements with
respect to securities; and may lend portfolio securities against collateral
consisting of cash or securities of the U.S. Government and its agencies and
instrumentalities which are consistent with its permitted investments.
Neither the Intermediate Bond, Blue Chip or Asset Allocation
Funds, nor their corresponding Master Portfolios, may:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result, more than 5% of
its total assets will be invested in the securities of any one issuer or it
would own more than 10% of the voting securities of such issuer, except that up
to 25% of its total assets may be invested without regard to these limitations;
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and provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the same
investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Pledge, mortgage or hypothecate the assets of any Fund to
any extent greater than 10% of the value of the total assets of that Fund.
3. Make loans to other persons, except that a Fund may make
time or demand deposits with banks, provided that time deposits shall not have
an aggregate value in excess of 10% of a Fund's net assets, and may purchase
bonds, debentures or similar obligations that are publicly distributed, may
loan portfolio securities not in excess of 10% of the value of the total assets
of such Fund, and may enter into repurchase agreements as long as repurchase
agreements maturing in more than seven days do not exceed 10% of the value of
the total assets of a Fund;
4. Purchase or sell commodities contracts, except that any
Fund may purchase or sell futures contracts on financial instruments, such as
bank certificates of deposit and U.S. Government securities, foreign currencies
and stock indexes and options on any such futures if such options are written
by other persons and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums paid on all
such options that are held at any time do not exceed 20% of the total net
assets of that Fund, and (iii) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed 5% of the total
assets of the Fund;
5. Purchase any securities for any Fund that would cause more
than 25% of the value of the Fund's total assets at the time of such purchase
to be invested in the securities of one or more issuers conducting their
principal activities in the same industry; provided that there is no limitation
with respect to investments in obligations issued or guaranteed by the United
States Government, its agencies and instrumentalities; and provided further
that a Fund may invest all its assets in a diversified, open-end management
investment company, or a series thereof, with substantially the same investment
objectives, policies and restrictions as the Fund without regard to the
limitations set forth in this paragraph (5).
6. Invest the assets of any Fund in nonmarketable securities
that are not readily marketable (including repurchase agreements maturing in
more than seven days, securities described in restriction with respect to such
Fund (2) in the Prospectuses, restricted securities, certain OTC options and
securities used as cover for such options and stripped mortgage-backed
securities)
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to any extent greater than 10% of the value of the total assets of that Fund;
provided, however, that a Fund may invest all its assets in a diversified,
open-end management investment company, or a series thereof with substantially
the same investment objectives, policies and restrictions as the Fund, without
regard to the limitations set forth in this paragraph (6).
7. Borrow money for any Fund except for temporary emergency
purposes and then only in an amount not exceeding 5% of the value of the total
assets of that Fund. Borrowing shall, for purposes of this paragraph, include
reverse repurchase agreements. Any borrowings, other than reverse repurchase
agreements, will be from banks. Pacific Horizon will repay all borrowings in
any Fund before making additional investments for that Fund and interest paid
on such borrowings will reduce income.
8. Issue senior securities.
9. Underwrite any issue of securities, provided, however,
that a Fund may invest all its assets in a diversified, open-end management
investment company, or a series thereof, having substantially the same
investment objectives, policies and restrictions as such Fund, without regard
to the limitations set forth in this paragraph (9).
10. Purchase or sell real estate or real estate mortgage
loans, but this shall not prevent investments in instruments secured by real
estate or interests therein or in marketable securities of issuers that engage
in real estate operations.
11. Purchase on margin or sell short.
12. Purchase or retain securities of an issuer if those
members of the Board of Pacific Horizon or the Master Portfolio, each of whom
own more than 1/2 of 1% of such securities, together own more than 5% of the
securities of such issuer, provided, however, that a Fund may invest all its
assets in a diversified, open-end management investment company, or a series
thereof, having substantially the same investment objectives, policies and
restrictions as such Fund, without regard to the limitations set forth in this
paragraph (12).
13. Purchase securities of any other investment company
(except in connection with a merger, consolidation, acquisition or
reorganization) if, immediately after such purchase, Pacific Horizon (and any
companies controlled by it) would own in the aggregate (i) more than 3% of the
total outstanding voting stock of such investment company, (ii) securities
issued by such investment company would have an aggregate value in excess of 5%
of the value of the total assets
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of Pacific Horizon, or (iii) securities issued by such investment company and
all other investment companies would have an aggregate value in excess of 10%
of the value of the total assets of Pacific Horizon provided, however, that a
Fund may invest all its assets in a diversified, open-end management investment
company, or a series thereof, having substantially the same investment
objectives, policies and restrictions as such Fund, without regard to the
limitations set forth in this paragraph (13).
14. Invest in or sell put, call, straddle or spread options or
interests in oil, gas or other mineral exploration or development programs.
The Aggressive Growth Fund may not:
1. Purchase or sell real estate (however, the Fund may, to
the extent appropriate to its investment objective, purchase securities issued
by companies investing in real estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of
exercising control.
4. Purchase securities on margin, make short sales of
securities or maintain a short position, except that this limitation shall not
apply to transactions in futures contracts and related options.
5. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or as may otherwise be permitted by the Investment
Company Act of 1940.
6. Purchase securities of any one issuer (other than
obligations issued or guaranteed by U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
In accordance with current regulations of the Securities and
Exchange Commission, the Aggressive Growth Fund presently intends to limit its
investments in the securities of any single issuer to not more than 5% of its
total assets (measured at the time of purchase), except that up to 25% of the
Fund's total assets may be invested without regard to this
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<PAGE> 530
limitation. This intention is not, however, a fundamental policy
of the Fund.
7. Purchase any securities which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; (b) wholly-owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c) the
industry classification of utilities will be determined according to their
service. For example, gas, gas transmission, electric and gas, electric and
telephone will be considered a separate industry.
8. Borrow money or issue senior securities, except that the
Fund may borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of its total assets
at the time of such borrowing; or purchase securities at any time after such
borrowings (including reverse repurchase agreements) have been entered into and
before they are repaid. The Fund's transactions in futures and related options
(including the margin posted by the Fund in connection with such transactions)
are not subject to this investment limitation.
9. Make loans except that the fund may purchase or hold debt
instruments or enter into repurchase agreements pursuant to its investment
objective and policies and my lend portfolio securities in an amount not
exceeding 30% of its total assets.
10. Purchase securities without available market quotations
which cannot be sold without registration or the filing of a notification under
Federal or state securities laws, enter into repurchase agreements providing
for settlement more than seven days after notice, or purchase any other
securities deemed illiquid by the Directors if, as a result, such securities
and repurchase agreements would exceed 10% of the Funds total value.
The Fund intends that variable amount master demand notes
with maturities of nine months or less, as well as any investments in
securities that are not registered under the 1933 Act but that may be purchased
by institutional buyers under Rule 144A and for which a liquid trading market
exists as determined by the Board of Directors or Bank of America (pursuant to
guidelines adopted by the Board), will not be subject to this 10% limitation or
illiquid securities.
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11. Purchase or sell commodity contracts, or invest in oil,
gas or mineral exploration or development programs, except that the Fund may,
to the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities, and
may enter into futures contract and related options.
THE U.S. GOVERNMENT SECURITIES FUND AND CAPITAL INCOME FUND
-----------------------------------------------------------
MAY NOT:
- -------
1. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation. Securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities are not subject to this investment limitation.
2. Underwrite any issue of securities, except to the extent
that the purchase of securities directly from the issuer thereof in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
3. Purchase or sell real estate, except that a Fund may, to
the extent appropriate to its investment objective, invest in GNMA Certificates
and securities issued by companies which invest in real estate or interests
therein.
4. Purchase securities on margin (except for such short-term
credits as may be necessary for the clearance of transactions), make short
sales of securities or maintain a short position.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Funds may write covered call options.
6. Purchase or sell commodities or commodity contracts, or
invest in oil, gas or mineral exploration or development programs, except that:
(a) a Fund may, to the extent appropriate to its investment objective, invest
in securities issued by companies which purchase or sell commodities or
commodity contracts or which invest in such programs; and (b) a Fund may
purchase and sell futures contracts and options on futures contracts.
7. Purchase securities of other investment companies, except
(a) securities of money-market funds, to the extent permitted by the Investment
Company Act of 1940, or (b) in connection with a merger, consolidation,
acquisition or reorganization.
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8. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided, however, that (a) there is no
limitation with respect to investments in obligations issued or guaranteed by
the federal government and its agencies and instrumentalities; (b) each utility
(such as gas, gas transmission, electric and telephone service) will be
considered a single industry for purposes of this policy; and (c) wholly-owned
finance companies will be considered to be in the industries of their parents
if their activities are primarily related to financing the activities of their
parents.
9. Purchase securities of any issuer if as a result the
Fund will own more than 10% of the voting securities of such issuer.
10. Borrow money except from banks for temporary purposes and
in an amount not exceeding 10% of the value of the Fund's total assets, issue
senior securities (as defined in the Investment Company Act of 1940) or
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time of such
borrowing. Borrowing may take the form of sale of portfolio securities
accompanied by a simultaneous agreement as to their repurchase. (This borrowing
provision is not for investment leverage, but solely to facilitate management
of the Fund's portfolio by enabling the Fund to meet redemption requests when
the liquidation of portfolio securities is deemed to be disadvantageous or
inconvenient. The Fund will not purchase any securities while borrowings are
outstanding. Interest paid on borrowed funds will reduce the net investment
income of the Fund.) For the purpose of this restriction, collateral or escrow
arrangements with respect to margin for futures contracts are not deemed to be
a pledge of assets, and neither such arrangements nor the purchase of futures
contracts are deemed to be the issuance of a senior security.
11. Make loans, except that the Fund may purchase or hold
debt obligations in accordance with its investment objective, policies and
limitations; may enter into repurchase agreements with respect to securities;
and may lend portfolio securities against collateral consisting of cash or
securities of the U.S. Government and its agencies and its agencies and
instrumentalities which are consistent with its permitted investments.
12. Invest more than 10% of the value of its total assets in
securities with legal or contractual restrictions on
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resale (including repurchase agreements with terms greater than seven days over
the-counter options and the securities covering such options.)
The Fund intends that investments in securities that are not
registered under the 1933 Act but may be purchased by institutional buyers
under Rule 144A and for which a liquid trading market exists as determined by
the Board of Directors or Bank of America (pursuant to guidelines adopted by
the Board), will not be subject to this 10% limitation on illiquid securities.
13. Purchase securities of any issuer which has been in
continuous operation for less than three years (including operations of its
predecessors), except obligations issued or guaranteed by the U.S. government or
its agencies.
IN ADDITION:
1. Under normal market conditions the U.S. Government
Securities Fund may not invest less than 65% of its total assets in GNMA
Certificates.
2. Under normal market conditions the Capital Income Fund may
not invest less than 65% of its total assets in Convertible Securities. For
purposes of this limitation, securities acquired upon the conversion of
Convertible Securities are deemed to be Convertible Securities for a period of
two months after the effective date of their conversion.
THE CALIFORNIA TAX-EXEMPT BOND FUND MAY NOT:
-------------------------------------------
1. Make loans except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies.
2. Purchase or sell real estate (however, the Fund may, to
the extent appropriate to its investment objective, purchase Municipal
Securities secured by real estate or interests therein or securities issued by
companies investing in real estate or interests therein).
3. Purchase securities on margin, make short sales of
securities or maintain a short position.
4. Underwrite the securities of other issuers.
5. Purchase securities of companies for the purpose of
exercising control.
6. Invest in industrial revenue bonds where the payment of
principal and interest are the responsibility of a
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company (including its predecessors) with less than three years of continuous
operation.
7. Purchase or sell commodity contracts, or invest in oil,
gas or mineral exploration or development programs (however, the Fund may, to
the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
8. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets.
9. Purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
10. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
11. Purchase any securities which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that this limitation shall not apply
to Municipal Securities or governmental guarantees of Municipal Securities; and
provided, further, that for the purpose of this limitation only, industrial
development bonds that are backed only by the assets and revenues of a
nongovernmental user shall not be deemed to be Municipal Securities.
12. Borrow money or issue senior securities, except that the
Fund may borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of its total assets
at the time of such borrowing.
13. Write or sell puts, calls, straddles, spreads, or
combinations thereof except that the Fund may acquire stand-by commitments with
respect to its Municipal Securities.
14. Invest more than 10% of its total assets in securities
with legal or contractual restrictions on resale or
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for which no readily available market exists, including repurchase agreements
providing for settlement more than seven days after notice.
In accordance with current regulations of the SEC, the
California Tax-Exempt Bond Fund presently intends to limit its investments in
the securities of any single issuer to not more than 5% of its total assets
(measured at the time of purchase), except that up to 25% of the Fund's total
assets may be invested without regard to this limitation. This intention is
not, however, a fundamental policy of the Fund.
* * *
With respect to the Aggressive Growth, National Municipal
Bond, California Tax-Exempt Bond, U.S. Government Securities, Capital Income,
Corporate Bond, Intermediate Bond, Blue Chip, International Equity and Asset
Allocation Funds, if a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For the purposes of Investment Limitation P. 1 in the
California Tax-Exempt Bond Funds' Prospectus, Investment Limitation P. 2 in the
Capital Income Fund's Prospectus, Investment Limitation P. 8 in this Statement
of Additional Information with respect to the U.S. Government Securities Fund,
Corporate Bond Fund and International Equity Master Portfolio and Investment
Limitation P. 5 in this Statement of Additional Information with respect to the
Intermediate Bond, Blue Chip and Asset Allocation Funds, respectively, the
Funds treat, in accordance with the current views of the staff of the SEC and
as a matter of non-fundamental policy that may be changed without a vote of
shareholders, all supranational organizations as a single industry and each
foreign government (and all of its agencies) as a separate industry.
In order to permit the sale of a Fund's shares in certain
states, Pacific Horizon and the Master Portfolios may make commitments more
restrictive than the investment policies and limitations described above. As of
the date of this Statement of Additional Information, the following such
commitments have been made:
1. The Portfolios will not invest more than 5% of the
value of their net assets in warrants, of which no
more than 2% may be warrants which are not listed on
the New York or American Stock Exchanges.
2. The Portfolios will not invest in oil, gas or other
mineral leases.
-62-
<PAGE> 536
3. The Portfolios will not purchase or sell real
property, including limited partnership interests,
but excluding readily marketable interests in Real
Estate Investment Trusts ("REITs") or readily
marketable securities of companies that invest in
real estate in real estate limited partnerships.
4. The Portfolios have agreed to exclude any assets of
a Portfolio which are invested in the shares of any
money market mutual fund for the purposes of
calculating that Portfolio's investment advisory
fee.
5. The Portfolios will not purchase or retain the
securities of any issuer if the Officers or
Directors or Trustees of the Master Portfolio or its
investment adviser, owning beneficially more than
one half of one percent of the securities of an
issuer together own beneficially more than 5% of the
securities of that issuer.
6. The Portfolios will not invest more than 5% of their
total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation.
7. The Portfolios will not invest more than 15% of its
total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation or securities
of issuers which are restricted as to disposition.
8. The Portfolios will not invest more than 10% of
their respective total assets in illiquid securities
including securities of foreign issuers which are
not listed on a recognized domestic or foreign
securities exchange.
In the event that Pacific Horizon or the Master Trusts
determine that any such commitment is no longer in the best interests of a
Fund, it may revoke its commitment. In such event, the corresponding Fund may
no longer be able to sell its securities in such state.
* * *
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and
how such shares are priced, is included in the Prospectuses. Additional
information is contained below. The net asset values
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of the Master Portfolios corresponding to each of the Feeder Funds are
determined at the same time and on the same days as the net asset values per
share of the respective Feeder Funds are determined. The net asset value of
each of the Feeder Funds is equal to such Fund's pro rata share of the total
investments and other assets of its corresponding Master Portfolio, less any
liabilities with respect to such Feeder Fund, including each Feeder Fund's pro
rata share of the Master Portfolio's liabilities.
VALUATION OF THE AGGRESSIVE GROWTH FUND
Portfolio securities are valued at the last sales price on
the securities exchange on which such securities are primarily traded or at the
last sales price obtained from the NASDAQ. Securities not listed on an exchange
or NASDAQ, or securities for which there were no transactions, are valued at
the average of the most recent bid and asked prices. Restricted securities,
securities for which market quotations are not readily available, and other
assets are valued at fair value, using methods determined under the supervision
of the Board of the Company. Valuation of options is described above under
"Investment Objectives and Policies--Options Trading." Short-term securities
are valued at amortized cost, which approximates market value. The amortized
cost method involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of the difference
between the principal amount due at maturity and cost.
VALUATION OF THE CALIFORNIA TAX-EXEMPT BOND FUND AND THE NATIONAL
MUNICIPAL BOND FUND
The California Tax-Exempt Bond Fund's and National Municipal
Bond Fund's assets are valued for purposes of pricing sales and redemptions by
an independent pricing service (the "Service") approved by the particular
Board. When, in the judgment of the Service, quoted bid prices for portfolio
securities are readily available and are representative of the bid side of the
market, these investments are valued at the mean between quoted bid prices (as
obtained by the Service from dealers in such securities) and asked prices (as
calculated by the Service based upon its evaluation of the market for such
securities). Other investments (which constitute a majority of the California
Tax-Exempt Bond Fund's securities) are carried at fair value as determined by
the Service, based on methods which include consideration of yields or prices
of municipal bonds of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. The
Service may also employ electronic data processing techniques and matrix
systems to determine value. Short-term securities with remaining maturities of
60 days or less are valued at amortized cost, which approximates market value.
The amortized cost method involves
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<PAGE> 538
valuing a security at its cost on the date of purchase or, in the case of
securities purchased with more than 60 days remaining to maturity and to be
valued on the amortized cost basis only during the final 60 days of its
maturity, the market value on the 61st day prior to maturity. Thereafter, the
Company assumes a constant amortization to maturity of the difference between
the principal amount due at maturity and cost.
VALUATION OF CAPITAL INCOME FUND, U.S. GOVERNMENT SECURITIES
FUND, INTERNATIONAL EQUITY MASTER PORTFOLIO AND CORPORATE BOND
MASTER PORTFOLIO
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers. Other securities and assets for which market quotations are not
readily available are valued at their fair value using methods determined under
the supervision of the particular Board. Debt securities with remaining
maturities of 60 days or less are valued on an amortized cost basis unless the
Board determines that such basis does not represent fair value at the time.
Under this method, such securities are valued initially at cost on the date of
purchase or, in the case of securities purchased with more than 60 days to
maturity, are valued at their market or fair value each day until the 61st day
prior to maturity. Thereafter, absent unusual circumstances, a constant
proportionate amortization of any discount or premium is assumed until maturity
of the security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it
deems relevant in determining valuations for normal institutional-sized trading
units of debt securities and would not rely solely on quoted prices. The
methods used by the pricing service and the valuations so established will be
utilized under the general supervision of the particular Board. Valuation of
options is described above under "Investment Objectives and Policies Options
Trading."
VALUATION OF THE CORRESPONDING MASTER PORTFOLIOS FOR THE
INTERMEDIATE BOND, BLUE CHIP AND ASSET ALLOCATION FUNDS
Except for debt securities held by the Master Portfolios with
remaining maturities of 60 days or less, assets for which market quotations are
available are valued as follows: (a) each listed security is valued at its
closing price obtained
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<PAGE> 539
from the primary exchange on which the security is listed, or, if there were no
sales on that day, at its last reported current closing price; (b) each
unlisted security is valued at the last current bid price (or last current sale
price, as applicable) obtained from the NASDAQ; (c) United States Government
and agency obligations are valued based upon bid quotations from the Federal
Reserve Bank for identical or similar obligations; and (d) short-term money
market instruments (such as certificates of deposit, bankers' acceptances and
commercial paper) are most often valued by bid quotations or by reference to
bid quotations of available yields for similar instruments of issuers with
similar credit ratings. The Board of Trustees of Master Trust I has determined
that the values obtained using the procedures described in (c) and (d)
represent the fair values of the securities valued by such procedures. Most of
these prices are obtained by PFPC Inc. ("PFPC") from a service that collects
and disseminates such market prices. Bid quotations for short-term money market
instruments reported by such service are the bid quotations reported to it by
major dealers in such instruments.
Valuation of options is described above under "Investment
Objectives and Policies--Options Trading."
Debt securities held by the Master Portfolios with remaining
maturities of 60 days or less are valued on the basis of amortized cost, which
provides stability of net asset value. Under this method of valuation, the
security is initially valued at cost on the date of purchase or, in the case of
securities purchased with more than 60 days remaining to maturity and to be
valued on the amortized cost basis only during the final 60 days of its
maturity, the market value on the 61st day prior to maturity. Thereafter Master
Trust I assumes a constant proportionate amortization in value until maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the security, unless the Board of Trustees
determines that amortized cost no longer represents fair value. Master Trust I
will monitor the market value of these investments for the purpose of
ascertaining whether any such circumstances exist.
When approved by the Board of Trustees of Master Trust I,
certain securities may be valued on the basis of valuations provided by an
independent pricing service when such prices are believed to reflect the fair
market value of such securities. These securities may include those that have
no available recent market value, have few outstanding shares and therefore
infrequent trades, or for which there is a lack of consensus on the value, with
quoted prices covering a wide range. The lack of consensus might result from
relatively unusual circumstances such as no trading in the security for long
periods of time, or a company's involvement in merger or acquisition activity,
with widely varying valuations placed on the company's assets or
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<PAGE> 540
stock. Prices provided by an independent pricing service may be determined
without exclusive reliance on quoted prices and may take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data.
In the absence of an ascertainable market value, assets are
valued at their fair value as determined using methods and procedures reviewed
and approved by the Board of Trustees of Master Trust I.
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or
Letter of Intent privileges available to certain shareholders as described in
the Prospectuses, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) although more than
one beneficiary is involved; or "a qualified group" which has been in existence
for more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount,
provided that the purchases are made through a central administrator or a
single dealer, or by other means which result in economy of sales effort or
expense. A "qualified group" must have more than 10 members, must be available
to arrange for group meetings between representatives of the Funds and the
members, and must be able to arrange for mailings to members at reduced or no
cost to the Distributor. The value of shares eligible for the Right of
Accumulation privilege may also be used as a credit toward completion of the
Letter of Intent privilege. Such shares will be valued at their offering price
prevailing on the date of submission of the Letter of Intent. Distributions on
shares held in escrow pursuant to the Letter of Intent privilege will be
credited to the shareholder, but such shares are not eligible for a Fund's
Exchange Privilege.
The computation of the hypothetical offering price per share
of A shares for each Fund based on the value of the California Tax-Exempt Bond,
Aggressive Growth, U.S. Government Securities, Capital Income, Intermediate
Bond, Blue Chip, Asset Allocation, Corporate Bond and National Municipal Bond
Funds' net assets on February 29, 1996, the value of the International Equity
Master Portfolio's net assets at inception and each Fund's A shares outstanding
on such date is as follows:
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<TABLE>
<CAPTION>
U.S. Intermediate
California Aggressive Government Capital -------------------- Asset Corporate National International
Tax-Exempt Growth Securities Income Bond Blue Chip Allocation Bond Municipal Equity
Bond Fund Fund Fund Fund Fund Fund Fund Fund Bond Fund Fund
---------- ---------- ---------- ------- ---------- ---------- ---------- --------- ---------- -------------
<S> <C>
Net Assets..... $10.00
Outstanding
Securities..... 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
to Public...... $10.47
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: CAPITAL INCOME FUND, U.S. GOVERNMENT
SECURITIES FUND, CALIFORNIA TAX-EXEMPT BOND FUND, INTERMEDIATE BOND FUND, BLUE
CHIP FUND, ASSET ALLOCATION FUND, CORPORATE BOND FUND, NATIONAL MUNICIPAL BOND
FUND AND INTERNATIONAL EQUITY MASTER PORTFOLIO
Shares in the Capital Income Fund, U.S. Government Securities
Fund, California Tax-Exempt Bond Fund, Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, Corporate Bond Fund and National Municipal Bond Fund for
which orders for wire redemption are received on a business day before the
close of regular trading hours on the New York Stock Exchange (currently 4:00
p.m. Eastern Time) will be redeemed as of the close of regular trading hours
on such Exchange and the proceeds of redemption (less any applicable contingent
deferred sales charge on B shares or certain A shares) will normally be wired
in federal funds on the next business day to the commercial bank specified by
the investor on the Account Application (or other bank of record on the
investor's file with the Transfer Agent). Shares in the International Equity
Master Portfolio for which orders for wire redemption are received on a
business day before 12:00 p.m. Eastern time will be redeemed as of 12:00 p.m.
and the proceeds of redemption (less any applicable contingent deferred sales
charge on B or certain A shares) 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
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bank, the request must be in writing and signature guaranteed. Shares for which
orders for wire redemption are received after the close of regular trading
hours on the New York Stock Exchange (or 12:00 p.m. for the International
Equity Master Portfolio) or on a non-business day will be redeemed as of the
close of trading on such Exchange (or 12:00 p.m. with respect to the
International Equity Master Portfolio) on the next day on which shares of the
particular Fund are priced and the proceeds (less any applicable contingent
deferred sales charge on B shares or certain A shares) will normally be wired
in federal funds on the next business day thereafter. Redemption proceeds (less
any applicable contingent deferred sales charge on B shares or certain A
Shares) will be wired to a correspondent member bank if the investor's
designated bank is not a member of the Federal Reserve System. Immediate
notification by the correspondent bank to the investor's bank is necessary to
avoid a delay in crediting the funds to the investor's bank account. Proceeds
of less than $1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to
receive redemption proceeds, a written request must be sent to the Company, c/o
Pacific Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California
90080-9909. Such request must be signed by each shareholder, with each
signature guaranteed as described in the Funds' Prospectuses. Guarantees must
be signed by an authorized signatory and "signature guaranteed" must appear
with the signature. The Transfer Agent may request further documentation from
corporations, executors, administrators, trustees or guardians, and will accept
other suitable verification arrangements from foreign investors, such as
consular verification.
Investors in the U.S. Government Securities Fund, California
Tax-Exempt Bond Fund, Corporate Bond Fund and National Municipal Bond Fund
redeeming by check generally will be subject to the same rules and regulations
that commercial banks apply to checking accounts, although the election of this
privilege creates only a shareholder-transfer agent relationship with the
Transfer Agent. An investor may deliver Checks directly to the Transfer Agent,
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, in which
case the proceeds will be mailed, wired or made available at the Transfer Agent
on the next business day. The Check delivered to the Transfer Agent must be
accompanied by a properly executed stock power form on which the investor's
signature is guaranteed as described in the Funds' Prospectuses. After
clearance, Checks will be returned to the investor.
Because dividends on the U.S. Government Securities Fund,
California Tax-Exempt Bond Fund, Corporate Bond Fund and National Municipal
Bond Fund are declared daily, Checks should not be used to close an account, as
a small balance is likely to result.
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<PAGE> 543
Check redemption may be modified or terminated at any time by
the Company or the Transfer Agent upon notice to shareholders.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION: ALL FUNDS
- -------------------------------------------------------------
In General. As described in the Prospectuses, both A and B
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.") K shares may only be
purchased by: (a) businesses or other organizations that participate in the
401(k) Daily Advantage(R) Retirement Plan Program sponsored by Bank of America;
and (b) individuals investing proceeds from a redemption of shares from another
open-end investment company on which such individual paid a front-end sales
load if (i) such redemption occurred within 30 days prior to the purchase
order, and (ii) such other open-end investment company was not distributed and
advised by Concord Financial Group, Inc. and Bank of America, respectively, or
their affiliates. Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the
Funds and described in the respective Prospectuses. Purchase orders will be
effected only on business days.
A shares in each Fund are sold with a sales load, except for
such exemptions as noted in the Prospectuses. A shares which are subject to the
Large Purchase Exemption are also subject to a contingent deferred sales load.
These exemptions to the imposition of a sales load on A shares are due to the
nature of the investors and/or the reduced sales efforts that will be necessary
in obtaining such investments. A shares are also subject to a shareholder
servicing fee. B shares are sold without a front-end sales load, but are
subject to a contingent deferred sales charge and an ongoing distribution and
shareholder servicing fee. K shares are offered at net asset value with neither
a front-end sales charge, or a contingent deferred sales charge. K shares are
subject to a distribution plan fee and an administrative and shareholder
service fee. Service Organizations may be paid by the Distributor at the
Company's expense for shareholder services. Depending on the terms of the
particular account, Bank of America, its affiliates, and Service Organizations
also may charge their customers fees for automatic investment, redemption and
other services provided. Such fees may include, for example, account
maintenance fees, compensating balance requirements or fees based upon account
transactions, assets or income. Bank of America or the particular Service
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<PAGE> 544
Organization is responsible for providing information concerning these services
and any charges to any customer who must authorize the purchase of Fund shares
prior to such purchase.
Persons or organizations wishing to purchase Company shares
through their accounts at Bank of America or a Service Organization should
contact such entity directly for appropriate instructions.
Initial purchases of shares into a new account may not be
made by wire. However, persons wishing to make a subsequent purchase of Company
shares into an already existing account by wire should telephone the Transfer
Agent at (800) 346-2087. The investor's bank must be instructed to wire federal
funds to the Transfer Agent, referring in the wire to the particular Fund in
which such investment is to be made; the investor's portfolio account number;
and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for
IRAs, payment of which could require the liquidation of shares. B shares
liquidated by the Transfer Agent as fees for custodial services to IRA accounts
will not be subject to the contingent deferred sales charge. All fees charged
are described in the appropriate form. Shares may be purchased in connection
with these plans only by direct remittance to the Transfer Agent. Purchases for
IRA accounts will be effective only when payments received by the Transfer
Agent are converted into federal funds. Purchases for these plans may not be
made in advance of receipt of funds.
For processing redemptions, the Transfer Agent may request
further documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the
TeleTrade Privilege, any request for a wire redemption will be effected as a
TeleTrade transaction through the Automated Clearing House (ACH) system unless
more prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
EXCHANGE PRIVILEGE. Shareholders in the Pacific Horizon
Family of Funds have an exchange privilege whereby they may exchange all or
part of their shares for like shares of another investment portfolio in the
Pacific Horizon Family of Funds or for like shares of an investment portfolio
of Time Horizon Funds. In addition, shareholders of the Funds may exchange B
shares for Pacific Horizon Shares of the Pacific
-71-
<PAGE> 545
Horizon Prime Fund without the payment of any contingent deferred sales charge
at the time the exchange is made. By use of the exchange privilege, the
investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange instructions from any person representing himself or herself
to be the investor and believed by the Transfer Agent to be genuine. The
Transfer Agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon notice to
shareholders. For federal income tax purposes, exchange transactions are
treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
Exchange transactions described in Paragraphs A, B, C, D, E
and F below will be made on the basis of the relative net asset values per
share of the investment portfolios involved in the transaction.
A. A shares of any investment portfolio purchased with a sales
load, as well as additional shares acquired through
reinvestment of dividends or distributions on such shares,
may be exchanged without a sales load for other A shares of
any other investment portfolio in the Pacific Horizon Family
of Funds or for like shares of the Time Horizon Funds.
B. B shares acquired pursuant to an exchange transaction will
continue to be subject to a contingent deferred sales charge.
However, B shares that have been acquired through an exchange
of B shares may be exchanged for other B shares or for like
shares of Time Horizon Funds without the payment of a
contingent deferred sales charge at the time of exchange. In
determining the holding period for calculating the contingent
deferred sales charge payable on redemption of B shares, the
holding period of the shares originally held will be added to
the holding period of the shares acquired through exchange.
C. A shares acquired pursuant to an exchange transaction will
continue to be subject to any applicable contingent deferred
sales charge. However, A shares that have been acquired
through an exchange of A shares may be exchanged for other A
shares or for like shares of Time Horizon Funds without the
payment of a contingent deferred sales charge at the time of
exchange. In determining the holding period for calculating
the contingent deferred sales charge payable on redemption of
A shares, the holding period of the shares originally held
will be added to the holding period of the shares acquired
through exchange.
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<PAGE> 546
D. B shares may be exchanged for Pacific Horizon shares of the
Pacific Horizon Prime Fund ("Prime Shares") without paying a
contingent deferred sales charge. At the time of such an
exchange, a shareholder's holding period for calculating the
contingent deferred sales charge payable on redemption of B
shares of a Fund will cease to accumulate. If the
shareholder subsequently exchanges the shares back into B
shares of a Fund, the holding period accumulation on the
shares will resume as of the time when the exchange was made
into the Prime Shares. In the event that a shareholder
wishes to redeem Prime Shares acquired by exchange for B
shares of a Fund, the contingent deferred sales charge
applicable to the accumulated B share of a Fund holding
period prior to the exchange into the Prime Shares will be
charged.
E. A or B shares of any investment portfolio in the Pacific
Horizon Family of Funds or like shares of the Time Horizon
Funds acquired by a previous exchange transaction involving
shares on which a sales load has directly or indirectly been
paid (e.g. A shares purchased with a sales load or issued in
connection with an exchange transaction involving A shares
that had been purchased with a sales load), as well as
additional shares acquired through reinvestment of dividends
or distributions on such shares, may be redeemed and the
proceeds used to purchase without a sales load A or B shares,
as the case may be, 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.
F. A shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
shares of any other investment portfolio in the Family that
is offered without a sales load.
G. A shares of any investment portfolio in the Pacific Horizon
Family of Funds purchased without a sales load may be
exchanged without a sales load for A shares in any other
portfolio 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.
H. K shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a
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<PAGE> 547
sales load for other K shares of any other investment
portfolio in the Pacific Horizon Family of Funds or for like
shares of the Time Horizon Funds.
Except as stated above, a sales load will be imposed when A
shares of any investment portfolio in the Pacific Horizon Family of Funds that
were purchased or otherwise acquired without a sales load are exchanged for A
shares of another investment portfolio in the Pacific Horizon Family or for
like shares of the Time Horizon Funds which are sold with a sales load.
Exchange requests received on a business day prior to the
time shares of the investment portfolios involved in the request are priced
will be processed on the date of receipt. "Processing" a request means that
shares in the investment portfolio from which the shareholder is withdrawing an
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new investment portfolio into which the
shareholder is investing will also normally be purchased at the net asset value
per share next determined coincident to or after the time of redemption.
Exchange requests received on a business day after the time shares of the
investment portfolios involved in the request are priced will be processed on
the next business day in the manner described above.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of
America or a Service Organization, certain purchasers may arrange with the
Company's custodian for sub-accounting services paid by the Company without
direct charge to the purchaser.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent at its Columbus office is a day
on which the New York Stock Exchange is open for trading. In 1996, the holidays
on which the New York Stock Exchange is closed are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or
(d) an emergency exists as determined by the SEC. (The Company may also suspend
or postpone the recordation of the transfer of its shares upon the occurrence
of any of the foregoing conditions.)
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<PAGE> 548
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does
not increase such balance to $500 or more upon 60 days' notice. The contingent
deferred sales charge with respect to B or A shares is not charged on
involuntary redemptions. The Company will not require a shareholder to redeem
shares of a Fund if the balance held of record by the shareholder is less than
$500 solely because of a decline in the net asset value of the Fund's shares.
The Company may also redeem shares involuntarily if such redemption is
appropriate to carry out the Company's responsibilities under the 1940 Act.
If the Company's Board of Directors determines that
conditions exist which make payment of redemption proceeds wholly in cash
unwise or undesirable, the Company may make payment wholly or partly in
securities or other property. Additionally, the Company has made an undertaking
to the State of Texas that it may only make payment of such proceeds wholly or
in part in "readily marketable" securities or other property. (If the Company
determines that such undertaking is no longer in its best interests, it will
revoke such commitment. In such an event, the Funds will no longer be able to
sell their shares in the State of Texas). In such an event, a shareholder would
incur transaction costs in selling the securities or other property. The
Company has committed that it will pay all redemption requests by a shareholder
of record in cash, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of $250,000 or 1% of the net asset value at
the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL - ALL FUNDS
- -------------------
Each Fund will be treated as a separate corporate entity
under the Internal Revenue Code of 1986, as amended (the "Code"), and intends
to qualify as a "regulated investment company." By following this policy, each
Fund expects to eliminate or reduce to a nominal amount the federal income
taxes to which it may be subject. If for any taxable year a Fund of the Company
does not qualify for the special federal tax treatment afforded regulated
investment companies, all of the Fund's taxable income would be subject to tax
at regular corporate rates (without any deduction for distributions to
shareholders). In such event, the Fund's dividend distributions (including
amounts derived from interest on Municipal Securities in the case of the
California Tax-Exempt Bond Fund and the National Municipal Bond Fund) to
shareholders would be taxable as ordinary income to the extent of the current
and accumulated earnings and profits of the particular Fund and would be
eligible
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<PAGE> 549
for the dividends received deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the
Code requires, among other things, that each Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income (if any) and 90% of its tax-exempt income (if any) net
of certain deductions for each taxable year. In general, a Fund's investment
company taxable income will be its taxable income, including dividends,
interest, and short-term capital gains (the excess of net short-term capital
gain over net long-term capital loss), subject to certain adjustments and
excluding the excess of net long-term capital gain for the taxable year over
the net short-term capital loss for such year (if any). Each Fund will be taxed
on its undistributed investment company taxable income, if any. As stated, each
Fund of the Company intends to distribute at least 90% of its investment
company taxable income (if any) for each taxable year. To the extent such
income is distributed by a Fund (whether in cash or additional shares), it will
be taxable to shareholders as ordinary income.
A Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to a Fund's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities) (the
"Short-Short test"). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived
from the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and
the cost of the securities subject to the call is capital gain or loss.
Premiums from expired call options written by a Fund and net gains from closing
purchase transactions are treated as short-term capital gains for federal
income tax purposes, and losses on closing purchase transactions are short-term
capital losses. See Appendix B -- "Accounting and Tax Treatment" -- for a
general discussion of the federal tax treatment of futures contracts, related
options thereon and other financial
-76-
<PAGE> 550
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 specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this
excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders who have failed to provide either a correct
tax identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company that they are subject to backup withholding when
required to do so or that they are "exempt recipients."
At February 29, 1996, the _________________ and
________________ had capital loss carryovers of $_____. To the extent provided
by the regulations of the Code, these capital loss carryovers will be used to
offset future net realized gains
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<PAGE> 551
on securities transactions. As such, it is probable that the
gains so offset will not be distributed to shareholders.
FEDERAL - CALIFORNIA TAX-EXEMPT BOND FUND AND NATIONAL MUNICIPAL
- ----------------------------------------------------------------
BOND FUND
- ---------
The California Tax-Exempt Bond Fund's and National Municipal
Bond Fund 's policy is to pay each year as exempt-interest dividends
substantially all the Fund's Municipal Securities interest income net of
certain deductions. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of such Fund's taxable year. However, the aggregate amount of dividends
so designated by a Fund cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by such Fund during its
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code. The percentage of total dividends paid for any taxable
year which qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends from the particular Fund for such year. In
order for a Fund to pay exempt-interest dividends for any taxable year, at the
close of each quarter of its taxable year at least 50% of the aggregate value
of such Fund's assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of
the Funds as items of interest excludable from their gross income under Section
103(a) of the Code. However, each shareholder is advised to consult his or her
tax adviser with respect to whether exempt-interest dividends would retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" or a "related person" to such user with respect to
facilities financed through any of the tax-exempt obligations held by the
Funds. A "substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses a part of such facilities in his
or her trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. A "related
person" includes certain related natural persons, affiliated corporations,
partners and partnerships and S corporations and their shareholders.
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry shares, equal to the percentage of the total
non-capital gain dividends distributed during the shareholder's taxable year
that are exempt-interest
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<PAGE> 552
dividends, is not deductible for federal income tax purposes. In addition, if a
shareholder holds Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends received with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six months
holding requirement to a period of not less than the greater of 31 days or the
period between regular dividend distributions where the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.
As discussed in the Prospectus for the California Tax-Exempt
Bond Fund, dividends attributable to interest on certain private activity bonds
issued after August 7, 1986 must be included by shareholders as an item of tax
preference for purposes of determining possible liability for the Federal
alternative minimum tax applicable to individuals and corporations and the
environmental tax applicable to corporations. The alternative minimum tax rate
for individuals is 26-28% and for corporations is 20%. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified alternative minimum taxable income over $2,000,000.
Income itself exempt from federal income taxation may be
considered in addition to adjusted gross income when determining whether Social
Security payments received by a shareholder are subject to federal income
taxation.
STATE - CALIFORNIA TAX-EXEMPT BOND FUND
- ---------------------------------------
As a regulated investment company, the California Tax-Exempt
Bond Fund (the "Fund") will be relieved of liability for California state
franchise and corporate income tax to the extent its earnings are distributed
to its shareholders. The Fund will be taxed on its undistributed taxable
income. If for any year the Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of the Fund's taxable income
(including interest income on California Municipal Securities for franchise tax
purposes only) may be subject to California state franchise or income tax at
regular corporate rates.
If, at the close of each quarter of its taxable year, at
least 50% of the value of the total assets of a regulated investment company,
or series thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then a regulated investment company, or series thereof, will be
qualified to pay dividends exempt from California state personal income tax to
its non-corporate shareholders (hereinafter
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<PAGE> 553
referred to as "California exempt-interest dividends"). For this purpose,
California Exempt Securities are generally limited to California Municipal
Securities and certain U.S. Government and U.S. Possession obligations.
"Series" of a regulated investment company is defined as a segregated portfolio
of assets, the beneficial interest in which is owned by the holders of an
exclusive class or series of stock of the company. The Fund intends to qualify
under the above requirements so that it can pay California exempt-interest
dividends. If the Fund fails to so qualify, no part of its dividends to
shareholders will be exempt from the California state personal income tax. The
Fund may reject purchase orders for shares if it appears desirable to avoid
failing to so qualify.
Within 60 days after the close of its taxable year, the Fund
will notify each shareholder of the portion of the dividends paid by the Fund
to the shareholder with respect to such taxable year which is exempt from
California state personal income tax. The total amount of California
exempt-interest dividends paid by the Fund with respect to any taxable year
cannot exceed the excess of the amount of interest received by the Fund for
such year on California Exempt Securities over any amounts that, if the Fund
were treated as an individual, would be considered expenses related to
tax-exempt income or amortizable bond premium and would thus not be deductible
under federal income or California state personal income tax law. The
percentage of total dividends paid by the Fund with respect to any taxable year
which qualifies as California exempt-interest dividends will be the same for
all shareholders receiving dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Exempt Securities held by the
Fund, such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are
applicable for California state tax purposes. See "Additional Information
Concerning Taxes - Federal - California Tax-Exempt Bond Fund" above.
To the extent, if any, dividends paid to shareholders are
derived from the excess of net long-term capital gains over net short-term
capital losses, such dividends will not constitute California exempt-interest
dividends and will generally be taxed as long-term capital gains under rules
similar to those regarding the treatment of capital gains dividends for federal
income tax purposes. See "Additional Information Concerning Taxes -Federal- All
Funds" above. Moreover, interest on indebtedness incurred by a shareholder to
purchase or carry Fund shares is not deductible
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<PAGE> 554
for California state personal income tax purposes if the Fund distributes
California exempt-interest dividends during the shareholder's taxable year.
The foregoing is only a summary of some of the important
California state personal income tax considerations generally affecting the
Fund and its shareholders. No attempt is made to present a detailed explanation
of the California state personal income tax treatment of the Fund or its
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of any Fund dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
the Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation,
in general.
TAXATION OF THE MASTER PORTFOLIOS
Management of the Master Portfolios corresponding to each of
the Feeder Funds intends for each Master Portfolio to be treated as a
partnership (or, in the event that a Feeder Fund is the sole investor in a
Master Portfolio, as an agent or nominee) rather than as a regulated investment
company or a corporation under the Code. Under the rules applicable to a
partnership (or an agent of nominee) under the Code, any interest, dividends,
gains and losses of the Master Portfolios will be deemed to have been "passed
through" to their investors regardless whether any amounts are actually
distributed by the Master Portfolios.
Each investor in a Master Portfolio will be taxed on its
share (as determined in accordance with the governing instruments of the
particular Master Portfolio) of the Master Portfolio's ordinary income and
capital gains in determining its income tax liability. The determination of
such share will be made in accordance with the Code and regulations promulgated
thereunder. It is intended that each Master Portfolio's assets, income and
distributions will be managed in such a way that an investor in a Master
Portfolio will be able to satisfy the requirements of Subchapter M of the Code,
assuming that the investor invested all of its assets in the Master Portfolio.
-81-
<PAGE> 555
OTHER INFORMATION
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities.
Except as noted above with respect to California state
personal income taxation of dividends paid by the California Tax-Exempt Bond
Fund, income distributions may be taxable to shareholders under state or local
law as dividend income even though all or a portion of such distributions may
be derived from interest on tax-exempt obligations or U.S. government
obligations which, if realized directly, would be exempt from such income
taxes. Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally affecting purchasers of Fund shares. No attempt is
made to present a detailed explanation of the federal income tax treatment of
the Funds or their shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of Fund
shares should consult their tax advisers with specific reference to their own
tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust, Series
I (registered
</TABLE>
-82-
<PAGE> 556
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
investment company)
(since 1993); former
Director, Bunker Hill
Income Securities, Inc.
(registered investment
company) through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated,
Newport Beach, CA 92660-2629 (registered
investment adviser) 1991
to date; Partner,
Newport Partners
(private venture capital
firm), 1981 to date;
Chairman of the Board
and Chief Executive
Officer, First Pacific
Advisors, Inc. (registered
investment adviser) and
seven investment companies
under its management, prior to
1983; former Allied Member,
New York Stock Exchange;
Chairman of the Board of FPA
Paramount Fund, Inc. through
1984; Director, TIS Mortgage
Investment Company (real estate
investment trust); Trustee and
former Vice Chairman of the Board,
Claremont McKenna College;
Chartered Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from 1979
to 1991; Trustee, Master Investment
Trust, Series I (since 1993);
Director, Morgan Grenfell
Small Cap Fund (since 1986);
former Director, Bunker
Hill Income Securities, Inc.
(since 1989) (registered
</TABLE>
-83-
<PAGE> 557
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
investment companies);
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group)
from 1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988,
Pacific Rim Bankers Program
(a non-profit educational
institution); Dean Emeritus,
1981 to date, Dean,1964-81,
Graduate School of Business
Administration, University
of Washington; Director,
Washington Federal Savings
& Loan Association; Trustee,
Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January 1993,
University of Southern California;
Trustee, Master Investment Trust,
Series I (since 1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of
Finance and Business
Economics of the
Graduate School of
Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
</TABLE>
-84-
<PAGE> 558
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Corporation (insurance
and financial services
holding company); Director,
Source Capital, Inc.
(closed-end investment company);
Director of three open-end
investment companies
managed by First
Pacific Advisors, Inc.;
formerly Chairman of the
Board of Directors
(or Trustees) of
nineteen investment
companies managed
by American Capital
Asset Management, Inc.
Richard E. Stierwalt 40 Executive Chairman of the Board
125 W. 55th Street Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director,
Managing Director
and Chief Executive
Officer of the
Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust,
Series I, and Seafirst
Retirement Funds
(since 1993);
First Vice President,
Trust Operation
Administration,
Security Pacific
National Bank, 1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice
President, Seafirst
Retirement Funds (since
1993); Senior Vice
President, Shearson
Lehman Brothers, 1978-
1987.
Irimga McKay 35 Vice Senior Vice President,
1230 Columbia Street President July 1993 to date, prior
5th Floor thereto First Vice
La Jolla, CA 92037 President of the
</TABLE>
-85-
<PAGE> 559
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Administrator and
Distributor, November
1988 to July 1993;
Vice President, 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;
Vice President, Seafirst
Retirement Funds and
Master Investment Trust,
Series I (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 (since 1996)
Senior Vice President
Fidelity Institutional
Retirement Services
(1993 to September 1995);
Fidelity Accounting &
Custody Services
(1981 to 1993).
Martin R. Dean 31 Assistant Manager of Fund
3435 Stelzer Road Treasurer Accounting of BISYS
Columbus, OH 43219 Fund Services, May 1994
to Present; Assistant
Treasurer, Seafirst
Retirement Funds (since
1996); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
</TABLE>
-86-
<PAGE> 560
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, and Seafirst
Retirement Funds.
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Seafirst Retirement
Funds (since 1995);
prior thereto, Vice
President and Associate
General Counsel,
Alliance Capital
Management, L.P.
</TABLE>
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
The Audit Committee of the Board is comprised of all
directors and is chaired by Dr. Trefftzs. The Board does not have an Executive
Committee.
Each director is entitled to receive an annual fee of $25,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $20,000 per annum for his
services as President; Mr. Collins, in consideration of his years of service as
President and Chairman of the Board, receives an additional $40,000 per annum
in recognition of his years of service to the Company until February 28, 1997;
each member of a Committee of the Board is entitled to receive $1,000 for each
Committee meeting they participate in (whether or not held on the same day as a
Board meeting); and each Chairman of a Committee of the Board shall be entitled
to receive an annual retainer of $1,000 for his services as Chairman of the
Committee. The Funds, and each other fund of the Company, pays its
proportionate share of these amounts based on relative net asset values.
For the fiscal year ended February 29, 1996, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $_______. Of that amount, $______, $______, $______,
$______, $______, $______, $______, $_____ and $______ of directors'
compensation
-87-
<PAGE> 561
were allocated to the Aggressive Growth, California Tax-Exempt Bond, U.S.
Government Securities, Capital Income, Intermediate Bond, Blue Chip, Asset
Allocation, Corporate Bond and National Municipal Bond Funds, respectively. The
International Equity Master Portfolio did not commence investment operations
until ____________, 1996. Each director is also reimbursed for out-of-pocket
expenses incurred as a director. Drinker Biddle & Reath, of which Mr. McConnel
is a partner, receives legal fees as counsel to the Company. As of the date of
this Statement of Additional Information, the directors and officers of the
Company, as a group, own less than 1% of the outstanding shares of each of the
Company's investment portfolios.
Under a retirement plan approved by the Board of Directors,
including a majority of its directors who are not "interested persons" of the
Company, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer
then in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director served as Chairman of the
Board.
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
-88-
<PAGE> 562
writing within the 30 calendar days after the date the individual is first
elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before
March 1, 1994 as a director and possibly as Chairman, authorize the Company to
pay a retirement benefit following the director's death or resignation (unless
the director has vested benefits as a result of completing nine years of
service). Any such action shall be approved by the Board and by a majority of
the directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former
director is neither secured nor funded by the Company but shall be binding upon
its successors in interest. The payment of benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
- ----------------------------------------------------------
The trustees and officers of Master Investment Trust, Series
I ("Master Trust I"), their addresses, age, and principal occupations during
the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of See "Directors and
McDermott & Trayner the Boards Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 59 Trustee of Master Chartered Accountant;
Victory House, Trust I Retired Partner, KPMG
Nelson Quay Peat Marwick LLP.
Governor's Harbour
Grand Cayman
Cayman Islands
British West Indies
</TABLE>
-89-
<PAGE> 563
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Robert E. Greeley 62 Trustee of Master See "Directors and
Page Mill Asset Trust I Officers of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee of Master Retired President, Laird
1200 Shenandoah Drive East Trust I Norton Trust Company,
Seattle, WA 98112 Chairman of the Board of
Advisors, Phoenix Venture
Funds; Trustee, Seafirst
Retirement Funds; former
Supervisor, Collective
Investment Trust for Seafirst
Retirement Accounts; former
Trustee, First Funds of
America (registered
investment companies).
Cornelius J. Pings 66 Trustee of Master See "Directors and Officers of
Association of American Trust I the Company".
Universities
One DuPont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President of See "Directors and
125 West 55th Street Master Trust I Officers of the Company."
New York, NY 10019
Adrian J. Waters 32 Executive Vice Managing Director,
ITI House President, Concord Management
23 Earlsfort Terrace Treasurer and (Ireland) Ltd. since May
Dublin 2, Ireland Assistant 1993; Manager in the
Secretary of Investment Company Industry
Master Trust I Services Group, Price
Waterhouse 1989 to
May 1993; Member of
Oliver Freaney and Co./
Spicer and Openheim
Chartered Accountants
1986-1989.
Stephanie L. Blaha 36 Vice President of See "Directors and Officers of
Master Trust I the Company."
W. Bruce McConnel, III 52 Secretary of See "Directors and
1345 Chestnut Street Master Trust I Officers of the Company."
Philadelphia, PA 19107
</TABLE>
- -----------------------------
* Mr. Nathane is an "interested trustee" of Master Trust I as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $1,500 plus $500 per
meeting attended and $250 per day for each full day
-90-
<PAGE> 564
devoted to travel in connection with each meeting attended, for his services as
trustee of each of Master Trust I. Each trustee is also reimbursed for
out-of-pocket expenses incurred as a trustee. For its fiscal year ended February
29, 1996, Master Trust I paid or accrued for the account of its trustees as a
group for services in all capacities a total of $______; of that amount, $_____,
$_____, $_____ and $_____ were allocated to the Master Portfolios corresponding
to the Intermediate Bond, Blue Chip, Asset Allocation and Corporate Bond Funds,
respectively. The International Equity Master Portfolio did not commence
investment operations until ____________, 1996. The trustee's fees and
reimbursements are allocated among all of Master Trust I's portfolios based on
their relative net asset values. Drinker Biddle & Reath, of which Mr. McConnel
is a partner, receives legal fees as counsel to Master Trust I.
-91-
<PAGE> 565
The following chart provides certain information as of February 29, 1996 about
the fees received by directors of the Company as directors and/or officers of
the Company and as directors and/or trustees of the Fund Complex:
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM
AGGREGATE ACCRUED AS ANNUAL REGISTRANT
COMPENSATION PART OF BENEFITS AND FUND
NAME OF PERSON/ FROM THE FUND UPON COMPLEX* PAID
POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $ $ 0 $ 0 $
President and
Chairman of the
Board=
- ---------------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $ $ 0 $ 0 $
Vice Chairman of
the Board
- ---------------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley** $ $ 0 $ 0 $
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $ $ 0 $ 0 $
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $ $ 0 $ 0 $
Director+
- ---------------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $ $ 0 $ 0 $
Director
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Trust I. As of _________, 1996 Master Investment Trust, Series
II ceased operations.
** 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.
+ Mr. Pings became President and Chairman of the Board of the Company on
August 31, 1995.
-92-
<PAGE> 566
INVESTMENT ADVISER
Bank of America is the successor by merger to Security
Pacific National Bank ("Security Pacific"), which previously served as
investment adviser to the Company since the commencement of its operations. As
described in the Prospectuses, the Feeder Funds have not retained the services
of an investment adviser because they seek to achieve their investment
objectives by investing all their assets in their corresponding Master
Portfolio. In the Investment Advisory Agreements with the Companies, Bank of
America has agreed to provide investment advisory services as described in each
Prospectus. Bank of America has also agreed to pay all expenses incurred by it
in connection with its activities under its agreements other than the cost of
securities, including brokerage commissions, if any, purchased for the
Portfolios. In rendering its advisory services, Bank of America may utilize
Bank officers from one or more of the departments of the Bank which are
authorized to exercise the fiduciary powers of Bank of America with respect to
the investment of trust assets. In some cases, these officers may also serve as
officers, and utilize the facilities, of wholly-owned subsidiaries and other
affiliates of Bank of America or its parent corporation. In addition, the
Investment Advisory Agreements with respect to the Capital Income, Intermediate
Bond, Blue Chip, Asset Allocation and International Equity Master Portfolios
provide that Bank of America may, in its discretion, provide advisory services
through its own employees or employees of one or more of its affiliates that
are under the common control of Bank of America's parent, BankAmerica
Corporation; provided such employees are under the management of Bank of
America.
For the services provided and expenses assumed pursuant to
the particular investment advisory agreement, the Companies have agreed to pay
Bank of America fees, accrued daily and payable monthly, at the annual rates of
.35% of the net assets of each of the National Municipal Bond Fund and U.S.
Government Securities Fund; .40% of the net assets of the California Tax-Exempt
Bond Fund; .45% of the net assets of each of the Capital Income Fund,
Intermediate Bond Master Portfolio and Corporate Bond Master Portfolio; .55% of
the net assets of the Asset Allocation Master Portfolio; .60% of the net assets
of the Aggressive Growth Fund; and .75% of the net assets of the Blue Chip
Master Portfolio and International Equity Master Portfolio. The fees payable to
Bank of America are not subject to reduction as the value of each Fund's or
Master Portfolio's net assets increase. From time to time, Bank of America may
waive fees or reimburse a particular Fund or Master Portfolio for expenses
voluntarily or as required by certain state securities laws.
-93-
<PAGE> 567
For the fiscal years indicated, the following advisory fees
(net of waivers) were paid or payable to Bank of America by the Aggressive
Growth, California Tax-Exempt Bond, Capital Income and U.S. Government
Securities Funds as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year Ended February 29, Year ended February 28, Year ended February 28,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ $816,300 $1,016,640
- -------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ $606,131 $ 721,895
- -------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $572,638 $ 39,298
- -------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ $397,905 $ 507,308
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal years indicated, Bank of America waived
advisory fees with respect to the Aggressive Growth, California Tax-Exempt
Bond, Capital Income and U.S. Government Securities Funds as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year Ended February 29, Year ended February 28, Year ended February 28,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ $242,173 $190,993
- -------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $359,205 $387,148
- -------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ $ 0 $ 20,985
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Additionally, for the fiscal years indicated, Bank of America
assumed certain operating expenses (excluding certain shareholder servicing and
distribution expenses described below) of the Capital Income Fund as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Year ended February 29, Year ended February 28, Year ended February 28,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
-94-
<PAGE> 568
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal years indicated and for the period from the
commencement of operations through February 28, 1994, Bank of America waived
its entire advisory fee with respect to the Intermediate Bond Master Portfolio,
Blue Chip Master Portfolio, Asset Allocation Master Portfolio and Municipal
Master Portfolio as follows (No Advisory fee data is provided for the
International Equity Master Portfolio, since the International Equity Master
Portfolio did not commence operations until ____________, 1996):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Period from
commencement of
operations(1)
through
Year ended February 29, Year ended February 28, February 28,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Master $ $ 293,222 $ 84,856
Portfolio
- --------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $ $1,091,132 $225,019
- --------------------------------------------------------------------------------------------------------------------
Asset Allocation Master Portfolio $ $ 849,188 $197,611
- --------------------------------------------------------------------------------------------------------------------
Municipal Master Portfolio(2) $ $ 6,147 $ 108
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Additionally, for the fiscal years indicated and for the
period from commencement of operations through February 28,
- ------------------
1. The Intermediate Bond Master Portfolio, Blue Chip
Master Portfolio and Asset Allocation Master
Portfolio commenced operations on December 6, 1993
and the Municipal Master Portfolio commenced
operations on January 28, 1994.
2. Prior to ____________, 1996, the National Municipal
Bond Fund invested all of its assets in the Municipal
Master Portfolio. On ____________, 1996 the National
Municipal Bond Fund withdrew assets from the
Municipal Master Portfolio and invested them directly
in investment securities.
-95-
<PAGE> 569
1994, Bank of America assumed certain operating expenses of the Intermediate
Bond Fund, Blue Chip Fund, Asset Allocation Fund, Municipal Master Portfolio
and National Municipal Bond Fund as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Period from
commencement of
operations
through
Year ended February 29, Year ended February 28, February 28,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $ $207,033 $24,300
- ---------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ $245,776 $31,726
- ---------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ $245,718 $28,384
- ---------------------------------------------------------------------------------------------------------------------
Municipal Master Portfolio $ $121,591 $34,404
- ---------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ $180,700 $18,272
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods indicated, Bank of America waived its entire
advisory fee with respect to the Corporate Bond Master Portfolio as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Period April 25, 1994
(the date the
Predecessor Fund was
reorganized into the
Period October 1, 1994 Corporate Bond Fund)
Year ended February 29, through February 28, through September 30,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Master $ $58,897 $73,575
Portfolio
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
For the period from December 6, 1993 (commencement of
operations) through April 11, 1994, Bank of America had a Sub-Advisory
Agreement with Seattle Capital Management Company ("Seattle Capital") with
respect to management of the assets of the Intermediate Bond Master Portfolio
and that portion of the
-96-
<PAGE> 570
assets of the Asset Allocation Master Portfolio which Bank of America
determined from time to time to be appropriate for investment in debt
securities (including money market instruments). The Sub-Advisory Agreement
provided that Bank of America would pay Seattle Capital a monthly advisory fee
based upon the net assets of such Master Portfolios, at the annual rate of .45%
of the net assets of the Intermediate Bond Master Portfolio, and .55% of that
portion of the net assets of the Asset Allocation Master Portfolio managed by
Seattle Capital. For the period December 6, 1993 (commencement of operations)
through February 28, 1994, Bank of America paid Seattle Capital sub-advisory
fees of $0 and $0 for sub-advisory services to the Intermediate Bond Master and
Asset Allocation Master Portfolios, respectively.
Prior to its reorganization into the Corporate Bond Fund, the
Predecessor Fund was advised by Security Pacific Investment Management, Inc.
("SPIM"), an affiliate of Bank of America, until December 8, 1993 when SPIM
transferred its rights and obligations under its advisory agreement with the
Predecessor Fund (the "Prior Agreement") to Bank of America, which thereafter
served as investment adviser. For the period October 1, 1993 through April 24,
1994 and the fiscal years ended September 30, 1993 and 1992, the Predecessor
Fund paid $129,586, $228,245 and $218,010, respectively, in investment advisory
fees to SPIM (and Bank of America after December 8, 1993), pursuant to the
Prior Agreement.
The Investment Advisory Agreements between Bank of America and
each Company will be in effect until October 31, 1996, and will continue in
effect with respect to a particular Master Portfolio or Fund from year to year
thereafter only so long as such continuation is approved at least annually by
(i) the Board of Trustees/Directors of the particular Company or the vote of a
"majority," as defined in the 1940 Act, of the outstanding voting securities of
such particular Master Portfolio or Fund, and (ii) a majority of those
trustees/directors of the particular Company who are not "interested persons,"
as defined in the 1940 Act, of any party to the particular Investment Advisory
Agreement, acting in person at a meeting called for the purpose of voting on
such approval. Each Investment Advisory Agreement will terminate automatically
in the event of its "assignment," as defined in the 1940 Act. In addition,
each Investment Advisory Agreement is terminable with respect to a particular
Master Portfolio or Fund at any time without penalty upon 60 days' written
notice by the Board of Trustees/Directors of the particular Company, by vote of
the holders of a majority of a particular Master Portfolio's or Fund's
outstanding voting securities, or by Bank of America.
-97-
<PAGE> 571
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Funds or
Master Portfolios.
The Investment Advisory Agreements provide that Bank of
America shall not be liable for any error of judgment or mistake of law or for
any loss suffered in connection with the performance of the Investment Advisory
Agreements, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or negligence in the performance 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 Portfolios contemplated by the particular Investment Advisory
Agreement, the Prospectuses, and this Statement of Additional Information
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. It should be noted, however, that there have been no cases
deciding whether a national bank may perform services comparable to those
performed by Bank of America and that future changes in either federal or state
statutes and regulations
-98-
<PAGE> 572
relating to permissible activities of banks or trust companies and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Portfolios or from continuing to purchase Fund shares for the accounts of its
customers. (For a discussion of the Glass Steagall Act in connection with the
Company's Shareholder Service Plan, see "Plan Payments" in the Funds'
Prospectuses.)
On the other hand, as described herein, the Funds are
currently distributed by Concord Financial Group, Inc., Concord Holding
Corporation, its parent, either directly or through its off-shore subsidiary
with respect to the Intermediate Bond Master Portfolio, Blue Chip Master
Portfolio, Asset Allocation Master Portfolio and Corporate Bond Master
Portfolio provides the Funds and Master Portfolios with administrative
services. If current restrictions under the Glass-Steagall Act preventing a
bank from sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Companies expect that Bank of America
would consider the possibility of offering to perform some or all of the
services now provided by Concord Holding Corporation or Concord Financial
Group, Inc. From time to time, legislation modifying such restriction has been
introduced in Congress which, if enacted, would permit a bank holding company
to establish a non-bank subsidiary having the authority to organize, sponsor
and distribute shares of an investment company. If this or similar legislation
were enacted, the Companies expect that Bank of America's parent bank holding
company would consider the possibility of one of its non-bank subsidiaries
offering to perform some or all of the services now provided by Concord Holding
Corporation or Concord Financial Group, Inc. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by a particular Company's Board of
Directors/Trustees.
ADMINISTRATOR
- -------------
Concord Holding Corporation (the "Administrator"), with
offices at 125 W. 55th Street, 11th Floor, New York, New York 10019, and 3435
Stelzer Road, Columbus, Ohio 43219 is an indirect wholly-owned subsidiary of
The BISYS Group, Inc. The Administrator also serves as administrator to
several other investment companies.
The Administrator (and/or its off-shore affiliate with respect
to the Intermediate Bond Master Portfolio, Blue Chip Master Portfolio, Asset
Allocation Master Portfolio, Corporate Bond Master Portfolio and International
Equity Master Portfolio) provides administrative services to the Funds and the
-99-
<PAGE> 573
Master Portfolios as described in the Funds' Prospectuses pursuant to separate
administration agreements for each Company. Each Master Portfolio's
administration agreement will continue in effect until October 31, 1996 and
thereafter for successive periods of one year, provided that such continuance
is specifically approved at least annually (a) by a vote of a majority of those
members of the Board of Trustees of the particular Master Trust who are not
parties to the administration agreement or "interested persons" of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the particular Master Trust or by
vote of a "majority of the outstanding voting securities" of such Master
Portfolio. Each Master Portfolio's administration agreement is terminable at
any time with respect to such Master Portfolio, without penalty, by its Board
of Trustees or by vote of a majority of such Master Portfolio's outstanding
voting securities upon 60 days' notice to the Administrator, or by the
Administrator, upon 90 days' written notice to such Master Portfolio. The
Company's administration agreement will continue in effect until October 31,
1996 and thereafter will be extended with respect to each Fund for successive
periods of one year, provided that each such extension is specifically approved
by (a) vote of a majority of those members of the Company's Board of Directors
who are not interested persons of any party to the agreement, cast in person at
a meeting called for the purpose of voting on such approval, and (b) the
Company's Board of Directors or by vote of a majority of the outstanding voting
securities of such Fund. The agreement is terminable at any time without
penalty by the Company's Board of Directors or by vote of a majority of the
outstanding voting securities of any Fund upon 60 days' notice to the
Administrator, or by the Administrator upon 90 days' notice to the Company.
The Companies have agreed to pay the Administrator fees for
its services as Administrator, accrued daily and payable monthly, at the annual
rates of .05% of the average daily net assets of the Intermediate Bond Master
Portfolio, Blue Chip Master Portfolio, Asset Allocation Master Portfolio,
Corporate Bond Master Portfolio and International Equity Master Portfolio; .15%
of the average daily net assets of the Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, Corporate Bond Fund, National Municipal Bond Fund and
International Equity Master Portfolio; .20% of the average daily net assets of
the Government and Capital Income Funds; and .30% of the average daily net
assets of the Aggressive Growth and California Tax-Exempt Bond Funds. The fees
payable to the Administrator are not subject to reduction as the value of each
Fund's and Master Portfolio's net assets increase. From time to time, the
Administrator may waive fees or reimburse a Fund or Master Portfolio for
expenses, either voluntarily or as required by certain state securities laws.
-100-
<PAGE> 574
For the fiscal years indicated, the following administration
fees (net of waivers) were paid or payable to the Administrator by the
Aggressive Growth, California Tax-Exempt Bond, Capital Income and U.S.
Government Securities Funds as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year ended February 29, Year ended February 28, Year ended February 28,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ $408,150 $508,320
- -------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ $454,249 $541,341
- -------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $414,134 $ 17,466
- -------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ $227,374 $301,881
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal years indicated, the Administrator waived
administration fees with respect to the Aggressive Growth, California
Tax-Exempt Bond, Capital Income and U.S. Government Securities Funds as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year ended February 29, Year ended February 28, Year ended February 28,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ $181,979 $143,325
- -------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $ 0 $172,065
- -------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Additionally, for the fiscal years indicated, the
Administrator reimbursed operating expenses of the Capital Income Fund as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year ended February 29, Year ended February 28, Year ended February 28,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
-101-
<PAGE> 575
<TABLE>
<S> <C> <C> <C>
Capital Income Fund $ $ 0 $33,887
</TABLE>
For the fiscal years indicated and for the period from the
commencement of operations through February 28, 1994, the Administrator waived
its entire administration fee with respect to the Intermediate Bond Fund and
the Intermediate Bond Master Portfolio, the Blue Chip Fund and the Blue Chip
Master Portfolio, the Asset Allocation Fund and the Asset Allocation Master
Portfolio and National Municipal Bond Fund and the Municipal Master Portfolio
as follows (No Administration fee data is provided for the International Equity
Fund and International Equity Master Portfolio, since the International Equity
Fund and International Equity Master Portfolio did not commence operations
until _______________, 1996):
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Period from
commencement of
operations(1)
through
Year Ended February 29, Year ended February 28, February 28,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $ $ 1,723 $ 22
- ---------------------------------------------------------------------------------------------------------
Intermediate Bond Master $ $33,431 $ 9,429
Portfolio
- ---------------------------------------------------------------------------------------------------------
Blue Chip Fund $ $ 5,833 $ 87
- ---------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $ $72,742 $15,001
- ---------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ $ 4,703 $ 52
- ---------------------------------------------------------------------------------------------------------
Asset Allocation Master $ $79,573 $17,965
Portfolio
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
1. The Intermediate Fund, Blue Chip Fund, Asset
Allocation Fund and National Municipal Bond Fund
commenced operations on January 24, 1994, January 13,
1994, January 18, 1994 and January 28, 1994,
respectively. The Intermediate Bond Master
Portfolio, Blue Chip Master Portfolio and Asset
Allocation Master Portfolio commenced operations on
December 6, 1993 and the Municipal Master Portfolio
commenced operations on January 28, 1994.
-102-
<PAGE> 576
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
National Municipal Bond $ $ 2,720 $ 46
Fund(2)
- ---------------------------------------------------------------------------------------------------------
Municipal Master Portfolio $ $ 896 $ 15
- ---------------------------------------------------------------------------------------------------------
</TABLE>
For the periods indicated, the Administrator waived its entire
administration fee with respect to the Corporate Bond Fund and the Corporate
Bond Master Portfolio as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Period April 25, 1994
(the date the
Predecessor Fund was
reorganized into the
Period October 1, 1994 Corporate Bond Fund)
Year ended February 29, through February 28, through September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $ $19,569 $24,407
- -----------------------------------------------------------------------------------------------------------
Corporate Bond Master $ $ 6,544 $ 8,175
Portfolio
- -----------------------------------------------------------------------------------------------------------
</TABLE>
For the period October 1, 1993 through April 25, 1994, and the
fiscal years ended September 30, 1993 and 1992, SPIM, the former adviser to the
Corporate Predecessor Fund, and not the Corporate Predecessor Fund, paid
Concord $26,157, $45,649 and $43,602, respectively, for certain administrative
services provided to the Corporate Predecessor Fund pursuant to a
Sub-Administrative Agreement between SPIM and Concord.
If total expenses borne (directly or indirectly) by any Fund
in any fiscal year exceed the expense limitations imposed by applicable state
securities regulations, a Company may deduct from the payments to be made with
respect to such Fund and/or Master Portfolio to Bank of America and the
Administrator,
- -----------------
2. Prior to ____________, 1996, the National Municipal
Bond Fund invested all of its assets in the Municipal
Master Portfolio. On ____________, 1996 the National
Municipal Bond Fund withdrew its assets from the
Municipal Master Portfolio and invested directly in
investment securities.
-103-
<PAGE> 577
respectively, or Bank of America and the Administrator each will bear, the
amount of such excess to the extent required by such regulations in proportion
to the fees otherwise payable to them for such year. Such amount, if any, will
be estimated, reconciled and effected or paid, as the case may be, on a monthly
basis. As of the date of this Statement of Additional Information, the most
restrictive expense limitation that may be applicable to a Company limits
aggregate annual expenses with respect to a Fund, including management and
advisory fees and the Funds' pro rata share of such expenses of their
corresponding Master Portfolio but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2-1/2% of the first $30 million of
its average daily net assets, 2% of the next $70 million, and 1-1/2% of its
remaining average daily net assets. During the course of the Company's fiscal
year, the Administrator and Bank of America may assume certain expenses and/or
not receive payment of fees of one or more of the Funds or Master Portfolios,
while retaining the ability to be reimbursed by such Funds or Master Portfolios
for such amounts prior to the end of the fiscal year. This will have the
effect of increasing yield to investors at the time such fees are not received
or amounts are assumed and decreasing yield when such fees or amounts are
reimbursed.
The Administrator will bear all expenses in connection with
the performance of its services under the administration agreements with the
exception of the fees charged by The Bank of New York (with respect to the
Non-Feeder Funds) and PFPC (with respect to the Feeder Funds and their
corresponding Master Portfolios) for certain fund accounting services which are
borne by the Funds and Master Portfolios. See "General Information--Custodian
and Transfer Agent" below. Expenses borne by the Funds and Master Portfolios
include taxes, interest, brokerage fees and commissions, if any, fees of Board
members who are not officers, directors, partners, employees or holders of 5%
or more of the outstanding voting securities of Bank of America or the
Administrator or any of their affiliates, SEC fees and state securities
qualification fees, advisory fees, administration fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
outside auditing and legal expenses, costs of maintaining corporate existence,
costs attributable to investor services, including without limitation telephone
and personnel expenses, costs of preparing and printing prospectuses and
Statements of Additional Information for regulatory purposes, cost of
shareholders' and interestholders' reports and corporate meetings and any
extraordinary expenses. Certain shareholder servicing (and/or distribution
fees with respect to the Non-Feeder Funds) in connection with Pacific Horizon's
shares are also paid by Pacific Horizon. See "Distributor and Plan Payments."
-104-
<PAGE> 578
The administration agreements provide that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Company,
the Funds, Master Trust I, or the Master Portfolios in connection with the
performance of the administration agreements, except a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties or
from the reckless disregard by it of its obligations and duties thereunder.
PFPC (and an off-shore affiliate of PFPC with respect to the
Intermediate Bond Fund, Blue Chip Fund, Asset Allocation Fund and Corporate
Bond Fund and their corresponding Master Portfolios) provides the Feeder Funds
and their corresponding Master Portfolios with certain accounting services
pursuant to separate fund accounting services agreements with the
Administrator. Under the fund accounting services agreements, PFPC has agreed
to provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect to the Feeder Funds and their corresponding
Master Portfolios. The monthly fees charged by PFPC under the fund accounting
services agreements are borne by the Feeder Funds and their corresponding
Master Portfolios.
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 Pacific Horizon. Shares are sold on a continuous basis by the Distributor.
The Distributor has agreed to use its best efforts to solicit orders for the
sale of Pacific Horizon's shares although it is not obliged to sell any
particular amount of shares. The distribution agreement shall continue in
effect with respect to each Fund until October 31, 1996. Thereafter, if not
terminated, the distribution agreement shall continue automatically for
successive terms of one year, provided that such continuance is specifically
approved at least annually (a) by a vote of a majority of those members of
Pacific Horizon's Board of Directors who are not parties to the distribution
agreement or "interested persons" of any such party, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by Pacific
Horizon's Board of Directors or by vote of a "majority of the outstanding
voting securities" of the Funds as to which the distribution agreement is
effective; PROVIDED, HOWEVER, that the distribution agreement may be terminated
by Pacific Horizon at any time, without the payment of any penalty, by vote of
a majority of Pacific Horizon's entire Board of Directors or by a vote of a
"majority of the outstanding voting securities" of such Funds on 60 days'
written notice to
-105-
<PAGE> 579
the Distributor, or by the Distributor at any time, without the payment of any
penalty, on 90 days' written notice to Pacific Horizon. The agreement will
automatically and immediately terminate in the event of its "assignment".
For the fiscal years ended February 29, 1996 and the period
from the commencement of operations through February 28, 1994, the Distributor
received sales loads in connection with the purchase of shares of the
Aggressive Growth, California Tax-Exempt Bond, U.S. Government Securities,
Capital Income, Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds as follows (No fees payable to the Distributor by the
International Equity Master Portfolio are described, since the International
Equity Master Portfolio did not commence operations until ____________, 1996):
<TABLE>
<CAPTION>
Fiscal Year Ended February 29, 1996
------------------------------------------------------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By distributor Distributor Bank of america
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ $ $
- --------------------------------------------------------------------------------------------------------------
National Municipal $ $ $
Bond Fund
- --------------------------------------------------------------------------------------------------------------
</TABLE>
-106-
<PAGE> 580
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, 1995
------------------------------------------------------------------------
Amount of Total
Amount of Total Sales Sales Load retained
Total Sales Load Load Retained By By Affiliates of
Refceived By Distributor Distributor Bank of America
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 340,853(1) $ 60,878 $257,259
- -------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ 322,982(1) $ 37,001 $268,563
- -------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 181,635(1) $ 21,022 $ 90,642
- -------------------------------------------------------------------------------------------------------------
Capital Income Fund $2,449,559(1) $201,638 $388,254
- -------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 53,285 $ 5,470 $ 47,815
- -------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 186,628 $121,377 $165,251
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 114,338 $ 30,504 $ 83,884
- -------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 85,535(1) $ 9,400 $ 74,860
- -------------------------------------------------------------------------------------------------------------
<FN>
- ---------------------
1 Balance was paid to selling dealers.
</TABLE>
-107-
<PAGE> 581
<TABLE>
<CAPTION>
Period from Commencement of Operations*
through February 28, 1994
------------------------------------------------------------------------
Amount of Total
Aount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $14,623 $1,628 $12,995
- -------------------------------------------------------------------------------------------------------------
Blue Chip Fund $22,924 $2,692 $20,232
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $11,896 $2,243 $ 9,653
- -------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $23,828(1) $2,650 $21,178
- -------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods October 1, 1994 through February 28, 1995 and
April 25, 1994 (the date the Corporate Predecessor Fund reorganized into the
Corporate Bond Fund) through September 30, 1994, the Distributor received sales
loads in connection with the purchase of shares of the Corporate Bond Fund as
follows:
- ----------------------
* The Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds commenced operations on January 24, 1994, January
13, 1994, January 18, 1994 and January 28, 1994, respectively.
1 Balance was paid to selling dealers.
-108-
<PAGE> 582
<TABLE>
<CAPTION>
Year ended February 29, 1996
--------------------------------------------------------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load retained By By Affiliates of
Received By Distributor Distributor Bank of America
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $ $ $
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Period October 1, 1994 through
February 28, 1995
--------------------------------------------------------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $11,175 $1,436 $9,326
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Period April 25, 1994 (the date the Predecessor Fund reorganized into
the Corporate Bond Fund) through September 30, 1994
--------------------------------------------------------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $1,485(1) $125 $1,175
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
1 Balance was paid to selling dealers.
-109-
<PAGE> 583
As the Corporate Predecessor Fund was a closed-end fund, no
commissions were paid during the period October 1, 1993 through April 24, 1994.
The following table shows all sales loads, commissions and
other compensation received by the Distributor directly or indirectly from each
of the Aggressive Growth Fund, California Tax-Exempt Bond Fund, U.S. Government
Securities Fund, Capital Income Fund, Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, National Municipal Bond Fund and Corporate Bond Fund
during each fund's fiscal year ended February 29, 1996. As of February 29,
1996, the International Equity Master Portfolio had not commenced operations.
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions(1) and Repurchase(2) Transactions sation(3)
----------- -------------- ------------ ------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc.
Aggressive Growth Fund $ $ $ $
California Tax-Exempt Bond $ $ $ $
Fund
U.S. Government Securities $ $ $ $
Fund
Capital Income Fund $ $ $ $
Intermediate Bond Fund $ $ $ $
Blue Chip Fund $ $ $ $
Asset Allocation Fund $ $ $ $
National Municipal
Bond Fund $ $ $ $
Corporate Bond Fund $ $ $ $
</TABLE>
- -------------------
(1) Represents amounts received from front-end sales charge on A shares.
(2) Represents amounts received from contingent deferred sales charges on
B shares. The basis on which such sales charges are paid is described
in the Prospectuses. No B shares were offered or sold during the
fiscal year covered by this chart.
(3) Represents the total of (i) amounts paid to the Administrator for
administrative services provided to the Fund (see "Management of the
Company-Administrator" above) and (ii) payments made under the
Shareholder Service Plan, the Distribution and Services Plan,
-110-
<PAGE> 584
Distribution Plan and Administrative Service and Shareholder Services
Plan (see discussion in next section).
THE SHAREHOLDER SERVICE PLAN. In addition to the sales loads
described above, the Distributor is entitled to payment by Pacific Horizon for
certain shareholder servicing expenses in addition to the sales loads on A
shares described above and in the prospectus under the Shareholder Service Plan
(the "Plan") adopted by Pacific Horizon. The Non-Feeder Funds have in the past
had a Distribution Plan pursuant to which payments were made for distribution
and related expenses; however, effective July 1, 1993 the Company's Board of
Directors eliminated the Distribution Plan.
Under the Shareholder Service Plan for A shares, Pacific
Horizon pays the Distributor, with respect to the Funds for (a) non-
distribution shareholder services provided by the Distributor to Service
Organizations and/or the beneficial owners of Fund shares, including, but not
limited to shareholder servicing provided by the Distributor at facilities
dedicated for use by Pacific Horizon, provided such shareholder servicing is
not duplicative of the servicing otherwise provided on behalf of the Funds, and
(b) fees paid to Service Organizations (which may include the Distributor
itself) for the provision of support services for shareholders for whom the
Service Organization is the dealer of record or holder of record or with whom
the Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may
include, among other things: (i) establishing and maintaining accounts and
records relating to Clients that invest in Fund shares; (ii) processing
dividend and distribution payments from the Funds on behalf of Clients; (iii)
providing information periodically to Clients regarding their positions in
shares; (iv) arranging for bank wires; (v) responding to Client inquiries
concerning their investments in Fund shares; (vi) providing the information to
the Funds necessary for accounting or subaccounting; (vii) if required by law,
forwarding shareholder communications from the Funds (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Clients; (viii) assisting in processing
exchange and redemption requests from Clients; (ix) assisting Clients in
changing dividend options, account designations and addresses; and (x)
providing such other similar services.
The Shareholder Service Plan provides that the Distributor is
entitled to receive payments for expenses on a monthly basis, at an annual rate
not exceeding .25% of the average daily net assets of the A shares of the Funds
during such month for shareholder servicing expenses. The calculation of a
Fund's average daily net assets for these purposes does not
-111-
<PAGE> 585
include assets held in accounts opened via a transfer of assets from trust and
agency accounts of Bank of America. Further, payments made out of or charged
against the assets of a particular Fund must be in payment for expenses
incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies
than can be immediately paid due to the percentage limitations described above,
the unpaid amount is carried forward from month to month while the Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under the Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid amounts or credits due under the Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
For the fiscal year ended February 29, 1996, the A shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation,
Corporate Bond and National Municipal Bond Funds were charged the following
amounts pursuant to the Shareholder Service Plan:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Amount of Total Amount of Total Amount of Total
Shareholder Service Shareholder Service Shareholder Service
Total Shareholder Fee Paid to Fee Paid to Bank of Fee Paid to Affiliates
Service Fee Distributor America of Bank of America
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-112-
<PAGE> 586
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 29, 1996, the International Equity Master
Portfolio had not commenced operations.
For the fiscal years indicated and for the period from the
commencement of operations through February 28, 1994, the Distributor waived
all fees payable under the Shareholder Service Plan with respect to the
Intermediate Bond, Blue Chip, Asset Allocation and National Municipal Bond
Funds as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Period from
Commencement of
Year ended February 29, Year Ended February 28, Operations* through
1996 1995 February 28, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $ $2,873 $36
- ---------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ $9,721 $146
- ---------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ $7,754 $86
- ---------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ $4,533 $77
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year and the periods indicated, the Distributor
waived all fees payable under the Shareholder Service Plan with respect to the
Corporate Bond Fund as follows:
- ---------------------
* The Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds commenced operations on January 24, 1994, January
13, 1994, January 18, 1994 and January 28, 1994, respectively.
-113-
<PAGE> 587
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Period April 25, 1994 (the
date the Predecessor Fund
Period October 1, 1994 was reorganized into the
Year ended February 29, through February 28, Corporate Bond Fund)
1996 1995 through September 30, 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $ $32,614 $40,679
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Payments for shareholder service expenses under the Plan are
not subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the
Plan, the Distributor provides that a report of the amounts expended under the
Plan, and the purposes for which such expenditures were incurred, will be made
to the Board of Directors for its review at least quarterly. In addition, the
Plan provides that the selection and nomination of the directors of Pacific
Horizon who are not "interested persons" thereof have been committed to the
discretion of the directors who are neither "interested persons" (as defined in
the 1940 Act) of Pacific Horizon nor have any direct or indirect financial
interest in the operation of the Plan (or related servicing agreements) (the
"Non-Interested Plan Directors").
Pacific Horizon understands that Bank of America and/or some
Service Organizations may charge their clients a direct fee for administrative
and shareholder services in connection with the holding of A shares. These
fees would be in addition to any amounts which might be received under the
Plan. Small, inactive long-term accounts involving such additional charges may
not be in the best interest of shareholders.
Pacific Horizon's Board of Directors has concluded that the
Plan will benefit the Funds and their A shareholders. The Plan is subject to
annual reapproval by a majority of the Non-Interested Plan Directors and is
terminable at any time with respect to any Fund by a vote of majority of such
Directors or by vote of the holders of a majority of the A shares of the Fund
involved. Any agreement entered into pursuant to the Plan with a Service
Organization is terminable with respect to any Fund without penalty, at any
time, by vote of the holders of a majority of the Non-Interested Plan
Directors, by vote of the holders of a majority of the A shares of such Fund,
by the Distributor or by the Service Organization. Each agreement will also
terminate automatically in the event of its assignment.
-114-
<PAGE> 588
THE DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN,
ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN. The Distributor is also entitled
to payment from the Company for distribution and service fees pursuant to the
Distribution and Services Plan adopted on behalf of the B shares and for
distribution fees pursuant to the Distribution Plan adopted on behalf of K
shares. Under the Distribution and Services Plan and Distribution Plan, the
Company may pay the Distributor for: (a) direct out-of-pocket promotional
expenses incurred by the Distributor in advertising and marketing B and K
shares; (b) expenses incurred in connection with preparing, printing, mailing,
and distributing or publishing advertisements and sales literature for B and K
shares; expenses incurred in connection with printing and mailing Prospectuses
and Statements of Additional Information to other than current B and K
shareholders; (c) periodic payments or commissions to one or more securities
dealers, brokers, financial institutions or other industry professionals, such
as investment advisors, accountants, and estate planning firms (severally, "a
Distribution Organization") with respect to a Fund's B and K shares
beneficially owned by customers for whom the Distribution Organization is the
Distribution Organization of record or holder of record of such B and K shares;
(d) the direct or indirect cost of financing the payments or expenses included
in (a) and (c) above; or (e) for such other services as may be construed, by
any court or governmental agency or commission, including the SEC, to
constitute distribution services under the 1940 Act or rules and regulations
thereunder. With respect to K shares, payments under the Distribution Plan are
not intended for distribution services to the extent they are not permitted
under the Employee Retirement Income Security Act of 1974, as amended.
Pursuant to the Distribution and Services Plan with respect to
B shares and Administrative and Shareholder Services Plan with respect to K
shares, the Company may also pay securities dealers, brokers, financial
institutions or other industry professionals, such as investment advisors,
accountants, and estate planning firms (severally, a "Service Organization")
for support services provided with respect to its Client's B and K shares.
Administrative and shareholder services provided may include some or all of the
following: (i) processing dividend and distribution payments from a Fund on
behalf of its Clients; (ii) providing statements periodically to its Clients
showing their positions in B and K shares; (iii) arranging for bank wires; (iv)
responding to routine Client inquiries concerning their investment; (v)
providing the information to the Funds necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from a Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its
Clients; (vii) aggregating and processing purchase, exchange, and redemption
requests from its Clients and placing net purchase, exchange, and redemption
orders for its
-115-
<PAGE> 589
Clients; (viii) providing Clients with a service that invests the assets of
their accounts pursuant to specific or pre-authorized instructions; (ix)
establishing and maintaining accounts and records relating to Clients; (x)
assisting Clients in changing dividend options, account designations and
addresses; or (xi) other similar services if requested by the Company.
The Distribution and Services Plan provides that the
Distributor is entitled to receive payments on a monthly basis at an annual
rate not exceeding 1.00% of the average daily net assets during such month of
the outstanding B, shares. Not more than 0.25% of such net assets will be used
to compensate Service Organizations for personal services provided to B
shareholders, and/or the maintenance of such shareholders' accounts and not
more than 0.75% of such net assets of B shares will be used for promotional and
other primary distribution activities.
The Distribution Plan provides that the Distributor is
entitled to receive payments on a monthly basis at an annual rate not exceeding
0.75% of the average daily net assets during such month of the outstanding K
shares. In addition, under the Administrative and Shareholder Services Plan,
the Distributor is entitled to receive payments on a monthly basis for
administrative services and shareholder services at an annual rate not
exceeding 0.75% and 0.25%, respectively, of the average daily net assets during
such month of the outstanding K shares. The total of all 12b-1 fees,
administrative service and shareholder service fees may not exceed, in the
aggregate, the annual rate of 1.00% of the average daily net assets of a Fund's
K shares.
Payments made out of or charged against the assets of a
particular class of shares of a particular Fund must be in payment for expenses
incurred on behalf of that class.
Payments for distribution expenses under the Distribution Plan
and Distribution and Services Plan (collectively, the "12b-1 Plans") are
subject to Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of [Company] shares." The Rule provides, among
other things, that an investment company may bear such expenses only pursuant
to a plan adopted in accordance with the Rule. In accordance with the Rule,
the 12b-1 Plans provide that a written report of the amounts expended under the
12b-1 Plans, and the purposes for which such expenditures were incurred, will
be made to the Board of Directors for its review at least quarterly. In
addition, the 12b-1 Plans provide that it may not be amended to increase
materially the costs which a Fund may bear for distribution pursuant to the
12b-1 Plans without shareholder approval and that other material amendments
-116-
<PAGE> 590
of the 12b-1 Plans must be approved by a majority of the Board of Directors,
and by a majority of the directors who are neither "interested persons" (as
defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the 12b-1 Plans, or in any agreements
entered into in connection with the 12b-1 Plans, by vote cast in person at a
meeting called for the purpose of considering such amendments (the
"Non-Interested Plan Directors"). The selection and nomination of the
directors of the Company who are not "interested persons" of the Company have
been committed to the discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plans and the Administrative and
Shareholder Services Plan will benefit the Funds and their B and K
shareholders. The 12b-1 Plans and the Administrative and Shareholder Services
Plan are subject to annual reapproval by a majority of the Company's Board of
Directors, including a majority of the Non-Interested Plan Directors and is
terminable without penalty at any time with respect to any Fund by a vote of a
majority of the Non-Interested Plan Directors or by vote of the holders of a
majority of the outstanding B or K shares of the Fund involved. Any agreement
entered into pursuant to the 12b-1 Plans and the Administrative and Shareholder
Services Plan with a Service Organization is terminable with respect to any
Fund without penalty, at any time, by vote of a majority of the Non-Interested
Plan Directors, by vote of the holders of a majority of the outstanding B or K
shares of such Fund, or by the Service Organization. Each agreement will also
terminate automatically in the event of its assignment.
As of February 29, 1996, the Fund did not offer B or K shares.
YIELD, TAX-EQUIVALENT YIELD AND TOTAL RETURN
- --------------------------------------------
From time to time, the yields, tax-equivalent yield (with
respect to the Municipal and California Tax-Exempt Bond Funds) and the total
returns of the Funds may be quoted in and compared to other mutual funds with
similar investment objectives in advertisements, shareholder reports or other
communications to shareholders. The Funds may also include calculations in
such communications that describe hypothetical investment results. (Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any Fund.) Such calculations may from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the
-117-
<PAGE> 591
value, not only of the original Fund investment, but also of the additional
Fund shares received through reinvestment. As a result, the value of the Fund
investment would increase more quickly than if dividends or other distributions
had been paid in cash. The Funds may also include discussions or illustrations
of the potential investment goals of a prospective investor (including but not
limited to tax and/or retirement planning), investment management techniques,
policies or investment suitability of a Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund and/or a Master Portfolio), as well as the views of the investment adviser
as to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund. The Funds may also include in
advertisements charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stocks, bonds, Treasury bills and shares of a Fund. In addition,
advertisements or shareholder communications may include a discussion of
certain attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Funds is generally available by
calling (800) 346-2087.
YIELD CALCULATIONS. The yield for the respective share
classes of a Fund are calculated by dividing the net investment income per
share (as described below) earned by the Fund during a 30-day (or one month)
period by the maximum offering price per share (including the maximum front-end
sales charge of an A share) on the last day of the period and annualizing the
result on a semi-annual basis by adding one to the quotient, raising the sum to
the power of six, subtracting one from the result and then doubling the
difference. The Fund's net investment income per share earned during the
period with respect to a particular class is based on the average daily number
of shares outstanding in the class during the period entitled to receive
dividends and includes dividends and interest earned during the period
attributable to that class minus expenses accrued for the period attributable
to that class, net of reimbursements. This calculation can be expressed as
follows:
-118-
<PAGE> 592
a-b
Yield = 2 [(----- + 1)to the 6th power - 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 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
-119-
<PAGE> 593
market value that are less than the then-remaining portion of the original
issue discount (market premium), the yield to maturity is based on the
market value.
With respect to mortgage or other receivables-backed
obligations which are expected to be subject to monthly payments of principal
and interest ("pay downs"), (a) gain or loss attributable to actual monthly pay
downs are accounted for as an increase or decrease to interest income during
the period; and (b) a Fund or Master Portfolio may elect either (i) to amortize
the discount and premium on the remaining security, based on the cost of the
security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if any, if the weighted
average maturity date is not available, or (ii) not to amortize discount or
premium on the remaining security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared and paid as a dividend shortly thereafter. A Fund's maximum offering
price per share for purposes of the formula includes the maximum sales load
imposed by the Fund on A shares -- currently 4.50% of the per share offering
price.
The National Municipal Bond Fund 's "tax-equivalent" yield for
a particular class is computed by dividing that portion of the National
Municipal Bond Fund 's yield for a particular class (calculated as above) that
is tax-exempt by one minus a stated income tax rate and adding the product to
that portion, if any, of the National Municipal Bond Fund 's computed yield for
a particular class that is not tax- exempt. Tax-equivalent yields assume the
payment of Federal income taxes at the stated rate. The California Tax-Exempt
Bond Fund's "tax- equivalent" yield for a particular class is computed by: (a)
dividing the portion of the California Tax-Exempt Bond Fund's yield for a
particular class (calculated as above) that is exempt from both Federal and
California state income taxes by one minus a stated combined Federal and
California State income tax rate; (b) dividing the portion of the California
Tax-Exempt Bond Fund's yield for a particular class (calculated as above) that
is exempt from Federal income tax only by one minus a stated Federal income tax
rate; and (c) adding the figures resulting from (a) and (b) above to that
portion, if any, of the California Tax-Exempt Bond Fund's yield for a
particular class that is not exempt from Federal income tax. The combined
Federal and California income tax rate used in calculating the California
Tax-Exempt Bond Fund's "tax equivalent" yield for the 30-day period ended
February 29, 1996 was ____%.
-120-
<PAGE> 594
Based on the foregoing calculations, the yields of the A
shares of the U.S. Government Securities, Capital Income, Intermediate Bond,
Asset Allocation and Corporate Bond Funds (after fee waivers and expense
reimbursements) for the 30-day period ended February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Yield
-----
<S> <C>
U.S. Government Securities Fund ____%
Capital Income Fund ____%
Intermediate Bond Fund ____%
Asset Allocation Fund ____%
Corporate Bond Fund ____%
</TABLE>
Based on the foregoing calculations, the A shares of the
California Tax-Exempt Bond Fund's yield and tax-equivalent yield (after fee
waivers) and the A shares of the National Municipal Bond Fund's yield and
tax-equivalent yield (after fee waivers and expense reimbursements) for the
30-day period ended February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C> <C>
California Tax-Exempt Bond Fund _____% ______%
National Municipal Bond Fund _____% ______%
</TABLE>
No B or K shares were issued or outstanding during the 30-day
period ended February 29, 1996.
TOTAL RETURN CALCULATIONS. The Funds compute their average
annual total returns separately for their separate share classes by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular share class to the ending
redeemable value of such investment in such class. This is done by dividing
the ending redeemable value of a hypothetical $1,000 initial payment by $1,000
and raising the quotient to a power equal to one divided by the number of years
(or fractional portion thereof) covered by the computation and subtracting one
from the result. This calculation can be expressed as follows:
-121-
<PAGE> 595
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
The Funds compute their aggregate total returns separately for
their separate share classes by determining the aggregate rates of return
during specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value (variable "ERV" in each formula) is determined by assuming
complete redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations. In
addition, the Funds' average annual total return and aggregate total return
quotations reflect the deduction of the maximum front-end sales load charged in
connection with the purchase of A shares and the deduction of any applicable
contingent deferred sales charge with respect to B shares.
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A Shares of the
Aggressive Growth, Capital Income, U.S. Government Securities, California
Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds for the years or periods indicated were as follows:
-122-
<PAGE> 596
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Period from
One-Year Five-Year Ten-Year Commencement of
Period Ended Period Ended Period Ended Operations*
February 29, February 29, February 29, through February
1996 1996 1996 29, 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund % % % %
-----------------------------------------------------------------------------------------------------
Capital Income Fund % % N/A %
(after fee waivers and
expense
reimbursements)
-----------------------------------------------------------------------------------------------------
U.S. Government % % N/A %
Securities Fund (after
fee waivers and
expense
reimbursements)
-----------------------------------------------------------------------------------------------------
California Tax-Exempt % % % %
Bond Fund (after fee
waivers)
-----------------------------------------------------------------------------------------------------
Intermediate Bond Fund % N/A N/A %
-----------------------------------------------------------------------------------------------------
Blue Chip Fund % N/A N/A N/A
-----------------------------------------------------------------------------------------------------
Asset Allocation Fund % N/A N/A N/A
-----------------------------------------------------------------------------------------------------
National Municipal % N/A N/A %
Bond Fund (after fee
waivers and expense
reimbursements)
-----------------------------------------------------------------------------------------------------
- --------------------
<FN>
* The Aggressive Growth, Capital Income, U.S. Government Securities,
California Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset
Allocation and National Municipal Bond Funds commenced operations on
March 31, 1984, September 25, 1987, January 7, 1988, March 30, 1984,
January 24, 1994, January 13, 1994, January 18, 1994 and January 28,
1994, respectively.
</TABLE>
-123-
<PAGE> 597
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
- ---------------------------------------------------------------------------------------------------------------
One-Year Period Five-Year Ten-Year Period Period from
Ended Period Ended Ended Commencement of
February 29, February 29, February 29, Operations through
1996 1996 1996 February 29, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund % % % %
- ---------------------------------------------------------------------------------------------------------------
Capital Income Fund % % N/A %
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Securities % % N/A %
Fund
- ---------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond % % % %
Fund
- ---------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund % N/A N/A %
- ---------------------------------------------------------------------------------------------------------------
Blue Chip Fund % N/A N/A %
- ---------------------------------------------------------------------------------------------------------------
Asset Allocation Fund % N/A N/A %
- ---------------------------------------------------------------------------------------------------------------
National Municipal Bond % N/A N/A %
Fund (after fee waivers
and expense reimbursements)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A shares of the
Corporate Bond Fund for the periods indicated were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Average Annual Total Returns
- ---------------------------------------------------------------------------------------------------------------
April 25, 1994 (the date
the Corporate Predecessor
October 1, 1994 Fund was reorganized into
Year ended February through February 28, the Corporate Bond Fund)
29, 1996 1995 through February 28, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
-124-
<PAGE> 598
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund N/A N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Aggregate Total Returns
- ---------------------------------------------------------------------------------------------------------------
April 25, 1994 (the date the
Predecessor Fund was
October 1, 1994 reorganized into the
Year ended February 29, through February 28, Corporate Bond Fund) through
1996 1995 February 28, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund 4.25% 4.66%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Based on the foregoing calculations, the respective average
annual total returns and aggregate total returns for the Corporate Predecessor
Fund for the one, five and ten-year periods ended April 24, 1994 were 1.92%,
1.92% and 8.71% and 51.41%, 11.79% and 203.74%, respectively; and for the
Corporate Predecessor Fund for the one, five and ten-year periods ended
September 30, 1993 were 14.30%, 14.30% and 10.79% and 67.00%, 11.15% and
188.02%, respectively.
No B or K shares of any of the Funds were outstanding during
any of the years or periods indicated.
The Funds may also advertise total return data without
reflecting sales charges in accordance with the rules of the SEC. Quotations
which do not reflect such sales charges will, of course, be higher than
quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
- ---------------------
Pacific Horizon is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. Pacific Horizon's
Charter authorizes the Board of Directors to issue up to two hundred billion
full and fractional common shares. Pursuant to the authority granted in the
Charter, the Board of Directors has authorized the issuance of twenty-two
classes of stock - Classes A through W Common Stock, $.001 par value per share,
representing interests in twenty-two separate investment portfolios. Class D
represents interests in the Class
-125-
<PAGE> 599
A shares of the Aggressive Growth Fund, Class D -- Special Series 3 represents
interests in the B shares of the Aggressive Growth Fund and Class D -- Special
Series 5 represents interests in the K shares of the Aggressive Growth Fund;
Class E represents interests in the A shares of the U.S. Government Securities
Fund, Class E -- Special Series 3 represents interests in the B shares of the
U.S. Government Securities Fund and Class E -- Special Series 5 represents
interests in the K shares of the U.S. Government Securities Fund; Class F
represents interests in the A shares of the Capital Income Fund, Class F --
Special Series 3 represents interests in the B shares of the Capital Income
Fund and Class F -- Special Series 5 represents interests in the K shares of
the Capital Income Fund; Class G represents interests in the A shares of the
California Tax-Exempt Bond Fund, Class G -- Special Series 3 represents
interests in the B shares of the California Tax-Exempt Bond Fund and Class G --
Special Series 5 represents interests in the K shares of the California
Tax-Exempt Bond Fund; Class M represents interests in the A shares of the
Intermediate Bond Fund, Class M -- Special Series 3 represents interests in the
B shares of the Intermediate Bond Fund and Class M -- Special Series 5
represents interests in the K shares of the Intermediate Bond Fund; Class N
represents interests in the A shares of the Blue Chip Fund, Class N -- Special
Series 3 represents interests in the B shares of the Blue Chip Fund and Class N
- -- Special Series 5 represents interests in the K shares of the Blue Chip Fund;
Class O represents interests in the A shares of the Asset Allocation Fund,
Class O -- Special Series 3 represents interests in the B shares of the Asset
Allocation Fund and Class O -- Special Series 5 represents interests in the K
Shares of the Asset Allocation Fund; Class Q represents interests in the A
shares of the National Municipal Bond Fund, Class Q -- Special Series 3
represents interests in the B shares of the National Municipal Bond Fund and
Class Q -- Special Series 5 represents interests in the K shares of the
National Municipal Bond Fund; Class T represents interests in the A shares of
the International Equity Master Portfolio, Class T -- Special Series 3
represents interests in the B shares of the International Equity Master
Portfolio and Class T -- Special Series 5 represents interests in the K shares
of the International Equity Master Portfolio. Class W represents interests in
the A shares of the Corporate Bond Fund, Class W -- Special Series 3 represents
interests in the B shares of the Corporate Bond Fund and Class W -- Special
Series 5 represents interests in the K shares of the Corporate Bond Fund.
Pacific Horizon's charter also authorizes the Board of Directors to classify or
reclassify any particular class of Pacific Horizon's shares into one or more
series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectuses, Pacific Horizon's shares will be
fully paid and
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non-assessable. For information concerning possible restrictions upon the
transferability of Pacific Horizon's shares and redemption provisions with
respect to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share
held, and fractional votes for fractional shares held, and will vote in the
aggregate and not by class or series except as otherwise required by the 1940
Act or other applicable law or when permitted by the Board of Directors.
Shares have cumulative voting rights to the extent they may be required by
applicable law.
Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as Pacific Horizon shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it
is clear that the interests of each Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. Under
Rule 18f-2 the approval of an investment advisory agreement or 12b-1
distribution plan or any change in a fundamental investment policy would be
effectively acted upon with respect to a Fund only if approved by a majority of
the outstanding shares of such Fund. However, the rule also provides that the
ratification of independent public accountants, the approval of principal
underwriting contracts and the election of directors may be effectively acted
upon by shareholders of Pacific Horizon voting without regard to particular
Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of Pacific Horizon's common stock (or of the shares of a Fund
voting separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2 discussed above) or by
Pacific Horizon's Charter, Pacific Horizon may take or authorize such action
upon the favorable vote of the holders of more than 50% of the outstanding
common stock of Pacific Horizon voting without regard to class.
THE MASTER PORTFOLIOS
- ---------------------
The Intermediate Bond Master Portfolio, Blue Chip Master
Portfolio, Asset Allocation Master Portfolio and Corporate Bond Master
Portfolio and International Equity Master Portfolio are separate series of
Master Investment Trust, Series I. The Master Trust's Declaration of Trust
authorizes its Board of Trustees to issue an unlimited number of interests of
beneficial interest and to establish and designate any unissued interests of
one or more additional series of interests. Investors in the Master Portfolio
are entitled to distributions
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arising from the net investment income and net realized gains, if any, earned
on investments held by the Master Portfolio. Investors are also entitled to
participate in the net distributable assets of the Master Portfolio in which
they hold beneficial interests on liquidation. Beneficial interests have no
preemptive rights, conversion or exchange rights.
REPORTS
- -------
Shareholders will receive unaudited semi-annual reports
describing the Master Portfolio's and Fund's investment operations and annual
financial statements together with the reports of the independent accountants
of the Portfolios and the Funds.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
- ----------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York
1028, has been appointed custodian for the Non-Feeder Funds. PNC Bank,
National Association, Broad and Chestnut Streets, Philadelphia, PA 19101 has
been appointed custodian for the Feeder Funds and their corresponding Master
Portfolios. The Bank of New York (with respect to the Non-Feeder Funds) and
PFPC (with respect to the International Equity Master Portfolio, the Feeder
Funds and their corresponding Master Portfolios) provide the Funds and Master
Portfolios with certain accounting services pursuant to Fund Accounting
Services Agreements with the Administrator. Both PFPC, which is located at 103
Bellevue Parkway, Wilmington, DE 19809, and PNC Bank, National Association are
wholly owned subsidiaries of PNC Bancorp, Inc., a bank holding company. Under
separate Fund Accounting Services Agreements, The Bank of New York and PFPC
have agreed to provide certain accounting, bookkeeping, pricing, dividend and
distribution calculation services with respect their respective Funds and
Master Portfolios. The monthly fees charged by The Bank of New York and PFPC
under the Fund Accounting Agreements are borne by the Funds and Master
Portfolios. As custodians, The Bank of New York and PNC Bank, N.A. each (i)
maintain separate account or accounts in the name of the respective Funds
and/or Master Portfolios, as appropriate (ii) hold and disburse portfolio
securities; (iii) make receipts and disbursements of money, (iv) collect and
receive income and other payments and distributions on account of portfolio
securities, (v) respond to correspondence from security brokers and others
relating to their respective duties and (vi) make periodic reports concerning
their duties.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Funds and Master
Portfolios.
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COUNSEL
- -------
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of Pacific Horizon, is a partner), 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, serves as counsel to the Companies and will
pass upon the legality of the shares offered hereby.
_______________________________________, acts as counsel to Bank of America and
as special California counsel for the California Tax-Exempt Bond Fund and has
reviewed the portions of the California Tax-Exempt Bond Fund's Prospectus and
this Statement of Additional Information concerning California taxes and the
description of the special considerations relating to California Municipal
Securities.
INDEPENDENT ACCOUNTANTS
- -----------------------
____________________ independent accountants, with offices at
_________________________________________, has been selected as independent
accountants of each Fund and Master Portfolio for the fiscal year ended
February 28, 1996.
FINANCIAL STATEMENTS AND EXPERTS
- --------------------------------
The Annual Reports for each Fund for their fiscal year ended
February 29, 1996 (the "Annual Reports") accompanies this Statement of
Additional Information. The financial statements and notes thereto in each
Annual Report are incorporated in this Statement of Additional Information by
reference, and have been audited by ____________________, whose report thereon
also appears in each Annual Report and is also incorporated herein by
reference. Such financial statements have been incorporated herein in reliance
on the report of ____________________, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
MISCELLANEOUS
- -------------
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares or interests of a
Fund, a Master Portfolio or a particular series means the affirmative vote of
the lesser of (a) more than 50% of the outstanding shares or interests of such
Fund, Master Portfolio or series or (b) 67% of the shares or interests of such
Fund, Master Portfolio or series present at a meeting at which more than 50% of
the outstanding shares or interests of such Fund, Master Portfolio or series
are represented in person or by proxy.
At ______, the name, address and share ownership of the
entities which held more than 5% of the outstanding.
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<PAGE> 603
At April 18, 1996, 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: BA Investment Services, Inc., For
the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 103,513,191.16 shares (41.74%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 15,918,652 shares
(6.42%); and BA Securities, Inc., 185 Berry Street, Third floor, San Francisco,
CA 94107, 87,503,156.79 shares (35.29%)
At April 18, 1996, 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: 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,
41,166,250.41 shares (33.41%); Comcare, Inc., 4001 North Third Street, Suite
120, Phoenix, AZ, 18,095,338.05 shares (14.69%); and Comcare, Inc., 4001 North
Third Street, Suite 120, Phoenix, AZ, 17,386,230.27 shares (14.11%).
At April 18, 1996, 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 and
Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New York, NY
10286, 134,710,270.030 shares (14.14%); BA Investment Services, Inc., For the
Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 191,421,422.65 shares (20.09%); and VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 548,133,382 shares
(57.53%).
At April 18, 1996, 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 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,
218,907,053.62 shares (18.89%); 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,
325,646,595.56 shares (28.10%).
At April 18, 1996, 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: BA Investment Services, Inc., For the
Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 100,129,783.70 shares (39.87%); VAR & Co.,
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<PAGE> 604
180 E. 5th Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz,
41,190,467 shares (16.40%); BA Securities, Inc., 185 Berry Street, Third floor,
San Francisco, CA 94107, 45,530,054.82 shares (18.13%); and Bank of America
National Trust and Savings Association and Private Bank, Attn: ACI Unit 8329,
P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, 28,206,277.29 shares
(11.23%).
At April 18, 1996, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Government Fund were as follows: Toasty, Ltd., Leslie L. Alexander, One
Greenway Plaza, Suite 645, Houston, TX 77046, 20,070,021.75 shares (9.79%);
Rocket Ball, Ltd., One Greenway Plaza, Suite 645, Houston, TX 77046,
20,903,317.14 shares (10.19%); 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,
39,405,934.93 shares (19.21%); Good Health Plan of Washington, Attn: Linda Lam
Ha, 1501 4th Avenue, Suite 500, Seattle, WA 98101, 12,854,471.02 shares
(6.27%); and Providence Health Care, Attn: Linda Lam Ha, 1501 4th Avenue,
Suite 500, Seattle, WA 98101-1621, 13,256,010.36 shares (6.46%).
At April 18, 1996, 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: BA Securities, Inc., 185 Berry Street,
Third floor, San Francisco, CA 94107, 171,703,966.02 shares (7.98%); Hare &
Co., Bank of New York, and Short Term Investment Funds, Attn: Bimal Saha, One
Wall Street, New York, NY 10286, 142,985,602.500 shares (6.64%); and BA
Investment Services, Inc., For the Benefit of Clients, P.O. Box 7042, Attn:
Unit #7852 - Bob Santilli, San Francisco, CA 94120, 1,508,792,962.99 shares
(70.10%).
At April 18, 1996, 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,
267,651,623.98 shares (16.80%); 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,
572,679,889.38 shares (35.95%).
At April 18, 1996, 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 Fund were as follows: BA Investment Services, Inc.,
For the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
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<PAGE> 605
Francisco, CA 94120, 39,343,026.66 shares (73.17%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 9,920,747 shares
(18.45%); and BA Securities, Inc., 185 Berry Street, Third floor, San
Francisco, CA 94107, 2,781,908.01 shares (5.17%)
At April 18, 1996, 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 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, 2,249,858.53 shares (6.62%); 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, 22,470,327.24 shares (66.12%).
At April 18, 1996, 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: BA Securities,
Inc., 185 Berry Street, Third floor, San Francisco, CA 94107, 201,240,826.46
shares (38.17%); BA Investment Services, Inc., For the Benefit of Clients, P.O.
Box 7042, Attn: Unit #7852 - Bob Santilli, San Francisco, CA 94120,
209,179,155.47 shares (39.67%); and Bank of America National Trust and Savings
Association and Private Bank, Attn: Common Trust Funds Unit 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 74,935,409.28 shares (14.21%).
At April 18, 1996, 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, 17,704,983.07 shares (10.39%); and BISYS Fund
Services, FBO Sweep Customers, Attn: Linda Zerbe, First and Market Building,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 83,095,222.95 shares
(48.76%).
At April 18, 1996, the name, address and share ownership of
the entities which held more than 5% of the outstanding A Shares of the
Corporate Bond Fund were as follows: Smith Barney Inc. Custodian, 388
Greenwich, 16th Floor, New York, NY 10013-2391 122,420.435 shares (6.17%); and
Dean Witter Reynolds, Inc. Stock Record Department, 5 World Trade Center, New
York, NY 10048, Attn: Al Dimino, 114,691 shares (5.78%).
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<PAGE> 606
At such dates, no other person was known by the Company to
hold of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
At such date, no other person was known by the Company to hold
of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectuses relating to the Funds and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the Commission
by paying the charges prescribed under its rules and regulations.
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<PAGE> 607
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
<PAGE> 608
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
A-2
<PAGE> 609
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
A-3
<PAGE> 610
interest of unsubordinated instruments having a maturity of one year or less
which are issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
A-4
<PAGE> 611
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating
A-5
<PAGE> 612
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
A-6
<PAGE> 613
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
A-7
<PAGE> 614
probable credit stature upon completion of construction or elimination of basis
of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
A-8
<PAGE> 615
strong ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes
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<PAGE> 616
in business, economic or financial conditions are unlikely to increase
investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
A-10
<PAGE> 617
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk.
A-11
<PAGE> 618
The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
<PAGE> 619
APPENDIX B
As stated in the Prospectuses, the Portfolios, may enter into
futures contracts and options for hedging purposes. Such transactions are
described in this Appendix B.
I. INTEREST RATE FUTURES CONTRACTS
-------------------------------
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to
that which it hopes to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term
bonds and investing in long-term bonds when interest rates are expected to
decline. However, because of the liquidity that is often available in the
futures market the protection is more likely to be achieved, perhaps at a lower
cost and without changing the rate of interest being earned by a Fund, through
using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by a Portfolio, as
seller, to deliver the specific type of financial instrument called for in the
contract at a specific future time for a specified price. A futures contract
purchase would create an obligation by a Portfolio, as purchaser, to take
delivery of the specific type of financial instrument at a specific future time
at a specific price. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
B-1
<PAGE> 620
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a
gain, and if the purchase price exceeds the offsetting sale price, the
Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. The Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury bonds
and notes; Government National Mortgage Association (GNMA) modified
pass-through mortgage-backed securities; three-month United States Treasury
bills; and ninety-day commercial paper. A Portfolio may trade in any futures
contract for which there exists a public market, including, without limitation,
the foregoing instruments.
EXAMPLES OF FUTURES CONTRACT SALE. A Portfolio would engage
in an interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in a
Portfolio tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The investment adviser wishes
to fix the current market value of this portfolio security until some point in
the future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. Such Portfolio might enter into futures
contract sales of Treasury bonds for an equivalent of 98. If the market value
of the portfolio security
B-2
<PAGE> 621
does indeed decline from 100 to 95, the equivalent futures market price for the
Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of
interest rates and the equivalent futures market price could rise above 98. In
this case, the market value of the portfolio securities, including the
portfolio security being protected, would increase. The benefit of this
increase would be reduced by the loss realized on closing out the futures
contract sale.
If interest rate levels did not change, the Portfolio in the
above example might incur a loss of 2 points (which might be reduced by an
off-setting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
EXAMPLES OF FUTURES CONTRACT PURCHASE. A Portfolio would
engage in an interest rate futures contract purchase when it is not fully
invested in long-term bonds but wishes to defer for a time the purchase of
long-term bonds in light of the availability of advantageous interim
investments, e.g., shorter-term securities whose yields are greater than those
available on long-term bonds. The Portfolio's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Portfolio would be endeavoring at the same time to eliminate
the effect of all or part of an expected increase in market price of the
long-term bonds that the Portfolio may purchase.
For example, assume that the market price of a long-term bond
that a Portfolio may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The investment adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Portfolio might enter into futures contracts purchases of Treasury
bonds for an equivalent price of 98. At the same time, the Portfolio would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an
B-3
<PAGE> 622
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise
from 98 to 103. In that case, the 5-point increase in the price that the
Portfolio pays for the long-term bond would be offset by the 5-point gain
realized by closing out the futures contract purchase.
The investment adviser could be wrong in its forecast of
interest rates; long-term interest rates might rise to above 10%; and the
equivalent futures market price could fall below 98. If short-term rates at
the same time fall to 10% or below, it is possible that the Portfolio would
continue with its purchase program for long-term bonds. The market price of
available long-term bonds would have decreased. The benefit of this price
decrease, and thus yield increase, will be reduced by the loss realized on
closing out the futures contract purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Portfolio would discontinue its
purchase program for long-term bonds. The yield on short-term securities in
the portfolio, including those originally in the pool assigned to the
particular long-term bond, would remain higher than yields on long-term bonds.
The benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase. In each transaction,
expenses would also be incurred.
II. MUNICIPAL BOND INDEX FUTURES CONTRACTS
--------------------------------------
A municipal bond index assigns relative values to the bonds
included in the index and the index fluctuates with changes in the market
values of the bonds so included. The Chicago Board of Trade has designed a
futures contract based on the Bond Buyer Municipal Bond Index. This Index is
composed of a number of term revenue and general obligation bonds, and its
composition is updated regularly as new bonds meeting the criteria of the Index
are issued and existing bonds mature. The Index is intended to provide an
accurate indicator of trends and changes in the municipal bond market. Each
bond in the Index is independently priced by six dealer-to-dealer municipal
bond brokers daily. The prices are then averaged and multiplied by a
coefficient. The coefficient is used to maintain the continuity of the Index
when its composition changes. The Chicago Board of Trade, on which futures
contracts based on this Index are traded, as well as other U.S. commodities
exchanges, are regulated by the Commodity Futures Trading Commission.
Transactions on such exchange are cleared through a clearing corporation, which
guarantees the performance of the parties to each contract.
B-4
<PAGE> 623
The National Municipal Bond Fund will sell index futures
contracts in order to offset a decrease in market value of its portfolio
securities that might otherwise result from a market decline. The Portfolio
may do so either to hedge the value of its portfolio as a whole, or to protect
against declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the National Municipal Bond Fund will
purchase index futures contracts in anticipation of purchases of securities.
In a substantial majority of these transactions, the National Municipal Bond
Fund will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
Closing out a futures contract sale prior to the settlement
date may be effected by the National Municipal Bond Fund's entering into a
futures contract purchase for the same aggregate amount of the index involved
and the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the National Municipal Bond Fund is paid the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the National Municipal Bond Fund pays the difference and realizes a
loss. Similarly, the closing out of a futures contract purchase is effected by
the National Municipal Bond Fund's entering into a futures contract sale. If
the offsetting sale price exceeds the purchase price, the Portfolio realizes a
gain, and if the purchase price exceeds the offsetting sale price, the National
Municipal Bond Fund realizes a loss.
Example of a Municipal Bond Index Futures Contract
- --------------------------------------------------
Consider a portfolio manager holding $1 million par value of
each of the following municipal bonds on February 2 in a particular year.
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- ----- ------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
The current value of the portfolio is $5,003,750.
To hedge against a decline in the value of the portfolio,
resulting from a rise in interest rates, the portfolio manager can use the
municipal bond index futures contract. The
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<PAGE> 624
current value of the Municipal Bond Index is 86-09. Suppose the portfolio
manager takes a position in the futures market opposite to his or her cash
market position by selling 50 municipal bond index futures contracts (each
contract represents $100,000 in principal value) at this price.
On March 23, the bonds in the portfolio have the following
values:
<TABLE>
<S> <C>
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
</TABLE>
The bond prices have fallen, and the portfolio has sustained a
loss of $130,312. This would have been the loss incurred without hedging.
However, the Municipal Bond Index also has fallen, and its value stands at
83-27. Suppose now the portfolio manager closes out his or her futures
position by buying back 50 municipal bond index futures contracts at this
price.
The following table provides a summary of transactions and the
results of the hedge.
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset
the loss in the cash market, the $8,437 loss is significantly lower than the
loss which would have been incurred without hedging.
The numbers reflected in this appendix do not take into
account the effect of brokerage fees or taxes.
III. STOCK INDEX FUTURES CONTRACTS
-----------------------------
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures
B-6
<PAGE> 625
contract is a bilateral agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to a specified dollar amount times
the difference between the stock index value (which assigns relative values to
the common stocks included in the index) at the close of the last trading day
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the underlying stocks in the index is made.
Some stock index futures contracts are based on broad market indices, such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index. In
contrast, certain exchanges offer futures contracts on narrower market indices,
such as the Standard & Poor's 100 or indices based on an industry or market
segment, such as oil and gas stocks. Futures contracts are traded on organized
exchanges regulated by the Commodity Futures Trading Commission. Transactions
on such exchanges are cleared through a clearing corporation, which guarantees
the performance of the parties to each contract.
The Aggressive Growth Fund and Capital Income Fund, Blue Chip
Master Portfolio, Asset Allocation Master Portfolio and International Equity
Master Portfolio will sell stock index futures contracts in order to offset a
decrease in market value of their respective portfolio securities that might
otherwise result from a market decline. The Portfolios may do so either to
hedge the value of their respective portfolios as a whole, or to protect
against declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the Portfolios will purchase stock index
futures contracts in anticipation of purchases of securities. In a substantial
majority of these transactions, the Portfolios will purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.
In addition, the Aggressive Growth Fund and Capital Income
Fund, Blue Chip Master Portfolio, Asset Allocation Master Portfolio and
International Equity Master Portfolio may utilize stock index futures contracts
in anticipation of changes in the composition of their respective portfolio
holdings. For example, in the event that a Portfolio expects to narrow the
range of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on
a more restricted index, such as an index comprised of securities of a
particular industry group. The Portfolios may also sell futures contracts in
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of their
respective portfolios will decline prior to the time of sale.
B-7
<PAGE> 626
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
B-8
<PAGE> 627
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Aggressive Growth Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that
is, market value decreased and a Portfolio had entered into an anticipatory
purchase hedge, or market value increased and a Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
B-9
<PAGE> 628
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Aggressive Growth Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining Value of the Fund
</TABLE>
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
IV. FUTURES CONTRACTS ON FOREIGN CURRENCIES
---------------------------------------
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Aggressive Growth Fund to hedge against exposure to fluctuations in exchange
rates between the U.S. dollar and other currencies arising from multinational
transactions.
V. MARGIN PAYMENTS
---------------
Unlike when a Portfolio purchases or sells a security, no
price is paid or received by the Portfolio upon the purchase or sale of a
futures contract. Initially, the Portfolio will be
B-10
<PAGE> 629
required to deposit with the broker or in a segregated account with the
Portfolio's custodian an amount of cash or cash equivalents, the value of which
may vary but is generally equal to 10% or less of the value of the contract.
This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Portfolio upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when a Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures
contract, the investment adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Portfolio's position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid by or released to the Portfolio, and the Portfolio realizes
a loss or gain.
VI. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
------------------------------------------
There are several risks in connection with the use of futures
in the Portfolios as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the future and
movements in the price of the securities which are the subject of the hedge.
The price of the future may move more than or less than the price of the
securities being hedged. If the price of the future moves less than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in
an unfavorable direction, the Portfolio would be in a better position than if
it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, this advantage will be partially offset by the
loss on the future. If the price of the future moves more than the price
B-11
<PAGE> 630
of the hedged securities, the Portfolio involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of securities being hedged
and movements in the price of futures contracts, a Portfolio may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the
investment adviser. Conversely, a Portfolio may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by
the investment adviser. It is also possible that, where the Portfolio has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Portfolio may decline. If this
occurred, the Portfolio would lose money on the future and also experience a
decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities before a Portfolio is able to invest its
cash (or cash equivalents) in securities (or options) in an orderly fashion, it
is possible that the market may decline instead; if the Portfolio then
concludes not to invest in securities or options at that time because of
concern as to possible further market decline or for other reasons, the
Portfolio will realize a loss on the futures contract that is not offset by a
reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
B-12
<PAGE> 631
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the price
of futures, a correct forecast of general market trends or interest rate
movements by the investment adviser may still not result in a successful
hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although
the Portfolios intend to purchase or sell futures only on exchanges or boards
of trade where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board of trade will
exist for any particular contract or at any particular time. In such event, it
may not be possible to close a futures investment position, and in the event of
adverse price movements, the Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by a Portfolio is also subject to
the investment adviser's ability to predict correctly movements in the
direction of the market. For example, if a Portfolio has hedged against the
possibility of a decline in the market adversely affecting securities held by
it and securities prices increase instead, the Portfolio will lose part of all
of the benefit to the increased value of its securities which it has
B-13
<PAGE> 632
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it may
have to sell securities to meet daily variation margin requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. A Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
VII. OPTIONS ON FUTURES CONTRACTS
----------------------------
Each Portfolio may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts
may frequently involve less potential risk to the Portfolios because the
maximum amount at risk is the premium paid for the options (plus transaction
costs).
VIII. OTHER HEDGING TRANSACTIONS
--------------------------
The U.S. Government Securities Fund and Capital Income Fund
and the Blue Chip, Intermediate Bond, Asset Allocation and International Equity
Master Portfolios presently intend to use interest rate futures contracts, the
Aggressive Growth Fund and the Blue Chip, Asset Allocation and International
Equity Master Portfolios presently intend to use stock index futures contract
(and foreign currency futures contracts (and related
B-14
<PAGE> 633
options) with respect to the Aggressive Growth Fund and International Equity
Master Portfolio) in connection with their hedging activities. Nevertheless,
each of these Portfolios is authorized to enter into hedging transactions in
any other futures or options contracts which are currently traded or which may
subsequently become available for trading. Such instruments may be employed in
connection with the Portfolios' hedging strategies if, in the judgment of the
investment adviser, transactions therein are necessary or advisable.
IX. ACCOUNTING AND TAX TREATMENT
----------------------------
Accounting for futures contracts and related options will be
in accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts
held by a Portfolio at the close of the Portfolio's taxable year will be
treated for federal income tax purposes as sold for their fair market value on
the last business day of such year, a process known as "marking-to-market."
Forty percent of any gain or loss resulting from such constructive sale will be
treated as short-term capital gain or loss and 60% of such gain or loss will be
treated as long-term capital gain or loss without regard to the length of time
the Portfolio holds the futures contract or option ("the 40%-60% rule"). The
amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those futures contracts or options will
be adjusted to reflect any capital gain or loss taken into account by a
Portfolio in a prior year as a result of the constructive sale of the contracts
or options. With respect to futures contracts to sell, which will be regarded
as parts of a "mixed straddle" because their values fluctuate inversely to the
values of specific securities held by a Portfolio, losses as to such contracts
to sell will be subject to certain loss deferral rules which limit the amount
of loss currently deductible on either part of the straddle to the amount
thereof which exceeds the unrecognized gain (if any) with respect to the other
part of the straddle, and to certain wash sales regulations. Under short sales
rules, which also will be applicable, the holding period of the securities
forming part of the straddle (if they have not been held for the long-term
holding period) will be deemed not to begin prior to termination of the
straddle. With respect to certain futures contracts and related options,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Portfolio may make an election
which will exempt (in whole or in part) those identified futures contracts from
being treated for federal income tax purposes as sold on the last business day
of the Portfolio's taxable year, but gains and
B-15
<PAGE> 634
losses will be subject to such short sales, wash sales and loss deferral rules
and the requirement to capitalize interest and carrying charges. Under
Temporary Regulations, a Portfolio would be allowed (in lieu of the foregoing)
to elect either (1) to offset gains or losses from portions which are part of a
mixed straddle by separately identifying each mixed straddle to which such
treatment applies, or (2) to establish a mixed straddle account for which gains
and losses would be recognized and offset on a periodic basis during the
taxable year. Under either election, the 40%-60% rule will apply to the net
gain or loss attributable to the futures contracts, but in the case of a mixed
straddle account election, not more than 50 percent of any net gain may be
treated as long-term and no more than 40 percent of any net loss may be treated
as short-term.
Certain foreign currency contracts entered into by the
Aggressive Growth Fund may be subject to the "marking-to-market" process, but
gain or loss will be treated as 100% ordinary income or loss. To receive such
federal income tax treatment, a foreign currency contract must meet the
following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon
which the settlement value of the contract depends; (2) the contract must be
entered into at arm's length at a price determined by reference to the price in
the interbank market; and (3) the contract must be traded in the interbank
market. The Treasury Department has broad authority to issue regulations under
the provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Foreign currency contracts entered into by the Fund may result in
the creation of one or more straddles for federal income tax purposes, in which
case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
With respect to the Aggressive Growth Fund, and Capital Income
Fund and the Intermediate Bond, Asset Allocation and International Equity
Master Portfolios, some investments may be subject to special rules which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to
the value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (i) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(ii) the accruing of certain trade receivables and payables; and (iii) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. However, regulated futures contracts and
non-equity options are generally
B-16
<PAGE> 635
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market
rules, unless an election is made to have such currency rules apply. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is
also treated as a transaction subject to the special currency rules. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions
subject to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated
consistently for purposes of the Code. "Section 988 hedging transactions" are
not subject to the mark-to-market or loss deferral rules under the Code. It is
anticipated that some of the non-U.S. dollar denominated investments and
foreign currency contracts that such Funds may make or may enter into will be
subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital
gain or loss and will not be segregated from the gain or loss on the underlying
transaction.
Qualification as a regulated investment company under the Code
requires that each Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of each
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains
from options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by a Fund from a partnership or trust is
treated for this purpose as derived with respect to the Fund's business of
investing in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Fund in the same manner as by the partnership or
trust.
B-17
<PAGE> 636
An additional requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross
income must be derived from gains realized on the sale or other disposition of
the following investments held for less than three moths: (1) stock and
securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). With respect to futures contracts and other financial
instruments subject to the marking-to-market rules, the Internal Revenue
Service has ruled in private letter rulings that a gain realized from such a
futures contract or financial instrument will be treated as being derived from
a security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the marking-to-market rules, and will be treated as
being derived from a security held for less than three months only if the
contract or instrument is terminated (or transferred) during the taxable year
(other than by reason of marking-to-market) and less than three months have
elapsed between the date the contract or instrument is acquired and the
termination date. In determining whether the 30% test is met for a taxable
year, increases and decreases in the value of each Fund's futures contracts and
other investments that qualify as part of a "designated hedge," as defined in
the Code, may be netted.
B-18
<PAGE> 637
PACIFIC HORIZON FUNDS, INC.
X Shares of the California Tax-Exempt Money Market Fund
Cross Reference Sheet
_________________________________
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C> <C>
10. Cover Page . . . . . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . . . . Table of Contents
12. General Information and History . . . . . The Company
13. Investment Objectives and Policies . . . . Investment Objectives and
Policies
14. Management of the Fund . . . . . . . . . . Management of the Fund
15. Control Persons and Principal Holders of Management of the Fund;
Securities Miscellaneous
16. Investment Advisory and Other Services . Management of the Fund;
Investment Adviser;
Administrator; Distributor;
Custodian and Transfer Agent
17. Brokerage Allocation and Other Practices . Portfolio Transactions
18. Capital Stock and Other Securities . . . . General Information;
Description of Shares
19. Purchase, Redemption and Pricing of . . . Additional Purchase and
Securities Being Offered Redemption Information
20. Tax Status . . . . . . . . . . . . . . . . Additional Information
Concerning Taxes
21. Underwriters . . . . . . . . . . . . . . . Management of the Fund;
Distributor
22. Calculation of Performance Data . . . . . Yield Information
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate Item,
so numbered in Part C to this Registration Statement.
<PAGE> 638
PACIFIC HORIZON FUNDS, INC.
X SHARES
OF THE
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
(INVESTMENT PORTFOLIO OF
PACIFIC HORIZON FUNDS, INC.)
__________________, 1996
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Yield Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
-------------------------
This Statement of Additional Information applies to the X
Shares of the California Tax-Exempt Money Market Fund (the "Fund") of Pacific
Horizon Funds, Inc. ("Pacific Horizon" or the "Company"). This Statement of
Additional Information is meant to be read in conjunction with the prospectus
dated ______________, 1996 with respect to X Shares of the Fund, as the same
may from time to time be revised (the "Prospectus"), and is incorporated by
reference in its entirety into such 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 relating to the Company's X Shares may be obtained by calling
Concord Financial Group, Inc. at (800) 332-3863.
-1-
<PAGE> 639
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
-2-
<PAGE> 640
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation and commenced operations on March 30, 1984. The Fund commenced
operations on December 6, 1989 by offering a single series of shares known as
Pacific Horizon Shares. On March 1, 1993 and February 24, 1996, the Company
began offering Horizon Service Shares and Horizon Shares, respectively, of the
Fund, and as of the date of this Statement of Additional Information the
Company began its public offering of Class X Shares of the Fund.
The Company offers other classes and series of shares,
including Pacific Horizon Shares, Horizon Shares and Horizon Service Shares in
the Fund and in other investment portfolios which are described in separate
Prospectuses and Statements of Additional Information. For information
concerning these other shares, contact the Distributor at the telephone number
stated on the cover page of this statement of additional information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Fund describes the investment objective
of the Fund. The following information supplements and should be read in
conjunction with the description of the investment objective and policies in
the Prospectus for the Fund.
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of
Directors, Bank of America National Trust and Savings Association ("Bank of
America") is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities for the Fund. Securities
purchased and sold by the Fund are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. During its
last three fiscal periods, the Fund did not pay any brokerage commissions. The
cost of securities purchased by the Fund from underwriters generally includes
an underwriting commission or concession, and the prices at which securities
are purchased from and sold to dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or
dealers, it is the Company's policy to seek the best overall terms available.
The investment advisory agreement between the Company and Bank of America
provides that, in assessing the best overall terms available for any
transaction,
-3-
<PAGE> 641
Bank of America shall consider factors it deems relevant, including the breadth
of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, the investment advisory agreement authorizes
Bank of America, subject to the approval of the Company's Board of Directors,
to cause the Company to pay a broker-dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that such
commission is deemed reasonable in terms of either that particular transaction
or the overall responsibilities of Bank of America to the Fund and the Company.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities, and
(2) analyses and reports concerning industries, securities, economic factors
and trends, portfolio strategy and the performance of accounts.
The Directors will periodically review the commissions paid by
the Company to consider whether the commissions, if any, paid over
representative periods of time appear to be reasonable in relation to the
benefits inuring to the Company. It is possible that certain of the
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Company or the Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment
companies.
Brokerage or research services so received are in addition to
and not in lieu of services required to be performed by Bank of America and do
not reduce the advisory fee payable to Bank of America by the Company. Such
services may be useful to Bank of America in serving both the Company and other
clients and, conversely, supplemental information obtained by the placement of
business of other clients may be useful to Bank of America in carrying out its
obligations to the Company. The Company will not acquire certificates of
deposit or other securities issued by Bank of America or its affiliates, and
will give no preference to certificates of deposit or other securities issued
by broker-dealers and financial service organizations ("Service
Organizations"). In addition, portfolio securities in general will be
purchased from and sold to Bank of America, Concord Financial Group, Inc. (the
"Distributor") and their affiliates acting as principal underwriter, syndicate
member, market-maker, dealer, broker or in any other similar capacity,
-4-
<PAGE> 642
provided such purchase, sale or dealing is permitted under the investment
Company Act of 1940 and the rules thereunder.
The Fund's annual portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the Fund's portfolio securities. The
calculation excludes all securities the maturities of which at the time of
acquisition were thirteen months or less. There is not expected to be any
portfolio turnover for the Fund for regulatory reporting purposes.
The Fund may participate, if and when practicable, in bidding
for the purchase of securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice only when Bank of America, in its sole
discretion, subject to guidelines adopted by the Board of Directors, believes
such practice to be in the Fund's interest.
Subsequent to its purchase by the Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The Board of Directors or Bank of America,
pursuant to guidelines established by the Board, will promptly consider such an
event in determining whether the Fund involved should continue to hold the
obligation, but will only continue to hold the obligation if retention is in
accordance with the interests of the Fund and applicable regulations of the
Securities and Exchange Commission (the "SEC"). In addition, it is possible
that unregistered securities purchased by the Fund in reliance upon Rule 144A
under the Securities Act of 1933 could have the effect of increasing the level
of the Fund's illiquidity to the extent that qualified institutional buyers
become, for a period, uninterested in purchasing these securities.
To the extent permitted by law, Bank of America may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the Investment
Company Act of 1940) or their parents held by the Company as of the close of
its most recent fiscal year. As of February 29, 1996:
-5-
<PAGE> 643
PORTFOLIO INSTRUMENTS
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, COMMERCIAL
PAPER AND SHORT-TERM NOTES. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specific return. Bankers' acceptances are
negotiable deposits or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank
(meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument at maturity). Certificates of deposit and bankers'
acceptances acquired by the Fund will be dollar-denominated obligations of
domestic or foreign banks having total assets at the time of purchase
(including assets of both domestic and foreign branches) in excess of $2.5
billion. Commercial paper consists of unsecured promissory notes issued by
corporations. Short-term notes acquired by the Fund may be issued by
commercial or investment banking firms, financing companies or industrial or
manufacturing concerns. Commercial paper and short-term notes, except for
variable and floating rate instruments, will normally have maturities of nine
months or less and fixed rates of return, although such instruments may have
maturities of up to thirteen months. Commercial paper and short-term notes
will consist of issues which, with respect to the Fund are "Eligible
Securities" as defined by the SEC. Eligible Securities consist of instruments
that are either rated at the time of purchase in the top two rating categories
by one or more unaffiliated NRSROs or issued by issuers with such ratings. See
the Appendix to this statement of additional information for a description of
the applicable NRSRO ratings. Unrated instruments (including instruments with
long- term but no short-term ratings) purchased by the Fund will be of
comparable quality as determined by Bank of America pursuant to guidelines
approved by the Board of Directors and Bank of America.
Holding Euro CDs, Yankee CDs, Yankee BAs, commercial paper or
other obligations of foreign issuers may subject the Fund to investment risks
that are different in some respects from those incurred by a fund which invests
only in obligations of domestic issuers. Such risks include future political
and economic developments, the possible imposition of withholding taxes by the
particular country in which the issuer is located on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits,
the possible establishment of exchange controls or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which
may be made and interest rates which may be
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charged. In addition, the profitability of the banking industry is dependent
largely upon the availability and cost of funds for the purpose of financing
lending operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels
of reserves, limited in the amount which they can loan to a single borrower,
and subject to other regulations designed to promote financial soundness.
However, such laws and regulations do not necessarily apply to the Euro CDs,
Yankee CDs, Yankee BAs and other foreign bank obligations that the Fund may
acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S.
Government and its agencies and instrumentalities include Treasury bills,
certificates of indebtedness, notes and bonds, Treasury strips, and issues of
such entities as the Federal Home Loan Banks, Federal Land Banks, Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Maritime Administration,
Resolution Funding Corporation, Tennessee Valley Authority and Federal National
Mortgage Association. The Fund will not acquire obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank.
Government National Mortgage Association ("GNMA") certificates
are U.S. Government agency mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans, issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations, are
either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. A "pool" or group of such mortgages is assembled and,
after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal
on each mortgage is guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. GNMA certificates differ from bonds in that principal
is paid back monthly by the borrower over the term of the loan rather than
returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
In addition to
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GNMA certificates, mortgage-backed securities issued by the Federal National
Mortgage Association ("FNMA") and by the Federal Home Loan Mortgage Corporation
("FHLMC") may also be acquired. Securities issued and guaranteed by FNMA and
FHLMC are not backed by the full faith and credit of the United States. If
either fixed or variable rate pass-through securities issued by the U.S.
Government or its agencies or instrumentalities are developed in the future,
the Fund reserves the right to invest in them, after making appropriate
disclosure to investors. Certain securities issued by all governmental
agencies may be prepaid. Prepayment of mortgages underlying most
mortgage-backed securities may reduce their current yield and total return.
During periods of declining interest rates, such prepayments can be expected to
accelerate and the Fund would be required to reinvest the proceeds at the lower
interest rates then available.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Fund may acquire
variable and floating rate instruments as described in the Prospectus.
Variable and floating rate instruments are frequently not rated by credit
rating agencies; however, unrated variable and floating rate instruments
purchased by the Fund will be determined by the investment adviser under
guidelines established by the Company's Board of Directors to be of comparable
quality at the time of purchase to rated instruments eligible for purchase by
the Fund. In making such determinations, the investment adviser will consider
the earning power, cash flows and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
There may not be an active secondary market with respect to a particular
variable or floating rate instrument purchased by the Fund. The absence of
such an active secondary market could make it difficult for the Fund to dispose
of the variable or floating rate instrument involved. In the event the issuer
of the instrument defaulted on its payment obligations, the Fund could, for
this or other reasons, suffer a loss to the extent of the default. Variable
and floating rate instruments may be secured by bank letters of credit and may
have maturities of more than thirteen months. In determining the Fund's
average weighted maturity and whether a variable or floating rate instrument
has a remaining maturity of thirteen months or less, each variable rate
instrument having a demand feature that entitles the Fund to receive the
principal amount thereof at any time, or at specified intervals not exceeding
thirteen months, in each case on not more than thirty days' notice, shall be
deemed by the Company to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period remaining until
the principal amount can be recovered through demand; each variable rate
instrument not having such a demand feature but having a stated maturity of
thirteen months or less or issued or guaranteed by
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the U.S. Government or its agencies will be deemed to have a maturity equal to
the period remaining until the next interest rate adjustment; each floating
rate instrument having a demand feature that entitles the Fund to receive the
principal amount thereof at any time, or at specified intervals not exceeding
thirteen months, in each case on not more than thirty days' notice, shall be
deemed to have a maturity equal to the period of time remaining until the
principal amount owed can be recovered through demand. Variable and floating
rate instruments which are not payable upon seven days' notice and which do not
have an active trading market are considered illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch
Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA
Limited and IBCA Inc. ("IBCA") represent their opinions as to the quality of
debt securities. However, ratings are general and are not absolute standards
of quality, and debt securities with the same maturity, interest rate and
rating may have different yields while debt securities of the same maturity and
interest rate with different ratings may have the same yield.
An issuer's obligations under its debt securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code and laws which
may be enacted by federal or state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or, in the case of governmental entities, upon
the ability of such entities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on, and principal of, its
debt securities may be materially adversely affected by litigation or other
conditions.
MUNICIPAL SECURITIES. Primarily all of the assets of the Fund
are invested in "Municipal Securities" (securities issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, authorities, agencies and
instrumentalities, the interest on which is exempt from regular Federal income
tax in the opinion of bond counselor to the issuer). The Fund intends that
under normal market conditions at least 80% of its net assets will be invested
in California Municipal Securities.
Municipal Securities include debt obligations issued by
governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment
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of general operating expenses and the extension of loans to public institutions
and facilities. In addition certain types of private activity bonds are issued
by or on behalf of public authorities to finance various privately-operated
facilities. Municipal Securities also include short-term tax anticipation
notes, bond anticipation notes, revenue anticipation notes and other forms of
short-term loan obligations. Such notes are issued with a short-term maturity
in anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues.
There are variations in the quality of Municipal Securities
between classifications (such as general obligation, revenue and moral
obligation issues) and within a particular classification, and the yields on
Municipal Securities depend upon a variety of factors, including general money
market conditions, the financial condition of the issuer, general conditions of
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. It should also be noted, with
respect to all Municipal Securities issued after August 15, 1986 (August 31,
1986 in the case of certain bonds), that the issuer must comply with certain
rules formerly applicable only to "industrial development bonds" which, if the
issuer fails to observe them, could cause interest on the Municipal Securities
to become taxable retroactive to the date of issue.
The payment of principal and interest on most Municipal
Securities purchased by the Fund will depend upon the ability of the issuers to
meet their obligations. The District of Columbia, each state, each of their
political subdivisions, agencies, instrumentalities and authorities and each
multi-state agency of which a state is a member is a separate "issuer" as that
term is used in this Statement of Additional Information and the Prospectus.
The non-governmental user of facilities financed by private activity bonds is
also considered to be an "issuer."
From time to time proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to
federal tax legislation passed in 1986, interest on certain private activity
bonds must be included in an investor's federal alternative minimum taxable
income, and corporate investors must include all tax-exempt interest in their
federal alternative minimum taxable income. (See the Prospectus under
"Dividends, Distributions and Taxes.") The Fund cannot predict what
legislation, if any, may be proposed in Congress or in the California
legislature in the future as regards the federal and California state personal
income tax status of interest on Municipal Securities in general, or California
Municipal Securities in particular, or which
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proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of Municipal Securities (and
California Municipal Securities) for investment by the Fund and the liquidity
and value of the Fund's portfolio. In such an event the Board of Directors
would reevaluate the Fund's investment objectives and policies and consider
changes in its structure or possible dissolution.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase
agreements with respect to its portfolio securities as indicated in the
Prospectus. Pursuant to such agreements, the Fund purchases securities from
financial institutions such as banks and broker-dealers which are deemed to be
creditworthy by the investment adviser under guidelines approved by the Board
of Directors, subject to the seller's agreement to repurchase and the Fund's
agreement to resell such securities at a specified date and price. The Fund
will neither enter into repurchase agreements with Bank of America or Bank of
America's affiliates, nor give preference to repurchase agreements with Service
Organizations. The repurchase price generally equals the price paid by the
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the Fund's
custodian or a sub-custodian or in the Federal Reserve/Treasury book-entry
system, and the Fund will make payment for such securities only upon receipt of
evidence of physical delivery of the securities or of such book entry. The
seller under a repurchase agreement will be required to deliver instruments the
value of which is 102% of the repurchase price (excluding accrued interest),
provided that notwithstanding such requirement, the adviser shall require that
the value of the collateral, after transaction costs (including loss of
interest reasonably expected to be incurred on a default), shall be equal to or
greater than the resale price (including interest) provided in the agreement.
If the seller defaulted on its repurchase obligation, the Fund would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
were less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans by the Fund under the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into
reverse repurchase agreements with respect to its securities. Whenever the
Fund enters into a reverse repurchase agreement, it will place in a segregated
account maintained with the Fund's custodian cash, U.S. Government securities
and other liquid high-grade debt securities having a value equal to the
repurchase price (including accrued interest) and will
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subsequently monitor the account for maintenance of such equivalent value.
Reverse repurchase agreements are considered to be borrowings by the Fund under
the Investment Company Act of 1940.
INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The Fund may purchase securities on a "when-issued," "forward
commitment" or "delayed settlement" basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). When the Fund agrees to purchase
securities on a when-issued, forward commitment or delayed settlement basis,
its custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets (cash or
liquid securities) in the separate account so that the value of the account
remains equal to the amount of the Fund's commitment. The Fund does not intend
to engage in these transactions for speculative purposes but only in
furtherance of its investment objectives. Because the Fund will set aside cash
or liquid investments to satisfy its purchase commitments in the manner
described, the Fund's liquidity and the ability of the investment adviser to
manage it may be affected in the event the Fund's forward commitments,
commitments to purchase when-issued securities and delayed settlements ever
exceeded 25% of the value of its assets.
The Fund will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing
the transaction. If deemed advisable as a matter of investment strategy,
however, the Fund may dispose of or renegotiate a commitment after it is
entered into, and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In these cases
the Fund may realize a taxable capital gain or loss.
When the Fund engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Fund's incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued
purchase, a forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account
when determining the market value of the Fund starting on the day the Fund
agrees to purchase the securities. The Fund does not earn interest on the
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securities it has committed to purchase until they are paid for and delivered
on the settlement date.
STAND-BY COMMITMENTS. The Fund may acquire "stand-by
commitments" with respect to Municipal Securities held in its portfolio. Under
a "stand-by commitment," a dealer agrees to purchase from the Fund, at the
Fund's option, specified Municipal Securities at a specified price.
The amount payable to the Fund upon its exercise of a
"stand-by commitment" is normally the amortized cost of the underlying
instruments plus accrued interest, if any. "Stand-by commitments" can be
acquired when the remaining maturity of the underlying Municipal Securities is
not greater than thirteen months, and are exercisable by the Fund at any time
before the maturity of such obligations. In determining net asset value, the
Fund values Municipal Securities on the basis of amortized cost without
reference to the presence of the "stand-by commitment," as described below. A
"stand-by commitment" may be sold, transferred or assigned by the Fund only
with the instrument involved.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for a "stand-by
commitment" either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). The total
amount paid in either manner for outstanding "stand-by commitments" held by the
Fund will not exceed 1/2 of 1% of the value of its total assets calculated
immediately after each "stand-by commitment" is acquired.
The Fund intends to enter into "stand-by commitments" only
with dealers, banks and broker-dealers which, in the investment adviser's
opinion, present minimal credit risks. The Fund's reliance upon the credit of
these dealers, banks and broker-dealers is secured by the value of the
underlying Municipal Securities that are subject to a commitment.
The Fund will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise their rights
thereunder for trading purposes. The acquisition of a "stand-by commitment"
would not affect the valuation or assumed maturity of the underlying Municipal
Securities, which would continue to be valued at amortized cost in accordance
with the ordinary method of valuation employed by the Fund. "Stand-by
commitments" which would be acquired by the Fund would be valued at zero in
determining net asset value. Where the Fund paid any consideration directly or
indirectly
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for a "stand-by commitment," its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the Fund.
"Stand-by commitments" would not affect the Fund's average weighted maturity.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company has no reason to
believe that the information summarized herein is not correct in all material
respects, this information has not been independently verified for accuracy or
thoroughness by the Company. Rather, the information presented herein was
culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California, available as of the date of this Prospectus. Further, the
estimates and projections presented herein should not be construed as
statements of fact. They are based upon assumptions which may be affected by
numerous factors and there can be no assurance that target levels will be
achieved.
ECONOMIC FACTORS. Fiscal Years Prior to 1994-95.
The 1989-90 Fiscal Year ended with revenues below estimates, so that the
State's budget reserve, the Special Fund for Economic Uncertainties (the
"Special Fund") was fully depleted by June 30, 1990. A recession began in
mid-1990, which severely affected State General Fund revenues, and increased
expenditures above initial budget appropriations due to greater health and
welfare costs. The State's budget problems in recent years have also been
caused by a structural imbalance in that the largest General Fund Programs --
K-14 education, health, welfare and corrections -- were increasing faster than
the revenue base, driven by the State's rapid population growth. These
pressures are expected to continue as population trends maintain strong demand
for health and welfare services, as the school age population continues to
grow, and as the State's corrections program responds to a "Three Strikes" law
enacted in 1994, which requires mandatory life prison terms for certain
third-time felony offenders.
As a result of these factors and others, from the late 1980's
until 1992-93, the State experienced a period of budget imbalance. During this
period, expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund approaching $2.8
billion at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and
for each fiscal year thereafter, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance. The
Legislature and Governor agreed
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on the following principal steps to produce Budget Acts in the years 1991-92 to
1993-94:
1. Significant cuts in health and welfare program
expenditures;
2. Transfers of program responsibilities and funding
from the State to local governments (referred to as "realignment"), couples
with some reduction in mandates on local government;
3. Transfer of about $3.6 billion in local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools under
Proposition 98;
4. Reduction in growth of support for higher education
programs, coupled with increases in student fees;
5. Revenue increases (particularly in the 1991-92 Fiscal
Year budget), most of which were for a short duration;
6. Increased reliance on aid from the federal government
to offset the costs of incarcerating, educating and providing health and
welfare services to illegal immigrants; and
7. Various one-time adjustments and accounting changes.
Despite these budget actions, the effects of the recession led
to large, unanticipated deficits in the Special Fund as compared to projected
positive balances. By the 1993-94 Fiscal Year, the accumulated deficit was so
large that it was impractical to budget to retire it in one year, so a two-year
program was implemented, using the issuance of revenue anticipation warrants to
carry a portion of the deficit over the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan was
implemented in 1994-95.
Another consequence of the accumulated budget deficits,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller issued registered warrants to pay a variety
of obligations representing prior years' or continuing
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appropriations, and mandates from court orders. Available funds were used to
make constitutionally-mandated payments, such as debt service on bonds and
warrants. Between July 1 and September 4, 1992 the State Controller issued a
total of approximately $3.8 billion of registered warrants. After that date,
all remaining outstanding registered warrants (about $2.9 billion) were called
for redemption from proceeds of the issuance of 1992 Interim Notes after the
budget was adopted.
In late spring of 1992, the State Controller issued revenue
anticipation warrants maturing in the following fiscal year in order to pay the
State's continuing obligations. The State was forced to rely increasingly on
external debt markets to meet its cash needs, as a succession of notes and
warrants were issued in the period from June 1992 to July 1994, often needed to
pay previously maturing notes or warrants. These borrowings were used also in
part to spread out the repayment of the accumulated budget deficit over the end
of a fiscal year, as noted earlier.
A key feature of the 1993-94 Budget Act was a plan to retire
by December 31, 1994 the $2.8 billion budget deficit which had been accumulated
by June 30, 1993 (the "Deficit Retirement Plan"). This 18-month plan used
existing statutory authority to borrow $2.8 billion externally. The 1993-94
Budget Act provided that $1.6 billion of the deficit elimination loan would be
repaid by December 23, 1993 from a portion of the proceeds of the $2.0 billion
1993 Revenue Anticipation Warrants issued on June 23, 1993. Legislation
enacted with the 1993-94 Budget Act directed the State Controller to issue $1.2
billion of registered reimbursement warrants in the 1993-94 Fiscal Year to fund
the balance of the accumulated deficit. Pursuant to this directive, the State
issued $1.2 billion of 1994 Revenue Anticipation Warrants, Series A (the
"Series A Warrants") in February 1994, which matured on December 21, 1994. The
law also created in the State Treasury a Deficit Retirement Fund. The State
Controller transferred from the General Fund to the Deficit Retirement Fund the
sum of $1.2 billion in two equal installments on September 15, 1994 and
December 15, 1994, which moneys were used to retire the Series A Warrants.
The Deficit Retirement Plan anticipated a combined program to
balance the budget over the 1993-94 and 1994-95 Fiscal Years, and projected a
General Fund balance of $260 million, on June 30, 1995. Because fiscal
conditions did not improve as projected in the 1993-94 Fiscal Year, the revenue
assumptions of the Deficit Retirement Plan could not be met, and the Governor
indicated in the June 1994 Revision that the General Fund condition would be
about $1 billion worse at June 30, 1994 than was projected at the start of the
year. Accordingly, the 1994-95 Budget Act anticipated deferring retirement of
about $1 billion of the carryover budget deficit to the 1995-96 Fiscal Year,
when
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it is intended to be fully retired. This 22-month Deficit Reduction Plan
relied on existing statutory authority to borrow $4 billion externally of which
approximately $1 billion is the carryover budget deficit. In addition, Chapter
136, Statutes of 1994, created in the State Treasury the Warrant Payment Fund.
The State Controller is directed to transfer from the General Fund to the
Warrant Payment Fund in September 1995, November 1995, January 1996 and April
1996 in four equal installments the amount necessary to retire the $4.0 billion
of revenue anticipation warrants maturing on April 25, 1996.
1994-95 Fiscal Year. The Government's Budget Proposal for the
1994-95 Fiscal Year, as updated in May and June 1994, recognized that the
accumulated deficit could not be rapid in one year, and proposed a two-year
solution designed to eliminate the accumulated budget deficit, estimated at
about $1.8 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projected General Fund revenues and transfers of $41.9 billion, $2.1
billion more than actual revenues received in 1993-94, and expenditures of
$40.9 billion, an increase of $1.6 billion from the prior year.
As a result of the improving economy, the Department of
Finance's final estimates for the fiscal year showed revenues and transfers of
$42.7 billion and expenditures of $42.0 billion, reducing the accumulated
budget deficit to about $600 million and reflecting the Administration's
forecast of an improving economy.
The principal features of the 1994-95 Budget Act are as
follows:
1. Receipt of additional federal aid of about $760
million for costs of refugee assistance and costs of incarceration and
medical care for illegal immigrants. Only about $33 million of this
amount was received, with about another $98 million scheduled to be
received in the 1995-96 Fiscal Year;
2. Reductions of approximately $1.1 billion in health
and welfare costs. A 2.3% reduction in Aid to Family with Dependent
Children payments (equal to about $56 million for the entire fiscal
year) has been temporarily suspended by court order pending appeal;
3. A General Fund increase of approximately $38 million
in support for the University of California and $65 million for
California State University, accompanied by student fee increases for
both the University of California and California State University;
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4. Proposition 98 funding for K-14 schools was increased
by $526 million from 1993-94 Fiscal Year levels, representing an
increase for enrollment growth and inflation. Consistent with
previous budget agreements, Proposition 98 funding provided
approximately $4,217 per student for K-12 schools, equal to the level
in the prior three years; and
5. Additional miscellaneous cuts ($500 million), fund
transfers ($255 million), and adjustment to prior years' legislation
concerning property tax shifts for local governments ($300 million).
The 1994-95 Budget Act contained no tax increases. Under
legislation enacted for the 1993-94 Budget Act, the renters' tax credit was
suspended for two years (1993 and 1994). A ballot proposition to permanently
restore the renters' tax credit after this year failed at the June, 1994
election. The Legislature enacted a further one-year suspension of the
renters' tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal
Year.
The State's cash flow management plan for the 1994-95 Fiscal
Year included the issuance of $4.0 billion of revenue Anticipation Warrants,
Series C and D, on July 26, 1994, to mature on April 25, 1996, as part of a
two-year plan to retire the accumulated State budget deficit. To assure
repayment of these warrants, the Legislature enacted a backup mechanism which
could result in automatic expenditure cuts if projected revenues did not meet
certain targets (the "Budget Adjustment Law").
The third and last step in the Budget Adjustment Law process
occurred on October 16, 1995, when the State Controller issued a report (the
"October Trigger Report") reviewing the estimated cash condition of the General
Fund for the 1995-96 Fiscal Year. The State Controller estimated that the
General Fund would have at least $1.4 billion of internal cash resources on
June 30, 1996 (i.e., external borrowing would not be needed on June 30, 1996).
As a result of this finding, certain provisions of the Budget Adjustment Law,
which could have ultimately led to automatic, across-the-board cuts in the
General Fund budget, will not have to be implemented. Likewise, an earlier
report issued on November 15, 1994, avoided implementation of any automatic
budget cuts in the 1994-95 fiscal year.
1995-96 Fiscal Year. With strengthening revenues and reduced
caseload growth based on an improving economy, the State entered the 1995-96
Fiscal Year budget negotiations with the smallest nominal "budget gap" to be
closed in many years.
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Nonetheless, serious policy differences between the Governor and Legislature
prevented timely enactment of the budget. The 1995-96 Budget Act was signed by
the Governor on August 3, 1995, 34 days after the start of the fiscal year.
The Budget Act projected General Fund revenues and transfers of $44.1 billion,
a 3.5 percent increase from the prior year. Expenditures were budgeted at
$43.4 billion, a 4 percent increase. The Department of Finance projected that,
after repaying the last of the carryover budget deficit, there would be a
positive balance of $28 million in the budget reserve, the Special Fund for
Economic Uncertainties, at June 30, 1996. The Budget Act also projected
Special Fund revenues of $12.7 billion and appropriated Special Fund
expenditures of $13.0 billion.
The Governor's Budget for the 1996-97 Fiscal Year, released on
January 10, 1996, updated the current year projections, so that revenues and
transfers are estimated to be $45.0 billion, and expenditures to be $44.2
billion. The Special Fund is projected to have a positive balance of about $50
million at June 30, 1996, and on that date available internal borrowable
resources (available cash, after payment of all obligations due) will be about
$2.2 billion. The Administration projects it will issue up to $2.0 billion of
revenue anticipation notes in April, 1996, to mature by June 30, 1996, to
assist in cash flow management for the final two months of the year, after
repayment of the $4.0 billion RAW issue on April 25, 1996.
The following are the principal features of the 1995-96
Budget:
1. Proposition 98 funding for schools and community
colleges was originally budgeted to increase by about $1.0 billion
(General Fund) and $1.2 billion total above revised 1994-95 levels.
Because of higher than projected revenues in 1994-95, an additional
$543 million ($91 per K-12 ADA) was appropriated to the 1994-95
Proposition 98 entitlement. A large part of this is a block grant of
about $54 per pupil for any onetime purpose. For the first time in
several years, a full 2.7 percent cost of living allowance was funded.
The budget compromise anticipates a settlement of the CTA v. Gould
litigation (discussed below). The Governor's 1996-97 Budget indicates
that, with revenues even higher than projected, Proposition 98
apportionments will exceed the amounts originally budgeted, reaching a
level of $4,500 per ADA;
2. Cuts in health and welfare costs totaling about $0.9
billion. Some of these cuts (totaling about $500 million) require
federal legislative or administrative approval, which was still
pending as of January 1996.
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3. A 3.5 percent increase in funding for the University
of California ($90 million General Fund) and the California State
University system ($24 million General Fund), with no increases in
student fees;
4. The Budget assumed receipt of $473 million in new
federal aid for costs of illegal immigrants, above commitments already
made by the federal government. In the Governor's 1996-97 Budget, the
Administration revised this figure downward to $278 million; and
5. General Fund support for the Department of
Corrections is increased by about eight percent over the
prior year, reflecting estimates of increased prison population,
but funding is less than proposed in the 1995 Governor's Budget.
1996-97 Fiscal Year. On January 10, 1996, the Governor
released his proposed budget for the next fiscal year (the "1996-97 Budget").
The Governor requested total General Fund appropriations of about $45.2
billion, based on projected revenues and transfers of about $45.6 billion,
which would leave a budget reserve in the Special Fund at June 30, 1997 of
about $400 million. The Governor renewed a proposal, which had been rejected
by the Legislature in 1995, for a 15 percent phased cut in individual and
corporate tax rates over three years (the budget proposal assumes this will be
enacted, reducing revenues in 1996-97 by about $600 million). There was also a
proposal to restructure trial court funding in a way which would result in a
$300 million decrease in General Fund revenues. The Governor requested
legislation to make permanent a moratorium on cost of living increases for
welfare payments, and suspension of a renters tax credit, which otherwise would
go back into effect in the 1996-97 Fiscal Year. He further proposed additional
costs in certain health and welfare programs, and assumed that costs previously
approved by the Legislature will receive federal approval. The Governor's
Budget proposes increases in funding for K-12 schools under Proposition 98, for
State higher education systems (with a second year of no student fee
increases), and for corrections. The Governor's Budget projects external cash
flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange
County, California and its Investment Pool (the "Pool") filed for bankruptcy
under Chapter 9 of the United States Bankruptcy Code. Approximately 187
California public entities, substantially all of which are public agencies
within the County, invested funds in the Pool. Many of the agencies have
various bonds, notes or other forms of indebtedness outstanding, in some
instances the proceeds of which were invested in the Pool.
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Various investment advisors were employed by the County to restructure the
Pool. Such restructuring led to the sale of substantially all of the Pool's
portfolio, resulting in losses estimated to be approximately $1.7 billion or
approximately 22% of amounts deposited by the Pool investors, including the
County. It is anticipated that such losses may result in delays or failures of
the County as well as investors in the Pool to make scheduled debt service
payments. Further, the County expects substantial budget deficits to occur in
Fiscal Year 1995 with possibly similar effects upon operations of investors in
the Pool.
Investor access to monies in the Pool subsequent to the filing
was pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i)
established a formula for distribution of all available cash and securities
from the Pool to the Pool investors, including the County, (ii) established
formulas for distribution among certain settling Pool investors of several
tranches of new County obligations to be payable from, and in some instances
secured by, certain designated sources of potential recoveries on Pool related
claims, and (iii) designated certain outstanding short term note obligations of
the County to be senior to or on a parity with certain of the new County
obligations. By order dated May 22, 1995, following distribution of all
available cash and securities from the Pool to the Pool investors, including
the County, the Bankruptcy Court dismissed the bankruptcy filing of the Pool
based upon the Court's finding that the Pool was not eligible for relief under
Chapter 9 of the Bankruptcy Code because it is not a municipality and it has
not been specifically authorized to file under Chapter 9 as required by the
Bankruptcy Code. In negotiations regarding a plan of adjustment for the
County, many municipal investors in the Pool have indicated a willingness to
subordinate their remaining claims against the County to those of other
creditors and to make their further recovery contingent on recovery by the
County in litigation with brokerage houses, investment advisors and other
defendants regarding the Pool's investments. On December 21, 1995, the County
filed a proposed plan based on this premise, pursuant to which most creditors
other than municipal investors would be paid in full or reinstated. On January
19, 1996, the County filed a disclosure statement with regard to this plan. As
of January 22, 1996, no hearing has yet been scheduled on the disclosure
statement.
Following its bankruptcy filing, the County has, with
Bankruptcy Court approval, made payments of scheduled principal and interest on
its outstanding obligations where no alternative source of payment (such as
reserve funds on deposit with indenture trustees, letters of credit, municipal
bond insurance
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policies or other alternative payment sources) was available. The County has
not replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In the proposed plan, the County proposes to cancel
obligations to make such set-asides for certain bonds, and to increase the
applicable interest rates in compensation. In addition, the County has failed
to satisfy its obligation to accept tenders of its $110,200,000 aggregate
principal amount of Taxable Pension Obligation Bonds, Series B, used to finance
County pension obligations. Interest at a rate set pursuant to the bond
documents has been timely paid on such Pension Bonds. The failure to satisfy
the contractual obligations discussed above may constitute defaults under the
documents governing such securities.
To June 30, 1995 there had been no default in payment of
scheduled interest and principal (excluding the tender payment described above
and the Note Debt hereinafter described) to holders of County securities,
although certain securities are scheduled to mature at various times thereafter
and the Fund is unable to predict whether or to what extent such securities
will be timely paid by the County. On June 27, 1995, the Bankruptcy Court
approved a Stipulation and an Extension Agreement that, offered to holders of
certain short term note obligations of the County ("Note Debt") who elected to
be treated thereunder: (i) extension of maturity dates to June 30, 1996; (ii)
payment of monthly interest at a rate below existing contract rates; (iii)
accrual of monthly interest equal to the difference between the amount paid and
the contract rate, plus a settlement adjustment of 0.95%; (iv) waiver of
post-bankruptcy interest recapture or disallowance; (v) waiver of defenses to
repayment of the Note Debt claims based on California limitations on municipal
indebtedness; and (vi) allowance of the Note Debt claims, subject to certain
reserved rights. The holders of in excess of 90% of the outstanding aggregate
principal amount of all Note Debt elected such treatment on July 7, 1995.
Certain of the holders did not approve the agreement and those notes, in the
amount of $2.8 million, were defaulted upon by the County on July 18, 1995.
Both S&P and Moody's have suspended or downgraded ratings on
various debt securities of the County and certain of the investors in the Pool
and, following the defeat of the proposition submitted to the voters on June
27, announced their intention to downgrade the County's debt to default status,
regardless of whether the Stipulation and Extension Agreement
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receives approval by holders of the Note Debt. On July 18, 1995, S&P declared
the Note Debt in default in spite of the approval of the Stipulation and
Extension Agreement. S&P further stated that it had no reason to believe that
the County would be able to fulfill the terms of the Stipulation and Extension
Agreement on June 30, 1996. Such suspensions or downgradings could affect both
price and liquidity of the County's securities. The Fund is unable to predict
(i) the occurrence of covenant and/or payment defaults with respect to
obligations of the County and/or investors in the Pool or (ii) the financial
impact of any such defaults or credit rating suspensions or downgradings upon
the value or liquidity of such securities.
The California Tax-Exempt Money Market Fund currently holds an
Orange County Note, with a par value of $4,500,000 that matures on June 30,
1996. The Orange County Note is supported by a Letter of Credit issued by PNC
Bank, National Association ("PNC"). BankAmerica Corporation has agreed to
reimburse PNC for any payments PNC may make under the Letter of Credit. The
Letter of Credit expires after June 30, 1996. On November 30, 1995, the
Company, on behalf of the California Tax-Exempt Money Market Fund, filed with
the United States Bankruptcy Court, Central District of California, a Proof of
Claim with respect to the Orange County Note.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain
California constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below.
REVENUE DISTRIBUTION. Certain California Municipal Securities
in the California Tax-Exempt Money Market Fund may be obligations of issuers
which rely in whole or in part on California State revenues for payment of
these obligations. Property tax revenues and a portion of the State's general
fund surplus are distributed to counties, cities and their various taxing
entities and the State assumes certain obligations theretofore paid out of
local funds. Whether and to what extent a portion of the State's general fund
will be distributed in the future to counties, cities and their various
entities is unclear.
SENATE BILL 671. In 1988, California enacted legislation
providing for a water's-edge combined reporting method if an election fee was
paid and other conditions met. On October 6, 1993, the Governor signed Senate
Bill 671 (Alquist) which modifies the unitary tax law by deleting the
requirements that a taxpayer electing to determine its income on a water's-edge
basis pay a fee and file a domestic disclosure spreadsheet and instead
requiring an annual information return. Significantly, the Franchise Tax Board
can no longer disregard a
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taxpayer's election. The Franchise Tax Board is reported to have estimated
state revenue losses from the Legislation as growing from $27 million in
1993-94 to $616 million in 1999-2000, but others, including Assembly Speaker
Willie Brown, disagreed with that estimate and asserted that more revenue will
be generated for California, rather than less, because of an anticipated
increase in economic activity and additional revenue generated by the
incentives in the Legislation.
PROPOSITION 13. Certain California Municipal Securities in
the California Tax-Exempt Money Market Fund may be obligations of issuers who
rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities
to increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, and on June 3, 1986, the California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the
1% limitation does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges on (i) any indebtedness approved by the
voters prior to July 1, 1978, or (ii) any bonded indebtedness for the
acquisition or improvement of real property approved on or after July 1, 1978,
by two-thirds of the votes cast by the voters voting on the proposition.
Section 2 of Article XIIIA defines "full cash value" to mean "the County
Assessor's valuation of real property as shown on the 1975/76 tax bill under
`full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement
Article XIIIA (Statutes of 1978, Chapter 292, as amended) provides that
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to
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July 1, 1978, and that each county will levy the maximum tax permitted by
Article XIIIA of $4.00 per $100 assessed valuation (based on the former
practice of using 25%, instead of 100%, of full cash value as the assessed
value for tax purposes). The legislation further provided that, for the
1978/79 fiscal year only, the tax levied by each county was to be apportioned
among all taxing agencies within the county in proportion to their average
share of taxes levied in certain previous years. The apportionment of property
taxes for fiscal years after 1978/79 has been revised pursuant to Statutes of
1979, Chapter 282, which provides relief funds from State moneys beginning in
fiscal year 1979/80 and is designed to provide a permanent system for sharing
State taxes and budget funds with local agencies. Under Chapter 282, cities
and counties receive more of the remaining property tax revenues collected
under Proposition 13 instead of direct State aid. School districts receive a
correspondingly reduced amount of property taxes, but receive compensation
directly from the State and are given additional relief. Chapter 282 does not
affect the derivation of the base levy ($4.00 per $100 assessed valuation) and
the bonded debt tax rate.
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be adjusted annually to reflect changes in consumer prices,
population and certain services provided by these entities. Article XIIIB also
provides that if these entities' revenues in any year exceed the amounts
permitted to be spent, the excess is to be returned by revising tax rates or
fee schedules over the subsequent two years.
Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to determine its
applicability to specific situations involving the State and local taxing
authorities. Depending upon the interpretation, Article XIIIB may limit
significantly a governmental entity's ability to budget sufficient funds to
meet debt service on bonds and other obligations.
PROPOSITION 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative
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constitutional amendment and statute called the "Classroom Instructional
Improvement and Accountability Act." Proposition 98 changed State funding of
public education below the university level and the operation of the State
Appropriations Limit, primarily by guaranteeing K-14 schools a minimum share of
General Fund revenues. Under Proposition 98 (modified by Proposition 111 as
discussed below), K-14 schools are guaranteed the greater of (a) in general, a
fixed percent of General Fund revenues ("Test 1"), (b) the amount appropriated
to K-14 schools in the prior year, adjusted for changes in the cost of living
(measured as in Article XIIIB by reference to State per capita personal income)
and enrollment ("Test 2"), or (c) a third test, which would replace Test 2 in
any year when the percentage growth in per capita General Fund revenues from
the prior year plus one half of one percent is less than the percentage growth
in State per capita personal income ("Test 3"). Under Test 3, schools would
receive the amount appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an additional small
adjustment factor. If Test 3 is used in any year, the difference between Test
3 and Test 2 would become a "credit" to schools which would be the basis of
payments in future years when per capital General Fund revenue growth exceeds
per capita personal income growth. Legislation adopted prior to the end of the
1988-89 Fiscal Year, implementing Proposition 98, determined the K-14 schools'
funding guarantee under Test 1 to be 40.3 percent of the General Fund tax
revenues, based on 1986-87 appropriations. However, that percent has been
adjusted to approximately 35 percent to account for a subsequent redirection of
local property taxes, since such redirection directly affects the share of
General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of
both houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIIIB limit to K-14 schools.
During the recent recession, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98 sources stayed almost constant at approximately $4,220 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
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In 1992, a lawsuit was filed, California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. As part of
the negotiations leading to the 1995-96 Budget Act, an oral agreement was
reached to settle this case. It is expected that a formal settlement
reflecting these conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million, while
schools will repay $825 million. The State share of the repayment will be
reflected as expenditures above the current Proposition 98 base circulation.
The schools' share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the current
base. Repayments are spread over the eight-year period of 1994-95 through
2001-02 to mitigate any adverse fiscal impact. Once a court settlement is
reached, and the Director of Finance certifies that such a settlement has
occurred, approximately $377 million in appropriations from the 1995-96 Fiscal
Year to schools will be disbursed in August 1996.
PROPOSITION 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1, on the June
5, 1990 ballot as Proposition 111, was approved by the voters and took effect
on July 1, 1990. Among a number of important provisions, Proposition 111
recalculates spending limits for the State and for local governments, allows
greater annual increases in the limits, allows the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduces the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removes the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts
in the base calculation for the next year, limits the amount of State tax
revenue over the limit which would be transferred to school districts and
community college districts, and exempts increased gasoline taxes and truck
weight fees form the State appropriations limit. Additionally, Proposition 111
exempts from the State appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative
provides the following: (i) requires that any tax for general governmental
purposes imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative body and
by a majority
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vote of the electorate of the governmental entity, (ii) requires that any
special tax (defined as taxes levied for other than general governmental
purposes) imposed by a local governmental entity be approved by a two-thirds
vote of the voters within that jurisdiction, (iii) restricts the use of
revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (viii) permits these provisions to
be amended exclusively by the voters of the State of California.
In September 1988, the California Court of Appeal in CITY OF
WESTMINSTER V. COUNTY OF ORANGE, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511
(Cal. Ct. App. 1988), held that Proposition 62 is unconstitutional to the
extent that it requires a general tax by a general law city, enacted on or
after August 1, 1985 and prior to the effective date of Proposition 62, to be
subject to approval by a majority of voters. The Court held that the
California Constitution prohibits the imposition of a requirement that local
tax measures be submitted to the electorate by either referendum or initiative.
It is not possible to predict the impact of this decision on charter cities, on
special taxes or on new taxes imposed after the effective date of Proposition
62.
PROPOSITION 87. On November 8, 1988, California voters
approved Proposition 87. Proposition 87 amended Article XVI, Section 16, of
the California Constitution by authorizing the California Legislature to
prohibit redevelopment agencies from receiving any of the property tax revenue
raised by increased property tax rates levied to repay bonded indebtedness of
local governments which is approved by voters on or after January 1, 1989. It
is impossible to predict whether the California Legislature will enact such a
prohibition nor is it possible to predict the impact of Proposition 87 on
redevelopment agencies and their ability to make payments on outstanding debt
obligations.
HEALTH CARE LEGISLATION. Certain California Municipal
Securities held by the California Tax-Exempt Money Market Fund may be
obligations which are payable solely from the revenues of
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health care institutions. Certain provisions under California law may
adversely affect these revenues and, consequently, payment on those Municipal
Securities.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation.
California law now provides that the State of California shall selectively
contract with hospitals to provide acute inpatient services to Medi-Cal
patients. Medi-Cal contracts currently apply only to acute inpatient services.
Generally, such selective contracting is made on a flat per diem payment basis
for all services to Medi-Cal beneficiaries, and generally such payment has not
increased in relation to inflation, costs or other factors. Other reductions
or limitations may be imposed on payment for services rendered to Medi-Cal
beneficiaries in the future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual
payments only to the extent the California legislature appropriates adequate
funding therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known
as "preferred provider organizations" ("PPOs"), which offer financial
incentives for subscribers who use only the hospitals which contract with the
plan. Under an exclusive provider plan, which includes most health maintenance
organizations ("HMOs"), private payors limit coverage to those services
provided by selected hospitals. Discounts offered to HMOs and PPOs may result
in payment to the contracting hospital of less than actual cost and the volume
of patients directed to a hospital under an HMO or PPO contract may vary
significantly from projections. Often, HMO or PPO contracts are enforceable
for a stated term, regardless of provider losses or of bankruptcy of the
respective HMO or PPO. It is expected that failure to execute and maintain
such PPO and HMO contracts would reduce a hospital's patient base or gross
revenues. Conversely, participation may maintain or increase the patient base,
but may result in reduced payment and lower net income to the contracting
hospitals.
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These California Municipal Securities may also be insured by
the State of California pursuant to an insurance program implemented by the
Office of Statewide Health Planning and Development for health facility
construction loans. If a default occurs on insured California Municipal
Securities, the State Treasurer will issue debentures payable out of a reserve
fund established under the insurance program or will pay principal and interest
on an unaccelerated basis from unappropriated State funds. At the request of
the Office of Statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983, to evaluate the adequacy of the reserve fund
established under the insurance program and based on certain formulations and
assumptions found the reserve fund substantially underfunded. In September of
1986, Arthur D. Little, Inc. prepared an update of the study and concluded that
an additional 10% reserve be established for "multi-level" facilities. For the
balance of the reserve fund, the update recommended maintaining the current
reserve calculation method. In March of 1990, Arthur D. Little, Inc. prepared
a further review of the study and recommended that separate reserves continue
to be established for "multi-level" facilities at a reserve level consistent
with those that would be required by an insurance company.
MORTGAGES AND DEEDS. Certain California Municipal Securities
in the California Tax-Exempt Money Market Fund may be obligations which are
secured in whole or in part by a mortgage or deed of trust on real property.
California has five principal statutory provisions which limit the remedies of
a creditor secured by a mortgage or deed of trust. Two limit the creditor's
right to obtain a deficiency judgment, one limitation being based on the method
of foreclosure and the other on the type of debt secured. Under the former, a
deficiency judgment is barred when the foreclosure is accomplished by means of
a nonjudicial trustee's sale. Under the latter, a deficiency judgment is
barred when the foreclosed mortgage or deed of trust secures certain purchase
money obligations. Another California statute, commonly known as the "one form
of action" rule, requires creditors secured by real property to exhaust their
real property security by foreclosure before bringing a personal action against
the debtor. The fourth statutory provision limits any deficiency judgment
obtained by a creditor secured by real property following a judicial sale of
such property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgement may be ordered against the debtor.
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Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights
under the power of sale contained in the mortgage or deed of trust are subject
to the constraints imposed by California law upon transfers of title to real
property by private power of sale. During the three-month period beginning
with the filing of a formal notice of default, the debtor is entitled to
reinstate the mortgage by making any overdue payments. Under standard loan
servicing procedures, the filing of the formal notice of default does not occur
unless at least three full monthly payments have become due and remain unpaid.
The power of sale is exercised by posting and publishing a notice of sale for
at least 20 days after expiration of the three-month reinstatement period. The
debtor may reinstate the mortgage, in the manner described above, up to five
business days prior to the scheduled sale date. Therefore, the effective
minimum period for foreclosing on a mortgage could be in excess of seven months
after the initial default. Such time delays in collections could disrupt the
flow of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold
that the private-right-of-sale proceedings violate the due process requirements
of the Federal or State Constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the California
Tax-Exempt Money Market Fund may be obligations which finance the acquisition
of single family home mortgages for low and moderate income mortgagors. These
obligations may be payable solely from revenues derived from the home
mortgages, and are subject to California's statutory limitations described
above applicable to obligations secured by real property. Under California
antideficiency legislation, there is no personal recourse against a mortgagor
of a single family residence purchased with the loan secured by the mortgage,
regardless of whether the creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on
such mortgage loans may be imposed only with respect to voluntary prepayments
made during the first five years during the term of the mortgage loan, and then
only if the borrower prepays an amount in excess of 20% of the original
principal amount of the mortgage loan in a 12-month period; a prepayment charge
cannot in any event exceed six months' advance
-31-
<PAGE> 669
interest on the amount prepaid during the 12-month period in excess of 20% of
the original principal amount of the loan. This limitation could affect the
flow of revenues available to an issuer for debt service on the outstanding
debt obligations which financed such home mortgages.
INVESTMENT LIMITATIONS
The Prospectus for the Fund sets forth certain fundamental
policies that may not be changed with respect to the Fund without the
affirmative vote of the holders of the majority of the Fund's outstanding
shares (as defined below under "Miscellaneous"). Similarly, the following
enumerated additional fundamental policies may not be changed with respect to
the Fund without such a vote of shareholders.
THE FUND MAY NOT:
1. Purchase or sell real estate (however, the Fund may,
to the extent appropriate to its investment objective, purchase securities
issued by companies investing in real estate or interests therein and may
purchase Municipal Securities secured by real estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of
exercising control.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets.
6. Make loans except that the Fund may purchase or hold
debt instruments and enter into repurchase agreements pursuant to its
investment objective and policies.
7. Invest in industrial revenue bonds where the payment
of principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation.
8. Purchase or sell commodity contracts, or invest in
oil, gas or mineral exploration or development programs (however, the Fund may,
to the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
-32-
<PAGE> 670
9. Purchase securities while its borrowings (including
reverse repurchase agreements) are outstanding.
10. Write or sell puts, calls, straddles, spreads, or
combinations thereof except that the Fund may acquire stand-by commitments with
respect to its Municipal Securities.
11. Purchase any securities which would cause 25% or more
of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that this limitation shall not apply
to Municipal Securities or governmental guarantees of Municipal Securities; and
provided, further, that for the purpose of this limitation only, industrial
development bonds that are backed only by the assets and revenues of a
non-governmental user shall not be deemed to be Municipal Securities.
* * *
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For purposes of Investment Limitation paragraph 11, the Fund
treats, in accordance with the current views of the staff of the SEC and as a
matter of non-fundamental policy that may be changed without a vote of
shareholders, all supranational organizations as a single industry and each
foreign government (and all of its agencies) as a separate industry.
For purposes of Investment Limitation paragraph 6, the Fund
may hold debt instruments whether such instruments are part of a public
offering or privately negotiated.
In order to permit the sale of shares in certain states, the
Fund may make commitments more restrictive than the investment policies and
limitations described above. The Company has agreed to the following
additional restrictions:
1. The Fund will not invest in oil, gas or mineral leases.
2. The Fund will not invest more than 5% of its net assets in
warrants (valued at the lower of cost or market), of which not more than 2% may
be warrants which are not listed on the New York or American Stock Exchanges.
Should the Fund determine that these commitments or any other
commitments are no longer in the best interests of the
-33-
<PAGE> 671
Fund, it will revoke such commitments by terminating sales of its shares in the
state involved.
PURCHASE AND REDEMPTION OF SHARES
IN GENERAL
The Company or its transfer agent may require any information
reasonably necessary to evidence that a redemption has been duly authorized.
Under the Investment Company Act of 1940 the Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period
during which the New York Stock Exchange is closed (other than customary
weekend and holiday closings), during which trading on such Exchange is
restricted, during which an emergency exists (as determined by the SEC by rule
or regulation) as a result of which disposal or valuation of portfolio
securities is not reasonably practicable or for such other periods as the SEC
may permit. The Fund may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.
In addition, the Fund may redeem shares involuntarily in
certain instances if such redemption is appropriate to carry out the Company's
responsibilities under the Investment Company Act of 1940. If the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable, the Fund may make payment wholly
or partly in readily-marketable securities or other property. In such an event
a shareholder would incur transaction costs in selling the securities or other
property. See "Net Asset Value" below for an example of when such form of
payment might be appropriate. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the Company's net asset value at the beginning of such
period.
Any institution purchasing shares on behalf of separate
accounts will be required to hold the shares in a single nominee name (a
"Master Account"). Institutions investing in more than one Fund offered by the
Company must maintain a separate Master Account for each Fund. Institutions
may arrange with the Fund's transfer agent for certain sub-accounting services
(such as purchase, redemption and dividend record keeping).
-34-
<PAGE> 672
NET ASSET VALUE
IN GENERAL. The Fund's net asset value per share is
calculated by dividing the total value of the assets belonging to the Fund,
less the value of any liabilities applicable to the Fund, by the total number
of outstanding shares of the Fund. The Fund's net asset value is calculated
separately from each other of the Company's Fund's net asset value. "Assets
belonging to" the Fund consist of the consideration received upon the issuance
of shares representing interests in the Fund together with all income,
earnings, profits and proceeds derived from the investment thereof, any
proceeds from the sale, exchange or liquidation of such investments, any funds
or payments derived from any re-investment of such proceeds, and a portion of
any general assets of the Company not belonging to the Fund. The Fund is
charged with the direct expenses of the Fund and with a share of the general
expenses of the Company. The determinations by the Board of Directors as to
direct and allocable expenses and the allocable portion of general assets with
respect to the various portfolios are conclusive. The expenses that are
charged to the Fund are borne equally by each share of the Fund except for
payments to Service Organizations, including BA Investment Services, Inc.
("BAIS"), and Rule 12b-1 fees that are borne solely by X Shares of the Fund,
payments to Service Organizations that are borne solely by Horizon Service
Shares and certain payments that are borne solely by Pacific Horizon Shares as
described in the Prospectuses for such Shares.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent at its Columbus office is a day
on which both the Fund's custodian and the New York Stock Exchange are open for
trading, except a "business day" does not include Martin Luther King, Jr. Day,
Columbus Day or Veteran's Day. In 1996 the holidays on which the New York
Stock Exchange is closed are: New Year's Day, President's Day, Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
AMORTIZED COST METHOD. The Fund uses the amortized cost
method of valuation in computing the net asset value of its shares for purposes
of sales and redemptions. Under this method the Fund values each of its
portfolio securities at cost on the date of purchase and thereafter assumes a
constant proportionate amortization of any discount or premium until maturity
of the security. As a result the value of a portfolio security for purposes of
determining net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method seems to provide certainty in
portfolio valuation it may result in periods during which values, as determined
by amortized cost, are higher or lower than the amount the Fund would receive
if it sold its portfolio securities.
-35-
<PAGE> 673
The market value of the securities in the Fund can be expected to vary
inversely with changes in prevailing interest rates. Thus, if interest rates
have increased from the time a security was purchased, such security, if sold,
might be sold at a price less than its amortized cost. Similarly, if interest
rates have declined from the time a security was purchased, such security, if
sold, might be sold at a price greater than its amortized cost. In either
instance, if the security is held to maturity, no gain or loss will be
realized.
In connection with its use of amortized cost valuation, the
Fund limits the dollar-weighted average maturity of its portfolio to not more
than 90 days and does not purchase any instrument with a remaining maturity of
greater than 397 calendar days. The Company's Board of Directors has also
established, pursuant to rules promulgated by the SEC, procedures that are
intended to stabilize the Fund's net asset value per share for purposes of
sales and redemptions at $1.00. Such procedures include the determination, at
such intervals as the Board deems appropriate, of the extent, if any, to which
the Fund's net asset value per share calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
1/2 of 1% the Board will promptly consider what action, if any, should be
initiated. If the Board believes that the amount of any deviation may result
in material dilution or other unfair results to investors or existing
shareholders, it will take such steps as it considers appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity, shortening the Fund's average portfolio maturity, withholding or
reducing dividends, reducing the number of the Fund's outstanding shares
without monetary consideration or determining net asset value per share by
using available market quotations. If the Fund reduces the number of its
outstanding shares without monetary consideration it will mail written notice
to shareholders at least three business days before the redemption and in the
notice will state the reason for the redemption and the fact that the
redemption may result in a capital loss to shareholders.
The Fund's administrator, Concord Holding Corporation (the
"Administrator"), may use a pricing service to value certain portfolio
securities where the prices provided are believed by the Administrator pursuant
to guidelines adopted by the Board of Directors to reflect the fair value of
such securities. In valuing the Fund's securities, the pricing service would
normally take into consideration such factors as yield, risk, quality,
maturity, type of issue, trading characteristics, special circumstances and
other factors it deems relevant in determining valuations for normal
institutional-sized trading
-36-
<PAGE> 674
units of debt securities and would not rely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the Company's Board of Directors. Additionally, in
determining market-based net asset value per share all portfolio securities for
which market quotations (or appropriate substitutes that reflect current market
conditions) are not readily available shall be valued at their fair value as
determined by the valuation committee in accordance with procedures established
by the Board of Directors.
X SHARES
Persons wishing to establish a Sweep Account at BAIS or
certain other Service Organizations should contact BAIS or a Service
Organization directly for appropriate instructions. Depending on the terms of
the Sweep Account, BAIS or its affiliates and Service Organizations or their
affiliates also may charge its customers fees for 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. BAIS or the particular Service Organization is
responsible for providing information concerning these services and any charges
to any customers who must authorize the purchase of shares prior to such
purchase.
Miscellaneous. Certificates for shares will not be issued.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or
(d) an emergency exists as determined by the SEC. (The Company may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in the 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 shares. The Company may also redeem shares
involuntarily if such redemption is
-37-
<PAGE> 675
appropriate to carry out the Company's responsibilities under the Investment
Company Act of 1940.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in readily
marketable securities or other property. In such an event, a shareholder would
incur transaction costs in selling the securities or other property. The
Company has committed that it will pay all redemption requests by a shareholder
of record in cash, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of $250,000 or 1% of the net asset value at
the beginning of such period.
MANAGEMENT OF THE FUND
Directors and Officers
- ----------------------
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue of Musick, Peeler & Garrett
Suite 410 (until April, 1993);
Pasadena, CA 91101-3005 Trustee, Master Investment
Trust, Series I (registered
investment company) (since
1993); former Director, Bunker
Hill Income Securities, Inc.
(registered investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive Officer,
Advisors Incorporated Fletcher Capital Advisors,
4 Upper Newport Plaza Incorporated, (registered
Suite 100 investment adviser) 1991
Newport Beach, CA 92660-2629 to date; Partner, 1991 Newport
Partners (private venture capital
firm), 1981 to date; Chairman of
the Board and Chief Executive
</TABLE>
-38-
<PAGE> 676
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Officer, First Pacific Advisors,
Inc. (registered investment adviser)
and seven investment companies
under its management, prior to
1983; former Allied Member,
New York Stock Exchange;
Chairman of the Board
of FPA Paramount Fund, Inc.
through 1984; Director, TIS
Mortgage Investment Company (real
estate investment trust); Trustee
and former Vice Chairman of the
Board, Claremont McKenna College;
Chartered Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill Asset Management
Page Mill Asset (a private investment company)
Management since 1991; Manager, Corporate
433 California Street Investments, Hewlett Packard
Suite 900 Company to from 1979 1991;
San Francisco, CA 94104 Trustee, Master Investment Trust,
Series I (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 Board,
17760 14th Ave., N.W. 1988 to date, Executive Director,
Seattle, WA 98177 1977 to 1988, Pacific Rim Bankers
Program (a non-profit educational
institution); Dean Emeritus, 1981
to date, Dean, 1964-81, Graduate
School of Business
</TABLE>
-39-
<PAGE> 677
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C>
Administration, University of
Washington; Director, Washington
Federal Savings & Loan
Association; Trustee, Seafirst
Retirement Funds (since 1993)
(registered investment company).
Cornelius J. Pings* 66 Chairman of President, Association of American
Association of American the Board and Universities, February 1993 to date;
Universities President Provost, 1982 to January 1993,
One DuPont Circle Senior Vice President for Academic
Suite 730 Affairs, 1981 to January 1993,
Washington, DC 20036 University of Southern California;
Trustee, Master Investment Trust,
Series I (since 1995).
Kenneth L. Trefftzs 83 Director Private Investor; formerly Distinguished
11131 Briarcliff Drive Emeritus Professor of Finance and Chairman
San Diego, CA 92131-1329 of the Department of Finance and Business
Economics of the Graduate School of
Business of the University of Southern
California; former Director, Metro Goldwyn
Mayer, Inc.; Director, Fremont General
Corporation (insurance and financial services
holding company); Director, Source Capital,
Inc. (closed-end investment company);
Director of three open-end investment
companies managed by First Pacific Advisors,
Inc.; formerly Chairman of the Board of
Directors (or Trustees) of nineteen
investment companies managed by American
Capital Asset Management, Inc.
</TABLE>
-40-
<PAGE> 678
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Richard E. Stierwalt Executive Chairman of the Board and Chief
125 W. 55th Street 40 Vice President Executive Officer, July 1993
New York, NY 10019 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, 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 date,
125 W. 55th Street President prior thereto Director and President
New York, NY 10019 of the Administrator and Distributor,
February 1987 to July 1993; Executive
Vice President, Seafirst Retirement
Funds (since 1993); Senior Vice
President, Shearson Lehman Brothers,
1978-1987.
Irimga McKay 35 Vice Senior Vice President, July 1993
1230 Columbia Street President to date, prior thereto First Vice
5th FL President of the Administrator and
San Diego, CA 92101 Distributor, November 1988 to July
1993; Vice President, 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.
</TABLE>
-41-
<PAGE> 679
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Stephanie L. Blaha 36 Assistant Vice Manager of Client Services of the
BISYS Fund Services President Administrator, March 1995 to date,
100 First Avenue, Suite 300 prior thereto Assistant Vice President
Pittsburgh, PA 15222 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 and Master
Investment Trust, Series I (since 1996);
Account Manager, AT&T American Transtech,
Mutual Fund Division, July 1989 to
October 1991.
Mark E. Nagle 36 Treasurer Senior Vice President, Fund Accounting
BISYS Fund Services Services, The BISYS Account Group, Inc.,
3435 Stelzer Road September 1995 to Present; Treasurer,
Columbus, OH 43219 Seafirst Retirement Funds (since 1996);
Senior Vice President Fidelity
Institutional Retirement Services
(1993 to September 1995); Fidelity
Accounting & Custody Services
(1981 to 1993).
Martin R. Dean 31 Assistant Manager of Fund Accounting of BISYS
BISYS Fund Services Treasurer Fund Services, May 1994 to Present;
3435 Stelzer Road Assistant Treaurer, Seafirst Retirement
Columbus, OH 43219 Funds (since 1996); Senior Manager
at KPMG Peat Marwick previously
1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm of Drinker
1345 Chestnut Street Biddle & Reath. Secretary, Master
Philadelphia National Bank Investment Trust, Series I, and
Building, Suite 1100 Seafirst Retirement Funds
Philadelphia, PA 19107
</TABLE>
-42-
<PAGE> 680
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
George O. Martinez 35 Assistant Senior Vice President and Director
3435 Stelzer Road Secretary of Legal and Compliance Services
Columbus, OH 43219 of the Administrator since April 1995;
Assistant Secretary, Seafirst Retirement
Funds (since 1995); prior thereto, Vice
President and Associate General Counsel,
Alliance Capital Management, L.P.
- -----------------------------
</TABLE>
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
The Audit Committee of the Board is comprised of all directors
and is chaired by Dr. Trefftzs. The Board does not have an Executive
Committee.
Each director is entitled to receive an annual fee of $25,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $20,000 per annum for his
services as President; Mr. Collins, in consideration of his years of service as
President and Chairman of the Board, receives an additional $40,000 per annum
in recognition of his years of service to the Company until February 28, 1997;
each member of a Committee of the Board is entitled to receive $1,000 for each
Committee meeting they participate in (whether or not held on the same day as a
Board meeting); and each Chairman of a Committee of the Board shall be entitled
to receive an annual retainer of $1,000 for his services as Chairman of the
Committee. The Fund, and each other fund of the Company, pays its
proportionate share of these amounts based on relative net asset values.
For the fiscal year ended February 29, 1996, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $____________; 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.
-43-
<PAGE> 681
Under a retirement plan approved by the Board of Directors,
including a majority of its directors who are not "interested persons" of the
Company, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer
then in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director provided as Chairman of the
Board.
Years of service for purposes of calculating the benefit
described above are based upon service as a director or Chairman after February
28, 1994. Retirement benefits in which a director has become vested may not be
reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer
payable to directors thereafter), and (ii) using the interest rate in effect as
of the date of the director's death or resignation by the Pension Benefit
Guaranty Corporation (or any successor thereto) for valuing immediate annuities
under terminating defined benefit pension plans. A director's election to
receive a single sum must be made in writing within the 30 calendar days after
the date the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before
March 1, 1994 as a director and possibly as Chairman, authorize the Company to
pay a retirement benefit following the director's death or resignation (unless
the director has vested benefits as a result of completing nine years of
service). Any such action shall be approved by the Board and by a majority of
the directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or
-44-
<PAGE> 682
as not more than ten annual payments (beginning the first anniversary of the
director's date of death or resignation and continuing for one or more
anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former
director is neither secured nor funded by the Company but shall be binding upon
its successors in interest. The payment of benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information about the
director/trustee fees of the Company for the fiscal year ended February 29,
1996.
<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 $________ $0 $0 $________
Director+
Douglas B. Fletcher $________ $0 $0 $________
Vice Chairman of the Board
Robert E. Greeley** $________ $0 $0 $________
Director
Kermit O. Hanson $________ $0 $0 $________
Director
Cornelius J. Pings $________ $0 $0 $________
President and Chairman of
the Board
Kenneth L. Trefftzs $________ $0 $0 $______
Director
- ------------------------------
<FN>
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I and Master Investment Trust, Series
II. As of ________________, 1996, Master Investment Trust, Series II
ceased operations.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Collins was President and Chairman of the Board of the Company
until August 31, 1995.
</TABLE>
-45-
<PAGE> 683
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 Fund, since the commencement of its operations. In the
investment advisory agreement, 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 Company. In rendering its advisory
services, Bank of America may utilize Bank officers from one or more of the
departments of the Bank which are authorized to exercise the fiduciary powers
of Bank of America with respect to the investment of trust assets. In some
cases, these officers may also serve as officers, and utilize the facilities,
of wholly-owned subsidiaries or other affiliates of Bank of America or its
parent corporation. For the services provided and expenses assumed pursuant to
the investment advisory agreement, the Company has agreed to pay Bank of
America fees, accrued daily and payable monthly, at the following annual rates:
.10% of the first $3 billion of the Fund's net assets, plus .09% of the next $2
billion of the Fund's net assets, plus .08% of the Fund's net assets over $5
billion. From time to time, Bank of America may waive fees or reimburse the
Company for expenses voluntarily or as required by certain state securities
laws.
For the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996, Bank of America was paid in the aggregate, pursuant
to the investment advisory agreements applicable to them, advisory fees (net of
waivers) of $269,869, $301,964 and $___________, respectively, by the Fund.
For the fiscal years ended February 28, 1994, February 28, 1995 and February
29, 1996, Bank of America in the aggregate, waived fees and reimbursed expenses
with respect to the Fund in the amount of $22,998, $0 and $____________,
respectively.
The Company's investment advisory agreement for the Fund
provides that Bank of America shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company in connection with the
performance of the investment advisory agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or negligence
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
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<PAGE> 684
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in INVESTMENT COMPANY INSTITUTE V. CAMP that the
Glass-Steagall Act prohibits a bank from operating a fund for the collective
investment of managing agency accounts. Subsequently, the Board of Governors
of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies.
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America and its affiliates may
perform the services for the Company contemplated by the investment advisory
agreement, the Prospectus, and this Statement of Additional Information without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations. It should be noted, however, that there have been no cases
deciding whether a bank may perform services comparable to those performed by
Bank of America and its affiliates and future changes in either federal or
state statutes and regulations relating to permissible activities of banks or
trust companies and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could prevent Bank of America and its affiliates from
continuing to perform such services for the Company or from continuing to
purchase Company shares for the accounts of its customers.
For a discussion of the Glass-Steagall Act in connection with
the Company's Shareholder Services Plan, see "Shareholder Services Plan" in the
Prospectuses for Horizon Service Shares.
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<PAGE> 685
On the other hand, as described herein, the Fund is currently
distributed by the Distributor, and the Administrator, its parent, provides the
Company with administrative services. If current restrictions under the
Glass-Steagall Act preventing a bank from sponsoring, organizing, controlling
or distributing shares of an investment company were relaxed, the Company
expects that Bank of America would consider the possibility of offering to
perform some or all of the services now provided by the Administrator or the
Distributor. From time to time, legislation modifying such restriction has
been introduced in Congress which, if enacted, would permit a bank holding
company to establish a non-bank subsidiary having the authority to organize,
sponsor and distribute shares of an investment company. It is not possible, of
course, to predict whether or in what form such legislation might be enacted or
the terms upon which Bank of America or such a non-bank affiliate might offer
to provide services for consideration by the Company's Board of Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with
principal offices at 3435 Stelzer Road, Columbus, Ohio 43219, is a wholly-owned
subsidiary of The BISYS Group, Inc. The Administrator also serves as
administrator to several other investment companies.
The Administrator provides administrative services for the
Fund as described in its Prospectus pursuant to a Basic Administrative Services
Agreement. The agreement will continue in effect with respect to the Fund
until October 31, 1996 and thereafter will be extended with respect to the Fund
for successive periods of one year, provided that each such extension is
specifically approved (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 cause and without penalty by the Company's Board of Directors
or by a vote of a majority of the Fund's outstanding shares upon 60 days'
notice to the Administrator, or by the Administrator upon 90 days' notice to
the Company.
For its services under the Basic Administrative Services
Agreement, the Administrator is entitled to receive an administration fee,
accrued daily and payable monthly, at the following annual rates: .10% of the
first $7 billion of the Fund's net assets, plus .09% of the next $3 billion of
the Fund's net assets, plus .08% of the Fund's net assets over $10 billion.
From time to time, the Administrator may waive fees or
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<PAGE> 686
reimburse the Company for expenses, either voluntarily or as required by
certain state securities laws.
For the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996 the Administrator was paid, pursuant to the
administration agreement then in effect, administration fees (net of waivers)
of $269,869, $301,618 and $____________, respectively, by the Fund. For the
fiscal years ended February 28, 1994, February 28, 1995 and February 29, 1996
aggregate fee waivers and expense reimbursements by the Administrator with
respect to the Fund were $22,998, $0 and $____________, respectively.
If total expenses borne by the Fund in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations, the
Company may deduct from the payments to be made with respect to the Fund to
Bank of America and the Administrator, respectively, or Bank of America and the
Administrator each will bear, the amount of such excess to the extent required
by such regulations. Such amount, if any, will be estimated and accrued daily
and paid on a monthly basis. As of the date of this Statement of Additional
Information, the most restrictive expense limitation that may be applicable to
the Company limits aggregate annual expenses with respect to the Fund,
including management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2-1/2% of the first $30 million of
its average daily net assets, 2% of the next $70 million and 1-1/2% of its
remaining average daily net assets. During the course of the Company's fiscal
year, the Administrator and Bank of America may prospectively waive payment of
fees and/or assume certain expenses of one or more of the Company's funds, as a
result of competitive pressures and in order to preserve and protect the
business and reputation of the Administrator and Bank of America. This will
have the effect of increasing yield to investors at the time such fees are not
received or amounts are assumed and decreasing yield when such fees or amounts
are reimbursed.
The Administrator will bear all expenses in connection with
the performance of its services under the Basic Administrative Services
Agreement for the Fund with the exception of fees charged by The Bank of New
York for certain fund accounting services which are borne by the Fund. See
"Custodian and Transfer Agent" below. Expenses borne by the Company include
taxes, interest, brokerage fees and commissions, if any, fees of directors who
are not officers, directors, partners, employees or holders of 5% or more of
the outstanding voting securities of Bank of America or the Administrator or
any of their affiliates, SEC fees and state securities qualification fees,
advisory fees, administrative fees, fees payable to Service Organizations,
charges of custodians,
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<PAGE> 687
transfer and dividend disbursing agents' fees, certain insurance premiums,
outside auditing and legal expenses, costs of maintaining corporate existence,
costs attributable to investor services, including without limitation telephone
and personnel expenses, costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes, cost of
shareholders' reports and corporate meetings and any extraordinary expenses.
The Basic Administrative Services Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law
or any loss suffered by the Fund in connection with the matters to which the
agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence in the performance of the Administrator's duties or from the
reckless disregard by the Administrator of its obligations and duties
thereunder.
DISTRIBUTOR
The Distributor acts as the exclusive distributor of the
shares of the Fund pursuant to a distribution agreement with the Company.
Shares are sold on a continuous basis by the Distributor as agent, although the
Distributor is not obliged to sell any particular amount of shares. No
compensation is payable by the Fund to the Distributor for its distribution
services. The distribution agreement shall continue in effect with respect to
the Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement shall continue automatically for successive terms of one
year, provided that such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Directors of the
Company who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Directors of the Company or
by vote of a "majority of the outstanding voting securities" of the Fund as to
which the distribution agreement is effective; provided, however, that the
distribution agreement may be terminated by the Company at any time, without
the payment of any penalty, by vote of a majority of the entire Board of
Directors of the Company or by a vote of a "majority of the outstanding voting
securities" of the Fund on 60 days' written notice to the Distributor, or by
the Distributor at any time, without the payment of any penalty, on 90 days'
written notice to the Company. This Agreement will automatically and
immediately terminate in the event of its "assignment."
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<PAGE> 688
THE DISTRIBUTION AND SERVICES PLAN. The Distributor is also
entitled to payment from the Company for distribution and service fees pursuant
to the Distribution and Services Plan (the "12b-1 Plan") adopted on behalf of
the Class X shares. Under the 12b-1 Plan, the Company may pay the Distributor
for: (a) direct out-of-pocket promotional expenses incurred by the Distributor
in advertising and marketing Class X shares; (b) expenses incurred in
connection with preparing, printing, mailing, and distributing or publishing
advertisements and sales literature for Class X shares; (c) expenses incurred
in connection with printing and mailing Prospectuses and Statements of
Additional Information to other than current Class X shareholders; (d) periodic
payments or commissions to one or more securities dealers, brokers, financial
institutions or other industry professionals, such as investment advisors,
accountants, and estate planning firms, including any of the Company's service
providers, (severally, "a Distribution Organization") with respect to the
Fund's Class X shares beneficially owned by customers for whom the Distribution
Organization is the Distribution Organization of record or holder of record of
such Class X shares; (e) the direct or indirect cost of financing the payments
or expenses included in (a) and (d) above; or (f) for such other services as
may be construed, by any court or governmental agency or commission, including
the SEC, to constitute distribution services under the 1940 Act or rules and
regulations thereunder.
Pursuant to the 12b-1 Plan, the Company may also pay a
Distribution Organization for administrative support services provided with
respect to its Clients Class X shares. Administrative services provided may
include some or all of the following: (i) processing dividend and distribution
payments from the Fund on behalf of its Clients; (ii) providing information
periodically to its Clients showing their positions in Class X shares; (iii)
arranging for bank wires; (iv) responding to routine Client inquiries
concerning their investment in Class X shares; (v) providing the information to
the Fund necessary for accounting or sub-accounting; (vi) if required by law,
forwarding shareholder communications from the Fund (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to its Clients; (vii) aggregating and processing
purchase, exchange and redemption requests from its Clients and placing net
purchase, exchange and redemption orders for its Clients; (viii) establishing
and maintaining accounts and records relating to Clients that invest in Class X
shares; (ix) assisting Clients in changing dividend options, account
designations and addresses; (x) developing, maintaining and operating systems
necessary to support Sweep Accounts; (xi) providing customers with a service
that invests the assets of their accounts in the shares pursuant to specific or
pre-authorized instructions; or (xii) other similar services if requested by
the Company.
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<PAGE> 689
The 12b-1 Plan for Class X shares provides that the
Distributor is entitled to receive payments on a monthly basis at an annual
rate not exceeding .55% of the average daily net assets during such month of
the outstanding Class X shares to which such 12b-1 Plan relates. Not more than
0.25% of such net assets will be used to compensate Service Organizations for
administrative services provided to Class X shareholders and/or the maintenance
support of such shareholders' accounts and not more than 0.30% of such net
assets will be used for promotional and other primary distribution activities.
Payments made out of or charged against the assets of a
particular class of shares of the Fund must be in payment for expenses incurred
on behalf of that class.
Payments for distribution expenses under the 12b-1 Plan are
subject to Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of [Company] shares." The Rule provides, among
other things, that an investment company may bear such expenses only pursuant
to a plan adopted in accordance with the Rule. In accordance with the Rule,
the 12b-1 Plan provides that a written report of the amounts expended under the
12b-1 Plan, and the purposes for which such expenditures were incurred, will be
made to the Board of Directors for its review at least quarterly. In addition,
the 12b-1 Plan provides that it may not be amended to increase materially the
costs which the Fund may bear for distribution pursuant to the 12b-1 Plan
without shareholder approval and that other material amendments of the 12b-1
Plan must be approved by a majority of the Board of Directors, and by a
majority of the directors who are neither "interested persons" (as defined in
the 1940 Act) of the Company nor have any direct or indirect financial interest
in the operation of the 12b-1 Plan, or in any agreements entered into in
connection with the 12b-1 Plan, by vote cast in person at a meeting called for
the purpose of considering such amendments (the "Non-Interested Plan
Directors"). The selection and nomination of the directors of the Company who
are not "interested persons" of the Company have been committed to the
discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan will benefit the Fund and its Class X
shareholders. The 12b-1 Plan is subject to annual reapproval by a majority of
the Company's Board of Directors, including a majority of the Non-Interested
Plan Directors and is terminable without penalty at any time with respect to
the Fund by a vote of a majority of the Non-Interested Plan Directors or by
vote of the holders of a majority of the outstanding Class X shares of the
Fund. Any agreement entered
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<PAGE> 690
into pursuant to the 12b-1 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 or by vote of the holders of a majority of the
outstanding Class X shares of the Fund. Each agreement will also terminate
automatically in the event of its assignment.
CUSTODIAN AND TRANSFER AGENT
The Company has appointed The Bank of New York, 90 Washington
Street, New York, New York 10286, as custodian for the Fund. Additionally,
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035
has been appointed as transfer and dividend disbursing agent for the Fund. For
its services as transfer and dividend disbursing agent to the Fund, BISYS Fund
Services, Inc. ("BISYS") receives a fee, payable monthly, at the annual rate of
$10,000 per Fund. For the fiscal year ended February 29, 1996, BISYS received
_________ for services as transfer and dividend disbursing agent.
TAXES
The following is only a summary of certain additional
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus for the Fund. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its shareholders, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are advised to consult their tax advisers with
specific reference to their own tax situations.
FEDERAL TAX CONSIDERATIONS
The Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, the
Fund expects to eliminate or reduce to a nominal amount the federal income
taxes to which it may be subject. If for any taxable year the Fund does not
qualify for the special federal tax treatment afforded regulated investment
companies, all of the Fund's taxable income would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders). In
such event, the Fund's dividend distributions (including amounts derived from
interest on Municipal Securities) 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.
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<PAGE> 691
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income (if any) and 90% of its tax-exempt income (if any) net of certain
deductions for each taxable year. In general, the Fund's investment company
taxable income will be its taxable income, subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The Fund will be
taxed on its undistributed investment company taxable income, if any.
The Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months (the "short-short
test"). Interest (including original issue and accrued market discount)
received by the Fund upon maturity or disposition of a security held for less
than three months will not be treated as gross income derived from the sale or
other disposition of such security within the meaning of this requirement.
However, any other income that is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of
securities for this purpose.
Any distribution of the excess of net long-term capital gains
over net short-term capital losses is taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held the Fund's
shares and whether such gains are received in cash or additional Fund shares.
The Fund will designate such a distribution as a capital gain dividend in a
written notice mailed to shareholders after the close of the Fund's taxable
year.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%; however, because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (or at a maximum effective marginal rate of 39% in
the case of corporations having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income for each calendar year and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient
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<PAGE> 692
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or gross sale
proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
At February 29, 1996, the Fund, had unused capital loss
carryovers of approximately $____________ (of which $____________ will expire
in fiscal 2002 and $____________ will expire in fiscal 2003), respectively,
available for federal income tax purposes to be applied against future capital
gains, if any.
The policy of the Fund is to pay each year as exempt-interest
dividends substantially all the Fund's Municipal Securities interest income net
of certain deductions. An exempt-interest dividend is any dividend or part
thereof (other than a capital gains dividend) paid by the Fund and designated
as an exempt-interest dividend in a written notice mailed to shareholders after
the close of the Fund's taxable year. However, the aggregate amount of
dividends so designated by the Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Fund
during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
for any taxable year which qualifies as exempt-interest dividends will be the
same for all shareholders receiving dividends from the Fund for such year. In
order for the Fund to pay exempt-interest dividends for any taxable year, at
the close of each quarter of the Fund's taxable year at least 50% of the
aggregate value of the Fund's assets must consist of exempt-interest
obligations.
Exempt-interest dividends may be treated by shareholders of
the Fund as items of interest excludable from their gross income under Section
103(a) of the Code. However, each shareholder is advised to consult his or her
tax adviser with respect to whether exempt-interest dividends would retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" or a "related person" to such user with respect to
facilities financed through any of the tax-exempt obligations held by the Fund.
A "substantial user" is
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<PAGE> 693
defined under U.S. Treasury Regulations to include a non-exempt person who both
(1) regularly uses a part of such facilities in his or her trade or business
and (2) whose gross revenues derived with respect to the facilities financed by
the issuance of bonds are more than 5% of the total revenues derived by all
users of such facilities, who occupies more than 5% of the usable area of such
facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. A "related person" includes certain
related natural persons, affiliated corporations, partners and partnerships and
S corporations and their shareholders. Interest on indebtedness incurred by a
shareholder to purchase or carry shares of the Fund generally is not deductible
for federal income tax purposes.
Income itself exempt from federal income taxation will be
considered in addition to adjusted gross income when determining whether Social
Security payments received by a shareholder are subject to federal income
taxation.
SPECIAL CALIFORNIA TAX CONSIDERATIONS
As a regulated investment company, the Fund will be relieved
of liability for California state franchise and corporate income tax to the
extent the Fund's taxable income is distributed to its shareholders. The Fund
will be taxed on its undistributed taxable income. If for any year the Fund
does not qualify as a regulated investment company, all of its taxable income
(including interest income on California Municipal Securities for franchise tax
purposes only) may be subject to California state franchise or income tax at
regular corporate rates.
If, at the close of each quarter of its taxable year, at least
50% of the value of the total assets of a regulated investment company, or
series thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then the regulated investment company, or series of that company,
will be qualified to pay dividends exempt from California state personal income
tax to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Securities
are generally limited to California Municipal Securities and certain U.S.
Government and U.S. Possession obligations. "Series" of a regulated investment
company is defined as a segregated portfolio of assets, the beneficial interest
in which is owned by the holders of an exclusive class or series of stock of
the company. The Fund intends to qualify under the above requirements so that
it can pay California exempt-interest dividends. If the Fund does not so
qualify, no part of its respective dividends to shareholders will be exempt
from the California state personal income tax.
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<PAGE> 694
Within sixty days after the close of its taxable year, the
Fund will notify its respective shareholders of the portion of the dividends
paid by the Fund to each shareholder with respect to such taxable year which is
exempt from California state personal income tax. The total amount of
California exempt-interest dividends paid by the Fund with respect to any
taxable year cannot exceed the excess of the amount of interest received by the
Fund for such year on California Exempt Securities over any amounts that, if
the Fund were treated as an individual, would be considered expenses related to
tax exempt income or amortizable bond premium and would thus not be deductible
under federal income or California state personal income tax law. The
percentage of total dividends paid for any taxable year which qualifies as
California exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund for such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Exempt Securities held by the
Fund, such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are
applicable for California state tax purposes. See "Taxes - Federal Tax
Considerations" above. Interest on indebtedness incurred by a shareholder to
purchase or carry Fund shares is not deductible for California state personal
income tax purposes if the Fund distributes California exempt-interest
dividends during the shareholder's taxable year.
The foregoing is only a summary of some of the important
California state personal income tax considerations generally affecting the
Fund and its shareholders. No attempt is made to present a detailed
explanation of the California state personal income tax treatment of the Fund
or its shareholders, and this discussion is not intended as a substitute for
careful planning. Further, it should be noted that the portion of any Fund
dividends constituting California exempt-interest dividends is excludable from
income for California state personal income tax purposes only. Any dividends
paid to shareholders subject to California state franchise tax or California
state corporate income tax may therefore be taxed as ordinary or capital gains
dividends to such purchasers notwithstanding that all or a portion of such
dividends is exempt from California state personal income tax. Accordingly,
potential investors in the Fund, including, in particular, corporate investors
which may be subject to either California franchise tax or California corporate
income tax, should consult their tax advisers with respect to the application
of such taxes to the receipt of Fund
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<PAGE> 695
dividends and as to their own California state tax situation, in general.
OTHER INFORMATION
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities.
Exempt-interest dividends generally will be exempt from state
and local taxes as well. However, except as noted above with respect to
California state personal income tax, in some situations income distributions
may be taxable to shareholders under state or local law as dividend income even
though all or a portion of such distributions may be derived from interest on
tax-exempt obligations or U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action.
YIELD INFORMATION
The "yields" and "effective yields" of the Fund are calculated
according to formulas prescribed by the SEC. The standardized seven-day yield
for the Fund's series of shares is computed separately for each series by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in the Fund involved having a balance of one
share at the beginning of the period, dividing the net change in account value
by the value of the account at the beginning of the base period to obtain the
base period return, and multiplying the base period return by (365/7). The net
change in the value of an account in the Fund includes the value of additional
shares purchased with dividends from the original share, and dividends declared
on both the original share and any such additional shares, net of all fees,
other than nonrecurring account or sales charges, that are charged to all
shareholder accounts in proportion to the length of the base period and the
Fund's average account size. The capital changes to be excluded from the
calculation of the net change in account value are realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. The
effective annualized yield for the Fund is computed by compounding
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<PAGE> 696
the Fund's unannualized base period returns (calculated as above) by adding 1
to the base period returns, raising the sums to a power equal to 365 divided by
7, and subtracting 1 from the results. In addition, the Fund may quote a
standardized "tax-equivalent yield" for each of its series of shares which is
computed by: (a) dividing the portion of the Fund's yield (as calculated
above) for such series that is exempt from both federal and California state
income tax by one minus a stated federal, or a combined federal and California
state, income tax rate; (b) dividing the portion of the Fund's yield (as
calculated above) that is exempt from federal income tax only by one minus a
federal income tax rate, and (c) adding the figure resulting from (a) and (b)
above to that portion, if any, of the Fund's yield for such series of shares
that is not exempt from federal income tax. The fees which may be imposed by
institutions directly on their customers for cash management services are not
reflected in the Funds' calculations of yields.
The annualized yield, effective yield and tax-equivalent yield
(after fee waivers and expense reimbursements) for Pacific Horizon and Horizon
Service Shares of the California Tax-Exempt Money Market Fund was ____% and
____%; and ____% and ____%, respectively for the seven-day period ended
February 29, 1996. The combined federal and California income tax rate used in
calculating the foregoing tax-equivalent yields was _____%. As of February
29, 1996, Horizon Shares of the Fund had not commenced operations.
From time to time, the yields of the Fund may be quoted in and
compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of the
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income of the Fund would increase the value of the Fund investment 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. From time to time advertisements or communications to
shareholders may summarize the substance of information contained
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<PAGE> 697
in shareholder reports (including the investment composition of the Fund), as
well as the views of the investment adviser as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to 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. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and may include
testimonials as to the investment adviser's capabilities by clients. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, 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.
In addition to the publications listed in the Fund's
Prospectus, yield data as reported in the following publications may be used in
comparing the yields of the Fund to those of other mutual funds with similar
investment objectives: Business Week, Investor's Business Daily, Kiplinger,
U.S. News, Financial World, USA Today, Morningstar, Mutual Fund Monitor, and
American Banker.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. The Fund's Charter
authorizes the Board of Directors to issue up to two hundred billion full and
fractional shares of capital stock. The Board of Directors has authorized the
issuance of twenty-two classes of stock - Classes A through W, Common Stock
representing interests in twenty-two separate investment portfolios. Each
share of capital stock has a par value of $.001. This Statement of Additional
Information describes the X Shares of the Fund.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in its prospectuses, the Company's shares will be fully
paid and non-assessable. For information concerning possible restrictions upon
the transferability of the Company's shares and redemption provisions with
respect to such shares, see "Purchase and
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<PAGE> 698
Redemption Information" in this Statement of Additional Information.
The Funds' Pacific Horizon, Horizon Shares and Horizon Service
Shares differ from X Shares in the following respects. Only X Shares bear the
fees payable under the 12b-1 Plan that has been adopted for X Shares, which are
payable at the rate of up to .55% (on an annualized basis) of the average daily
net asset value of the X Shares that are outstanding from time to time. The
Fund's Pacific Horizon Shares and Horizon Service Shares bear the fees payable
under the Special Management Services Agreement and Shareholder Services Plan,
respectively, that have been adopted for Pacific Horizon Shares and Horizon
Service Shares, which are payable at the rate of up to .35% and .25%,
respectively (on an annualized basis), of the average daily net asset value of
the respective Pacific Horizon and Horizon Service Shares that are outstanding
from time to time as described in the Prospectuses for such shares. Only
Horizon Service Shares bear the fees payable under the Shareholder Services
Plan described below, which are payable at the rate of up to .25% (on an
annualized basis) of the average daily net asset value of the Horizon Service
Shares that are outstanding from time to time. As a result, at any given time,
the net yield on the Fund's X Shares will be approximately 0.25% less than the
yield on the Fund's Horizon Service Shares, 0.55% less than the yield on the
Horizon Shares and 0.23% less than the yield on the Fund's Pacific Horizon
Shares. Standardized yield quotations will be computed separately for each
series of shares.
Holders of all outstanding shares of the Fund will vote
together in the aggregate and not by class on all matters, except that only X
Shares of the Fund will be entitled to vote on matters submitted to a vote of
shareholders pertaining to its 12b-1 Plan; Horizon Service Shares of the Fund
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Fund's payments to Service Organizations and only Pacific
Horizon Shares of the Fund will be entitled to vote on matters submitted to a
vote of shareholders pertaining to the expenses that are borne exclusively by
such shares. Further, shareholders of the Fund, as well as those of any other
investment portfolio now or hereafter offered by the Company, will vote
together in the aggregate and not separately on a fund-by-fund basis, except as
otherwise required by law or when permitted by the Board of Directors. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Company shall not be deemed to have been effectively acted upon unless
approved by a majority of the outstanding shares of the Fund affected by the
matter. The Fund is affected by a matter unless it is clear that the interests
of the Fund in the matter are substantially identical
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<PAGE> 699
or that the matter does not affect any interest of the Fund. Under the Rule,
the approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to 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 in the
aggregate without regard to the Fund.
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.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of the Company, is a partner), 1345 Chestnut Street, Philadelphia
National Bank Building, Philadelphia, Pennsylvania 19107, serves as counsel to
the Company and will pass upon the legality of the shares offered hereby.
_________________________________________________________, acts as special
California counsel for the Company and has reviewed the portions of the
Prospectus and Statement of Additional Information for the Fund concerning
California taxes and the description of the special considerations relating to
California Municipal Securities.
INDEPENDENT ACCOUNTANTS
____________________, with offices at ______________
______________________________________, has been selected as independent
accountants of the Company for the fiscal year ending February 29, 1996.
REPORTS
The Fund will send its shareholders unaudited semi-annual
reports including a description of the Fund's investments, and annual financial
statements together with a report of independent accountants.
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<PAGE> 700
SHAREHOLDER VOTE
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of the Fund or a
particular series means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or of the series, or (b) 67% of the shares of the Fund or of
the series present at a meeting at which more than 50% of the outstanding
shares of the Fund or series are represented in person or by proxy.
At April 18, 1996, 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: BA Investment Services, Inc., For
the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 103,513,191.16 shares (41.74%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 15,918,652 shares
(6.42%); and BA Securities, Inc., 185 Berry Street, Third floor, San Francisco,
CA 94107, 87,503,156.79 shares (35.29%)
At April 18, 1996, 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: 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,
41,166,250.41 shares (33.41%); Comcare, Inc., 4001 North Third Street, Suite
120, Phoenix, AZ, 18,095,338.05 shares (14.69%); and Comcare, Inc., 4001 North
Third Street, Suite 120, Phoenix, AZ, 17,386,230.27 shares (14.11%).
At April 18, 1996, 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 and
Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New York, NY
10286, 134,710,270.030 shares (14.14%); BA Investment Services, Inc., For the
Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 191,421,422.65 shares (20.09%); and VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 548,133,382 shares
(57.53%).
At April 18, 1996, 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 for the Shareholder
Accounts
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<PAGE> 701
Maintained By Concord Financial Services, Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
218,907,053.62 shares (18.89%); 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,
325,646,595.56 shares (28.10%).
At April 18, 1996, 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: BA Investment Services, Inc., For the
Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 100,129,783.70 shares (39.87%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 41,190,467 shares
(16.40%); BA Securities, Inc., 185 Berry Street, Third floor, San Francisco, CA
94107, 45,530,054.82 shares (18.13%); and Bank of America National Trust and
Savings Association and Private Bank, Attn: ACI Unit 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 28,206,277.29 shares (11.23%).
At April 18, 1996, the name, address and share ownership of
the entities which held more than 5% of the outstanding Horizon Service Shares
of the Government Fund were as follows: Toasty, Ltd., Leslie L. Alexander, One
Greenway Plaza, Suite 645, Houston, TX 77046, 20,070,021.75 shares (9.79%);
Rocket Ball, Ltd., One Greenway Plaza, Suite 645, Houston, TX 77046,
20,903,317.14 shares (10.19%); 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,
39,405,934.93 shares (19.21%); Good Health Plan of Washington, Attn: Linda Lam
Ha, 1501 4th Avenue, Suite 500, Seattle, WA 98101, 12,854,471.02 shares
(6.27%); and Providence Health Care, Attn: Linda Lam Ha, 1501 4th Avenue,
Suite 500, Seattle, WA 98101-1621, 13,256,010.36 shares (6.46%).
At April 18, 1996, 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: BA Securities, Inc., 185 Berry Street, Third
floor, San Francisco, CA 94107, 171,703,966.02 shares (7.98%); Hare & Co., Bank
of New York, and Short Term Investment Funds, Attn: Bimal Saha, One Wall
Street, New York, NY 10286, 142,985,602.500 shares (6.64%); and BA Investment
Services, Inc., For the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 -
Bob Santilli, San Francisco, CA 94120, 1,508,792,962.99 shares (70.10%).
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<PAGE> 702
At April 18, 1996, 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,
267,651,623.98 shares (16.80%); 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,
572,679,889.38 shares (35.95%).
At April 18, 1996, 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 Fund were as follows: BA Investment Services, Inc., For
the Benefit of Clients, P.O. Box 7042, Attn: Unit #7852 - Bob Santilli, San
Francisco, CA 94120, 39,343,026.66 shares (73.17%); VAR & Co., 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, Attn: Linda Frintz, 9,920,747 shares
(18.45%); and BA Securities, Inc., 185 Berry Street, Third floor, San
Francisco, CA 94107, 2,781,908.01 shares (5.17%)
At April 18, 1996, 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 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, 2,249,858.53 shares (6.62%); 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, 22,470,327.24 shares (66.12%).
At April 18, 1996, 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: BA Securities,
Inc., 185 Berry Street, Third floor, San Francisco, CA 94107, 201,240,826.46
shares (38.17%); BA Investment Services, Inc., For the Benefit of Clients, P.O.
Box 7042, Attn: Unit #7852 - Bob Santilli, San Francisco, CA 94120,
209,179,155.47 shares (39.67%); and Bank of America National Trust and Savings
Association and Private Bank, Attn: Common Trust Funds Unit 8329, P.O. Box 3577
Terminal Annex, Los Angeles, CA 90051, 74,935,409.28 shares (14.21%).
At April 18, 1996, 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
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<PAGE> 703
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,
17,704,983.07 shares (10.39%); and BISYS Fund Services, FBO Sweep Customers,
Attn: Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 83,095,222.95 shares (48.76%).
At April 18, 1996, the name, address and share ownership of
the entities which held more than 5% of the outstanding Class A Shares of the
Corporate Bond Fund were as follows: Smith Barney Inc. Custodian, 388
Greenwich, 16th Floor, New York, NY 10013-2391 122,420.435 shares (6.17%); and
Dean Witter Reynolds, Inc. Stock Record Department, 5 World Trade Center, New
York, NY 10048, Attn: Al Dimino, 114,691 shares (5.78%).
At such dates, no other person was known by the Company to
hold of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectus relating to the X Shares, and this Statement of
Additional Information, omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the Commission
by paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report for the Fund for its fiscal year ended
February 29, 1996 (the "Annual Report") accompany this Statement of Additional
Information. The financial statements and notes thereto in the Annual Report
are incorporated into this Statement of Additional Information by reference.
The financial statements and notes in the Annual Report have been audited by
____________________, whose report thereon also appears in the Annual Report
and is also incorporated herein by reference. Such financial statements have
been incorporated herein in reliance on the report of ____________________,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
<PAGE> 705
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
A-2
<PAGE> 706
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE> 707
year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
A-4
<PAGE> 708
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB- " rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
A-5
<PAGE> 709
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
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
A-6
<PAGE> 710
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P) . . . - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes
A-7
<PAGE> 711
occur in the legal documents or the underlying credit quality of the bonds.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally 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"
A-8
<PAGE> 712
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A-9
<PAGE> 713
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"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"
A-10
<PAGE> 714
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-11
<PAGE> 715
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
<PAGE> 716
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Audited Financial Statements will be filed in a subsequent
Post-Effective Amendment to Registrant's Registration Statement which
will be filed within the 60 day waiting period and will become
effective at the same time as the amendment.
(b) Exhibits:
(1) (a) Restated Articles of Incorporation filed November 22, 1983
are incorporated by reference to Exhibit 1(a) to
Post-Effective Amendment No. 45 to the Registration
Statement of the Registrant on Form N-1A (Nos.
2-81110/811-4293) filed February 23, 1996 ("Post-Effective
Amendment No. 45").
(b) Articles Supplementary filed January 9, 1986 are
incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 45.
(c) Articles Supplementary to increase authorized capital stock
filed August 31, 1989 are incorporated by reference to
Exhibit 1(c) to Post-Effective Amendment No. 45.
(d) Articles Supplementary classifying shares filed August 31,
1989 are incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 45.
(e) Articles Supplementary classifying shares filed June 3,
1991 are incorporated by reference to Exhibit 1(e) to
Post-Effective Amendment No. 45.
(f) Articles Supplementary classifying and reclassifying shares
filed August 1, 1991 are incorporated by reference to
1
<PAGE> 717
Exhibit 1(f) to Post-Effective Amendment No. 45.
(g) Articles Supplementary to increase authorized capital stock filed
August 16, 1991 are incorporated by reference to Exhibit 1(g) to
Post-Effective Amendment No. 45.
(h) Articles Supplementary classifying shares filed August 16, 1991 are
incorporated by reference to Exhibit 1(h) to Post-Effective
Amendment No. 45.
(i) Articles Supplementary classifying shares filed November 25, 1991
are incorporated by reference to Exhibit 1(i) to Post-Effective
Amendment No. 45.
(j) Articles Supplementary classifying shares filed May 11, 1992 are
incorporated by reference to Exhibit 1(j) to Post-Effective
Amendment No. 45.
(k) Articles Supplementary reclassifying shares filed May 15, 1992 are
incorporated by reference to Exhibit 1(k) to Post-Effective
Amendment No. 45.
(l) Articles Supplementary classifying shares filed July 20, 1992 are
incorporated by reference to Exhibit 1(l) to Post-Effective
Amendment No. 45.
(m) Articles Supplementary to increase authorized capital stock filed
August 6, 1992 are incorporated by reference to Exhibit 1(m) to
Post-Effective Amendment No. 45.
(n) Articles Supplementary classifying shares filed August 6, 1992 are
incorporated by reference to Exhibit 1(n) to Post-Effective
Amendment No. 45.
(o) Articles Supplementary classifying shares filed March 3, 1993 are
incorporated by reference to Exhibit 1(o) to Post-Effective
Amendment No. 45.
(p) Articles Supplementary reclassifying shares filed May 12, 1993 are
2
<PAGE> 718
incorporated by reference to Exhibit 1(p) to Post-Effective
Amendment No. 45.
(q) Articles of Amendment eliminating restriction on number of classes
of shares filed May 8, 1990 are incorporated by reference to
Exhibit 1(q) to Post-Effective Amendment No. 45.
(r) Articles of Amendment reclassifying shares filed on July 9, 1993
are incorporated by reference to Exhibit 1(r) to Post-Effective
Amendment No. 45.
(s) Articles Supplementary classifying shares filed November 18, 1993
are incorporated by reference to Exhibit 1(s) to Post-Effective
Amendment No. 45.
(t) Articles Supplementary reclassifying shares filed November 18, 1993
are incorporated by reference to Exhibit 1(t) to Post-Effective
Amendment No. 45.
(u) Articles Supplementary reclassifying shares filed January 21, 1994
are incorporated by reference to Exhibit 1(u) to Post-Effective
Amendment No. 45.
(v) Articles Supplementary classifying shares filed October 30, 1995.
(w) Articles of Amendment cancelling shares filed on January 26, 1996
are incorporated by reference to Exhibit 1(v) to Post-Effective
Amendment No. 45.
(x) Articles Supplementary classifying shares filed on January 26, 1996
are incorporated by reference to Exhibit 1(w) to Post-Effective
Amendment No. 45.
(y) Articles Supplementary reclassifying shares filed on January 26,
1996 are incorporated by reference to Exhibit 1(x) to Post-
Effective Amendment No. 45.
(2) (a) Amended By-Laws dated January 15, 1987 are incorporated by
reference to Exhibit 2(a) to Post-Effective Amendment No. 45.
(b) Amendment to By-Laws dated July 17, 1987 is incorporated by
reference to Exhibit 2(b) to Post-Effective Amendment No. 45.
3
<PAGE> 719
(c) Amendment to By-Laws as approved by the Registrant's Board of
Directors on March 30, 1989 is incorporated by reference to Exhibit
2(c) to Post-Effective Amendment No. 45.
(d) Amendment to By-Laws as approved by the Registrant's Board of
Directors on January 29, 1990 is incorporated by reference to
Exhibit 2(d) to Post-Effective Amendment No. 45.
(e) Amendment to By-Laws as approved by the Registrant's Board of
Directors on November 29, 1995.
(3) None.
(4) (a) Specimen copy of share certificate for all Classes and Series of
Shares is incorporated by reference to Exhibit (4)(a) to Post-
Effective Amendment No. 37 to Registration Statement on Form
N-1A (Nos. 2-81110/811-4293) filed July 1, 1994 ("Post-Effective
Amendment No. 37").
(5) (a) Investment Advisory Agreement dated as of April 22, 1992
between Registrant and Bank of America National Trust and
Savings Association (Money Market Funds) is incorporated by
reference to Exhibit 5(a) to Post-Effective Amendment No. 45.
(b) Investment Advisory Agreement dated as of April 22, 1992 between
Registrant and Bank of America National Trust and Savings
Association (Non-Money Market Funds) is incorporated by reference
to Exhibit 5(b) to Post-Effective Amendment No. 45.
(c) Addendum to Investment Advisory Agreement dated as of March 1, 1993
between Registrant and Bank of America National Trust and Savings
Association (Money Market Funds - Prime Value Fund) is incorporated
by reference to Exhibit 5(c) to Post-Effective Amendment No. 45.
(d) Addendum to Investment Advisory Agreement dated as of March 1, 1993
4
<PAGE> 720
between Registrant and Bank of America National Trust and Savings
Association (Money Market Funds - Government and Treasury Only
Funds) is incorporated by reference to Exhibit 5(d) to
Post-Effective Amendment No. 45.
(e) Investment Advisory Agreement dated November 1, 1994 between
Registrant and Bank of America National Trust & Savings Association
with respect to the Capital Income Fund is incorporated by
reference to Exhibit 5(e) to Post-Effective Amendment No. 45.
(f) Form of Investment Advisory Agreement between Registrant and Bank
of America National Trust & Savings Association with respect to
the National Municipal Bond Fund.
(6) (a) Distribution Agreement between the Registrant and Concord
Financial Group, Inc. is incorporated by reference to Exhibit 6(a)
to Post-Effective Amendment No. 45.
(b) Agreement relating to the Distribution Agreement between Registrant
and Concord Financial Group, Inc. is incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment No. 45.
(c) Form of Broker/Dealer Agreement is incorporated by reference to
Exhibit 6(c) to Post-Effective Amendment No. 45.
(d) Form of Bank Agreement is incorporated by reference to Exhibit 6(d)
to Post-Effective Amendment No. 45.
(e) Form of Amended and Restated Distribution Agreement is incorporated
by reference to Exhibit (6)(e) to Post-Effective Amendment No. 42
to the Registration Statement of the Registrant on Form N-1A (Nos.
2-81110/811-4293) filed July 31, 1995 ("Post-Effective Amendment
No. 42").
(7) Board Guidelines on Significant Governance Issues (which includes a
5
<PAGE> 721
description of the Board of Director's retirement policy and
benefit) are incorporated by reference to Exhibit 7 to Post-
Effective Amendment No. 45.
(8) (a) Custody Agreement between Registrant and The Bank of New York
dated as of April 3, 1989 is incorporated by reference to
Exhibit 8(a) to Post-Effective Amendment No. 45.
(b) Amendment No. 1 to Custody Agreement between Registrant and The
Bank of New York dated as of March 30, 1990 is incorporated by
reference to Exhibit 8(b) to Post-Effective Amendment No. 45.
(c) Custodian Services Agreement between Registrant and PNC Bank, N.A
is incorporated by reference to Exhibit 8(c) to Post-Effective
Amendment No. 45.
(d) Transfer Agency Agreement between Registrant and BISYS Fund
Services, Inc.
(e) Sub-Custodian Agreement between Registrant, The Bank of New York,
and Security Pacific National Bank is incorporated by reference to
Exhibit 8(e) to Post-Effective Amendment No. 45.
(f) Sub-Custodian Agreement between The Bank of New York and Citibank,
N.A. dated May 18, 1988 is incorporated by reference to Exhibit
8(f) to Post-Effective Amendment No. 45.
(g) Form of Sub-Custody Agreement between The Bank of New York and Bank
of America National Trust and Savings Association is incorporated
by reference to Exhibit (8)(i) to Post-Effective Amendment No. 37.
(9) (a) Basic Administrative Services Agreement between Registrant and
Concord Holding Corporation (Money Market Funds) dated as of
November 13, 1989 is incorporated by reference to Exhibit 9(a)
to Post-Effective Amendment No. 45.
6
<PAGE> 722
(b) Amendment No. 1 to Basic Administrative Services Agreement between
Registrant and Concord Holding Corporation (Money Market Funds)
dated November 1, 1991 is incorporated by reference to Exhibit 9(b)
to Post-Effective Amendment No. 45.
(c) Amendment No. 2 to Basic Administrative Services Agreement dated as
of March 1, 1993 between Registrant and Concord Holding Corporation
(Money Market Funds) is incorporated by reference to Exhibit 9(c)
to Post-Effective Amendment No. 45.
(d) Amendment No. 3 to Basic Administrative Services Agreement dated as
of March 1, 1993 between Registrant and Concord Holding Corporation
is incorporated by reference to Exhibit 9(d) to Post-Effective
Amendment No. 45.
(e) Amendment No. 4 to Basic Administrative Services Agreement dated
November 1, 1993 between Registrant and Concord Holding Corporation
is incorporated by reference to Exhibit 9(e) to Post-Effective
Amendment No. 45.
(f) Amendment No. 5 to Basic Administrative Services Agreement dated
November 1, 1995 between Registrant and Concord Holding Corporation
is incorporated by reference to Exhibit 9(f) to Post-Effective
Amendment No. 46 to the Registration Statement of the Registrant on
Form N-1A (Nos. 281110/811-4293) filed March 4, 1996
("Post-Effective Amendment No. 46").
(g) Agreement relating to the Basic Administrative Services Agreement
between Registrant and Concord Holding Corporation is incorporated
by reference to Exhibit 9(f) to Post-Effective Amendment No. 45.
(h) Special Management Services Agreement among Registrant, Concord
Holding Corporation and Bank of America National Trust and Savings
Association (Money Market Funds) dated as of April 22, 1992
7
<PAGE> 723
is incorporated by reference to Exhibit 9(g) to Post-Effective
Amendment No. 45.
(i) Amendment No. 1 to Special Management Services Agreement dated as
of March 1, 1993 between Registrant, Concord Holding Corporation
and Bank of America National Trust and Savings Association (Money
Market Funds) is incorporated by reference to Exhibit 9(h) to
Post-Effective Amendment No. 45.
(j) Amendment No. 2 to Special Management Services Agreement dated as
of March 1, 1993 among Registrant, Concord Holding Corporation and
Bank of America National Trust and Savings Association (Money
Market Funds) is incorporated by reference to Exhibit 9(i) to
Post-Effective Amendment No. 45.
(k) Amendment No. 3 to Special Management Services Agreement dated as
of April 1, 1993 among Registrant, Concord Holding Corporation and
Bank of America National Trust and Savings Association (Money
Market Funds) is incorporated by reference to Exhibit 9(j) to
Post-Effective Amendment No. 45.
(l) Amendment No. 4 to Special Management Services Agreement among
Registrant, Concord Holding Corporation and Bank of America
National Trust and Savings Association (Money Market Funds) is
incorporated by reference to Exhibit 9(k) to Post-Effective
Amendment No. 45.
(m) Agreement relating to the Special Management Services Agreement
among Registrant, Concord Holding Corporation and Bank of America
National Trust and Savings Association (Money Market Funds) is
incorporated by reference to Exhibit 9(l) to Post-Effective
Amendment No. 45.
(n) Administration Agreement between Registrant and Concord Holding
Corporation (Non-Money Market Funds) dated as of November 13, 1989
is incorporated by reference to Exhibit 9(m) to Post-Effective
Amendment No. 45.
8
<PAGE> 724
(o) Amendment No. 1 to Administration Agreement between Registrant and
Concord Holding Corporation (Aggressive Growth Fund, U.S.
Government Securities Fund, Capital Income Fund and California
Tax-Exempt Bond Fund) dated as of November 1, 1991 is incorporated
by reference to Exhibit 9(n) to Post-Effective Amendment No. 45.
(p) Amendment No. 2 to Administration Agreement between Registrant and
Concord Holding Corporation (non-Money Market Funds) is
incorporated by reference to Exhibit 9(o) to Post-Effective
Amendment No. 45.
(q) Amendment No. 3 to the Administration Agreement between Registrant
and Concord Holding Corporation (non-Money Market Funds) is
incorporated by reference to Exhibit 9(p) to Post-Effective
Amendment No. 45.
(r) Amendment No. 4 to the Administration Agreement between Registrant
and Concord Holding Corporation (non-Money Market Funds) is
incorporated by reference to Exhibit 9(q) to Post-Effective
Amendment No. 45.
(s) Amendment No. 5 to Administration Agreement between Registrant and
Concord Holding Corporation (non-Money Market Funds) dated November
1, 1995 is incorporated by reference to Exhibit 9(s) to
Post-Effective Amendment No. 46.
(t) Form of Amendment No. 6 to the Administration Agreement.
(u) Agreement relating to the Administration Agreement between
Registrant and Concord Holding Corporation (non-Money Market Funds)
is incorporated by reference to Exhibit 9(r) to Post-Effective
Amendment No. 45.
9
<PAGE> 725
(v) Cash Management and Related Services Agreement between Registrant
and The Bank of New York (Horizon Shares and Horizon Service
Shares) dated as of May 1, 1990 is incorporated by reference to
Exhibit 9(s) to Post-Effective Amendment No. 45.
(w) Amendment to Cash Management and Related Services Agreement between
Registrant and The Bank of New York dated as of June 21, 1993 is
incorporated by reference to Exhibit 9(t) to Post-Effective
Amendment No. 45.
(x) Accounting Services Agreement between the Registrant and Provident
Financial Processing Corp is incorporated by reference to Exhibit
9(u) to Post-Effective Amendment No. 45.
(10)(1) Opinion of counsel that shares are validly issued, fully paid and
non-assessable.
(11) Consent of Drinker Biddle & Reath.
(12) None
(13) (a) Purchase Agreement between Registrant and The Dreyfus
Corporation is incorporated by reference to Exhibit 13(a) to
Post-Effective Amendment No. 45.
(b) Purchase Agreement between Registrant and Hambrecht & Quist Group,
Inc. dated March 31, 1988 is incorporated by reference to Exhibit
13(b) to Post-Effective Amendment No. 45.
(c) Investment Letter of Concord Financial Group, Inc. to The Horizon
Funds is incorporated by reference to Exhibit
__________________________________
1 Filed with the SEC on April 29, 1996 under Rule 24f-2 as part of
Registrant's 24f-2 Notice.
10
<PAGE> 726
13(c) to Post-Effective Amendment No. 45.
(d) Purchase Agreement between Pacific Horizon Tax-Exempt Money Market
Portfolio, Inc. and Hambrecht & Quist Group, Inc. is incorporated
by reference to Exhibit 13(d) to Post-Effective Amendment No. 45.
(e) Purchase Agreement between Pacific Horizon Tax-Exempt Money Market
Portfolio, Inc. and Pacific Horizon Tax-Exempt Funds, Inc. is
incorporated by reference to Exhibit 13(e) to Post-Effective
Amendment No. 45.
(f) Purchase Agreement between Pacific Horizon Tax-Exempt Money Market
Portfolio, Inc. and The Dreyfus Corporation is incorporated by
reference to Exhibit 13(f) to Post-Effective Amendment No. 45.
(g) Purchase Agreement between Pacific Horizon California Tax-Exempt
Bond Portfolio, Inc. and Hambrecht & Quist Group, Inc. is
incorporated by reference to Exhibit 13(g) to Post-Effective
Amendment No. 45.
(h) Purchase Agreement between Pacific Horizon California Tax-Exempt
Bond Portfolio, Inc. and The Dreyfus Corporation is incorporated by
reference to Exhibit 13(h) to Post-Effective Amendment No. 45.
(i) Purchase Agreement between Pacific Horizon California Tax-Exempt
Bond Portfolio, Inc. and Pacific Horizon Tax-Exempt Funds, Inc. is
incorporated by reference to Exhibit 13(i) to Post-Effective
Amendment No. 45.
(j) Investment Letter of Concord Financial Group, Inc. to The Horizon
Capital Funds is incorporated by reference to Exhibit 13(j) to
Post-Effective Amendment No. 45.
11
<PAGE> 727
(14) (a) Individual Retirement Account and accompanying Custodial
Agreement, Disclosure Statement, IRA Application and IRA
Transfer/Rollover Request Form is incorporated by reference to
Exhibit 14(a) to Post-Effective Amendment No. 45.
(b) Appointment of Successor Custodian for Individual Retirement
Account dated as of August 3, 1990 is incorporated by reference to
Exhibit 14(b) to Post-Effective Amendment No. 45.
(15) (a) Shareholder Service Plan for Non-Money Market Funds is
incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 45.
(b) Shareholder Services Plan for Horizon Service Shares as modified by
Registrant's Board of Directors on January 29, 1993 is incorporated
by reference to Exhibit 15(b) to Post-Effective Amendment No. 45.
(c) Revised Shareholder Servicing Agreement is incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 45.
(d) Revised Shareholder Service Agreement as modified by Registrant's
Board of Directors on January 29, 1993 is incorporated by reference
to Exhibit 15(d) to Post-Effective Amendment No. 45.
(e) Revised Shareholder Servicing Agreement for Non-Money Market Funds
is incorporated by reference to Exhibit 15(e) to Post-Effective
Amendment No. 45.
(f) Distribution and Services Plan and related Distribution and
Administrative Servicing Agreement with respect to Registrant's
Class "S" and Class "X" shares.
(16) (a) Schedule for Computation of Performance Quotations with respect
to the Prime
12
<PAGE> 728
Fund, Treasury Fund, Tax-Exempt Money Fund, Tax-Exempt Money Market
Fund, California Tax-Exempt Money Market Fund, Aggressive Growth
Fund, California Tax-Exempt Bond Fund, U.S. Government Securities
Fund (formerly known as the GNMA Extra Fund) and Capital Income
Fund (formerly known as the Convertible Securities Fund) is
incorporated by reference to Exhibit 16(a) to Post-Effective
Amendment No. 45.
(b) Schedule for Computation of Performance Quotations with respect to
the Government Fund, Treasury Only Fund and Prime Value Fund is
incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 45.
(c) Schedule for Computation of Performance Quotations with respect to
the Corporate Bond Fund, Flexible Bond Fund, Blue Chip Fund, Asset
Allocation Fund and National Municipal Bond Fund is incorporated by
reference to Exhibit 16(c) to Post-Effective Amendment No. 45.
(18) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of a
Multi-Class System.
Item 25. Persons Controlled by or under
Common Control with Registrant
------------------------------
Registrant is controlled by its Board of Directors.
13
<PAGE> 729
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Number of Record
Holders as of
Title of Class February 2, 1996
--------------
<S> <C>
Class A Common Stock 1207
Class A Common Stock - 575
Special Series 1
Class A Common Stock - 0
Special Series 2
Class B Common Stock 12,573
Class B Common Stock - 1,049
Special Series 1
Class B Common Stock - 0
Special Series 2
Class D Common Stock 14,758
Class E Common Stock 4,657
Class F Common Stock 16,282
Class G Common Stock 4,541
Class H Common Stock 0
Class I Common Stock 161
Class I Common Stock - 55
Special Series 1
Class I Common Stock - 0
Special Series 2
Class J Common Stock 597
Class J Common Stock - 186
Special Series 1
Class K Common Stock 750
Class K Common Stock - 125
Special Series 1
Class K Common Stock - 0
Special Series 2
Class L Common Stock 135
Class L Common Stock - 191
Special Series 1
Class L Common Stock - 0
Special Series 2
Class M Common Stock 539
Class N Common Stock 5,278
Class O Common Stock 1,677
Class Q Common Stock 340
Class R Common Stock 0
Class S Common Stock 0
Class T Common Stock 0
Class U Common Stock 0
Class V Common Stock 0
Class W Common Stock 2,549
</TABLE>
Item 27. Indemnification
---------------
Article VII, Section 3, of Registrant's Restated Articles of
Incorporation, incorporated herein by reference as Exhibit (1)(a) hereto, and
Article VI, Section 2, of Registrant's By-Laws, incorporated herein by
reference as Exhibit (2)(a) hereto, provide for the indemnification of
Registrant's directors
14
<PAGE> 730
and officers. Indemnification of the Fund's principal underwriter, custodians,
sub-custodians, transfer agent and sub-transfer agent is provided for,
respectively, in Article V of the Distribution Agreement, incorporated herein
by reference as Exhibit (6)(a), Article XV (and in Article V of the amended and
restated Distribution Agreement incorporated herein by reference as Exhibit
(6)(e)), Section 15 of the Custody Agreement incorporated herein by reference
as Exhibit (8)(a) hereto, Article III, Section 4 of the Sub-Custodian
Agreement, incorporated herein by reference as Exhibit (8)(f) hereto, and
Section 8 of the form of Sub-Custody Agreement incorporated herein by reference
as Exhibit (8)(g), Article VII, Section 7, of the Transfer Agency Agreement
included herewith as Exhibit (8)(d), and Article VI, Section 3, of the Cash
Management and Related Services Agreement incorporated herein by reference as
Exhibit (9)(v) hereto. Registrant has obtained from a major insurance carrier
a directors and officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its directors,
officers, employees or agents against any liability to which such person would
otherwise be subject by reason of his willful misfeasance, bad faith or gross
negligence in the performance of his duties or by reason of his reckless
disregard of the duties involved in the conduct of his office or under his
agreement with Registrant. Registrant will comply with Rule 484 under the
Securities Act of 1933 and Release 11330 under the Investment Company Act of
1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
15
<PAGE> 731
Item 28. Business and Other Connections of Investment Adviser
-----------------------------------------------------
Bank of America National Trust and Savings Association ("Bank
of America") performs investment advisory services for Registrant. Bank of
America and its predecessors have been in the business of managing the
investments of fiduciary and other accounts since 1904. In addition to its
trust business, Bank of America provides commercial and consumer banking
services.
To the knowledge of Registrant, none of the directors or
officers of Bank of America, except those set forth below, is or has been, at
any time during the past two calendar years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers of Bank of America also hold various positions with, and
engage in business for, BankAmerica Corporation, which owns all the outstanding
stock of Bank of America, or other subsidiaries of BankAmerica Corporation.
Set forth below are the names and principal businesses of the directors of Bank
of America and the directors and certain of the senior executive officers of
Bank of America who are engaged in any other business, profession, vocation or
employment of a substantial nature, other than with BankAmerica Corporation.
<TABLE>
<S> <C> <C> <C>
Director . . . . . . . Joseph F. Alibrandi Chairman of the Manufacturer of
Board, Whittaker Aerospace and
Corporation Biotechnology
Products
Director . . . . . . . Jill Elikann Barad President and Chief Toy manufacturer
Operating Officer,
Mattel, Inc.
Director . . . . . . . Peter B. Bedford Chairman and CEO, California based
Bedford Property Real Estate Dev-
Investors, Inc. elopment and In-
vestment Firm
</TABLE>
16
<PAGE> 732
<TABLE>
<CAPTION>
Position with
Bank of America
National Trust
and Savings Principal Type of
Association Name Occupation Business
- -------------- ---- ---------- --------
<S> <C> <C> <C>
Director. . . . Andrew F. Brimmer President, Consulting
Brimmer & Co., Inc.
Director . . . Richard A. Retired Chairman of Utility Company
Clarke the Board, Pacific
Gas and Electric
Company
President and
Director. . . David A. Coulter Chief Executive Banking
Officer and
President, Bank
America Corporation
and Bank of America National
Trust & Savings Association
Director. . . . Timm F. Crull Retired Chairman of Food and Related
the Board, Products
Nestle USA, Inc.
Director. . . . Kathleen Feldstein President, Economic
Economics Consulting
Studies, Inc.
Director . . . . Donald E. Guinn Chairman Emeritus, Telecommuni-
Pacific Telesis cations and
Group Diversified
Holding Com-
pany
Director . . . . Philip M. Hawley Retired Chairman Retail
and Chief Executive Department
Officer, The Stores
Broadway
Stores, Inc.
Director . . . . Frank L. Hope, Jr. Consulting Architectural
Architect and Engineering
Consulting
Director . . . . Ignacio E. Lozano, Chairman, Newspaper
Jr. "La Opinion" Publishing
Director . . . . Walter E. Massey, President, Higher
Ph.D. Morehouse Education
College
Director. . . . John M. Richman Counsel, Wachtell, Law firm
Lipton, Rosen &
Katz
</TABLE>
17
<PAGE> 733
<TABLE>
<CAPTION>
Position with
Bank of America
National Trust
and Savings Principal Type of
Association Name Occupation Business
- -------------- ---- ---------- --------
<S> <C> <C> <C>
Chief Executive
Officer and
Director . . . Richard M. Chairman of the Banking
Rosenberg Board, Bank
America Corporation and
Bank of America National
Trust & Savings Association
Director. . . . A. Michael Spence Dean of the Higher
Graduate School of Education
Business, Stanford
University
</TABLE>
Item 29. Principal Underwriters
----------------------
(a) Principal underwriter (exclusive distributor) also
acts as principal underwriter or exclusive distributor for The Infinity Funds,
Inc., The Pilot Funds, Seafirst Retirement Funds and Time Horizon Funds.
(b) For information as to the business, profession,
vocation or employment of a substantial nature of each of the principal
underwriter, its officers and directors, reference is made to their Form BD
File No. 8-37601 filed by the principal underwriter. For information, as to
the positions or offices of each of the principal underwriter, its officers and
directors, reference is made to the section entitled "Management" in the
Statements of Additional Information. Both the principal underwriter's Form BD
and the Registrants Statements of Additional Information are incorporated
herein by reference.
(c) Not Applicable.
18
<PAGE> 734
Item 30. Location of Accounts and Records
--------------------------------
(1) Concord Holding Corporation, 125 West 55th Street,
New York, New York 10019 (records relating to the
administrator).
(2) Concord Financial Group, Inc., 125 West 55th Street,
New York, New York 10019 (records relating to the
distributor).
(3) Concord Management (Ireland) Limited, Floor 2,
Block 2, Harcourt Centre, Dublin 2, Ireland (records
relating to the administrator for the Funds it
services).
(4) Bank of America National Trust and Savings
Association, 555 California Street, San Francisco,
California 94104 (records relating to the investment
adviser).
(5) Bank of America National Trust and Savings
Association, 555 California Street, San Francisco,
California 94104 (records relating to the
Sub-Custodian for the Funds it services).
(6) The Bank of New York, 90 Washington Street, New York,
New York 10286) (records relating to the custodian
for the Funds it services).
(7) BISYS Fund Services, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219 (records relating to the
transfer agent for the Funds it services).
(8) Drinker Biddle & Reath, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107- 3496 (Registrant's Charter,
By-Laws and Minute Books).
(9) PNC Bank, N.A., Broad and Chestnut Streets,
Philadelphia, PA 19101, (records relating to the
custodian for the Funds it services).
(10) PFPC, Inc. 103 Bellevue Parkway, Wilmington, DE
19809, (records relating to the sub-administrator for
the Funds it services).
Item 31. Management Services
-------------------
Inapplicable.
19
<PAGE> 735
Item 32. Undertakings
------------
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940, as amended, as though such
provisions were applicable to it.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom a prospectus
is delivered.
20
<PAGE> 736
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia, and the
Commonwealth of Pennsylvania, on this 30th day of April, 1996.
PACIFIC HORIZON FUNDS, INC.
Registrant
*/Cornelius John Pings
-------------------------------------
Cornelius John Pings
President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
*/Cornelius John Pings Chairman of the April 30, 1996
- ---------------------- Board and President
Cornelius John Pings
/s/ Mark Nagle Treasurer (Chief April 30, 1996
- ---------------------- Accounting and
Mark Nagle Financial Officer)
*/Thomas M. Collins Director April 30, 1996
- ----------------------
Thomas M. Collins
*/Douglas B. Fletcher Director April 30, 1996
- ----------------------
Douglas B. Fletcher
*/Robert E. Greeley Director April 30, 1996
- ----------------------
Robert E. Greeley
*/Kermit O. Hanson Director April 30, 1996
- ----------------------
Kermit O. Hanson
*/Kenneth L. Trefftzs Director April 30, 1996
- ----------------------
Kenneth L. Trefftzs
</TABLE>
*By: /s/ W. Bruce McConnel
------------------------------
W. Bruce McConnel, III
Attorney-in-fact
21
<PAGE> 737
SIGNATURES
Master Investment Trust, Series I has duly caused this
Amendment to the Registration Statement of the Pacific Horizon Funds, Inc. as
it relates to the Corporate Bond, Flexible Bond, Blue Chip, Asset Allocation
and International Equity Funds only, to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia, and the
Commonwealth of Pennsylvania on this 30th day of April, 1996.
MASTER INVESTMENT TRUST, SERIES I
/s/ Richard E. Stierwalt
--------------------------
Richard E. Stierwalt
President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement of Pacific Horizon Funds, Inc. has
been signed below by the Trustees and Principal Officers of Master Investment
Trust, Series I on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/ Richard Stierwalt President April 30, 1996
- ---------------------
Richard E. Stierwalt
*/Thomas M. Collins Chairman of the Board April 30, 1996
- -------------------
Thomas M. Collins
/s/ Adrian J. Waters Executive Vice President April 30, 1996
- -------------------- Assistant Secretary and
Adrian J. Waters Treasurer (Chief Accounting
and Financial Officer)
*/Michael Austin Trustee April 30, 1996
- -------------------
Michael Austin
*/Robert A. Nathane Trustee April 30, 1996
- -------------------
Robert A. Nathane
*/Robert E. Greeley Trustee April 30, 1996
- -------------------
Robert E. Greeley
*/Cornelius J. Pings Trustee April 30, 1996
- --------------------
Cornelius J. Pings
</TABLE>
*By: /s/ W. Bruce McConnel, III
------------------------------
W. Bruce McConnel, III
Attorney-in-fact
22
<PAGE> 738
PACIFIC HORIZON FUNDS, INC.
Certificate of Secretary
The following resolution was duly adopted by the Board of Directors of
Pacific Horizon Funds, Inc. on April 23, 1996 and remains in effect on the date
hereof:
FURTHER RESOLVED, that the directors and officers of Pacific Horizon who
may be required to execute any amendments to Pacific Horizon's Registration
Statement be, and each hereby is, authorized to execute a power of attorney
appointing W. Bruce McConnel, III and Cornelius J. Pings their true and
lawful attorney or attorneys, to execute in their name, place and stead, in
their capacity as director or officer, or both, of Pacific Horizon any and
all amendments to the Registration Statement, and all instruments necessary
or incidental in connection therewith, and to file the same with the SEC;
and either of said attorneys shall have the power to act thereunder with or
without the other said attorney and shall have full power of substitution
and resubstitution; and to do in the name and on behalf of said directors
and officers, or any or all of them, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and
to all intents and purposes as each of said directors or officers, or any or
all of them, might or could do in person, said acts of said attorneys, being
hereby ratified and approved.
IN WITNESS WHEREOF, I have hereunto set my hand this 29th day of April,
1996.
PACIFIC HORIZON FUNDS, INC.
/s/ W. Bruce McConnel, III
--------------------------
W. Bruce McConnel, III
Secretary
<PAGE> 739
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Cornelius John Pings, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable Pacific Horizon
Funds, Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a director and/or officer of the Fund any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/ Cornelius John Pings
-------------------------------------
Cornelius John Pings
Date: December 6, 1995
<PAGE> 740
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Thomas M. Collins, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Thomas M. Collins
-------------------------------------
Thomas M. Collins
Date: December 7, 1995
<PAGE> 741
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Douglas, B. Fletcher, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Douglas B. Fletcher
--------------------------------------
Douglas B. Fletcher
Date: December 7, 1995
<PAGE> 742
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Robert E. Greeley, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Robert E. Greeley
-------------------------------------
Robert E. Greeley
Date: December 7, 1995
<PAGE> 743
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Kermit O. Hanson, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Kermit O. Hanson
-------------------------------------
Kermit O. Hanson
Date: December 6, 1995
<PAGE> 744
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Kenneth L. Trefftzs, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Kenneth L. Trefftzs
-------------------------------------
Kenneth L. Trefftzs
Date: December 6, 1995
<PAGE> 745
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Thomas M. Collins, whose signature appears below, does hereby constitute and
appoint W. Bruce McConnel, III, his true and lawful attorney and agent, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said attorney and agent may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
s/Thomas M. Colllins
--------------------
Thomas M. Collins
Date: October 6, 1993
<PAGE> 746
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Michael Austin, whose signature appears below, does hereby constitute and
appoint Thomas M. Collins and W. Bruce McConnel, III, and either of them, his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
s/Michael Austin
----------------
Michael Austin
Date: October 6, 1993
<PAGE> 747
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Robert A. Nathane, whose signature appears below, does hereby constitute and
appoint Thomas M. Collins and W. Bruce McConnel, III, and either of them, his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
s/Robert A. Nathane
-------------------
Robert A. Nathane
Date: October 6, 1993
<PAGE> 748
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Robert E. Greeley, whose signature appears below, does hereby constitute and
appoint Thomas M. Collins and W. Bruce McConnel, III, and either of them, his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
s/Robert E. Greeley
-------------------
Robert E. Greeley
Date: October 6, 1993
<PAGE> 749
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Cornelius John Pings, whose signature appears below, does hereby constitute
and appoint Thomas M. Collins and W. Bruce McConnel, III, and either of them,
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
s/Cornelius John Pings
----------------------
Cornelius John Pings
Date: December 6, 1995
<PAGE> 750
EXHIBIT INDEX
--------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
1(v) Articles Supplementary classifying
shares filed October 30, 1995.
2(e) Amendment to By-Laws as approved
by the Registrant's Board of
Directors on November 29, 1995.
5(f) Form of Investment Advisory
Agreement between Registrant and
Bank of America National Trust &
Savings Association with respect to
the National Municipal Bond Fund.
8(d) Transfer Agency Agreement between
Registrant and BISYS Fund Services,
Inc.
9(t) Form of Amendment No. 6 to the
Administration Agreement.
11 Consent of Drinker Biddle & Reath.
15(f) Distribution and Services Plan and related
Distribution and Administrative
Servicing Agreement with respect to Registrant's Class
"S" and Class "X" shares.
18 Amended and Restated Plan Pursuant to
Rule 18f-3 for Operation of a
Multi-Class System.
</TABLE>
<PAGE> 1
EXHIBIT 1(V)
ARTICLES SUPPLEMENTARY
PACIFIC HORIZON FUNDS, INC., a Maryland corporation having its
principal office in Maryland in the City of Baltimore, Maryland (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The total number of shares of capital stock
which the Corporation was heretofore authorized to issue was Two
Hundred Billion (200,000,000,000) shares (of the par value of One Mill
($.001) each) of Common Stock classified as follows:
<TABLE>
<CAPTION>
Number of Shares
Classification Authorized
-------------- ----------------
<S> <C>
Class A 15,000,000,000
Class A-Special Series 1 15,000,000,000
Class A-Special Series 2 14,400,000,000
Class B 15,000,000,000
Class B-Special Series 1 15,000,000,000
Class B-Special Series 2 28,000,000,000
Class C 250,000,000
Class D 1,000,000,000
Class E 250,000,000
Class F 250,000,000
Class G 250,000,000
Class I 1,500,000,000
Class I-Special Series 1 3,000,000,000
Class I-Special Series 2 3,000,000,000
Class J 1,000,000,000
Class J-Special Series 1 1,000,000,000
Class K 15,000,000,000
Class K-Special Series 1 15,000,000,000
Class K-Special Series 2 7,000,000,000
Class L 15,000,000,000
Class L-Special Series 1 15,000,000,000
Class L-Special Series 2 7,000,000,000
Class M 100,000,000
Class N 100,000,000
Class O 100,000,000
Class P 1,500,000,000
Class P-Special Series 1 1,500,000,000
Class P-Special Series 2 8,000,000,000
Class Q 100,000,000
Class R 100,000,000
Class S 100,000,000
Class T 100,000,000
Class U 100,000,000
Class V 100,000,000
Class W 100,000,000
Unclassified 100,000,000
</TABLE>
SECOND: Pursuant to its powers under Section (4) of
Article VI of the Corporation's Articles of Incorporation
<PAGE> 2
(the "Charter"), the Board of Directors of the Corporation has
reclassified 1,650,000,000 shares of previously classified, authorized
and unissued Common Stock as follows:
<TABLE>
<CAPTION>
Previously Classified Shares Being Number of Shares
Reclassified Reclassified Shares Reclassified
---------------- ---------------------- -------------------
<S> <C> <C>
Class D Class D-Special Series 3 600,000,000
Class E Class E-Special Series 3 150,000,000
Class F Class F-Special Series 3 150,000,000
Class G Class G-Special Series 3 150,000,000
Class M Class M-Special Series 3 60,000,000
Class N Class N-Special Series 3 60,000,000
Class O Class O-Special Series 3 60,000,000
Class Q Class Q-Special Series 3 60,000,000
Class R Class R-Special Series 3 60,000,000
Class S Class S-Special Series 3 60,000,000
Class T Class T-Special Series 3 60,000,000
Class U Class U-Special Series 3 60,000,000
Class V Class V-Special Series 3 60,000,000
Class W Class W-Special Series 3 60,000,000
</TABLE>
pursuant to resolutions unanimously adopted by the Board of Directors
of the Corporation on July 26, 1995.
THIRD: Pursuant to Article VI, Section (5) of the
Charter, the shares of Common Stock newly reclassified hereby shall
have the following preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption:
1. ASSETS BELONGING TO A CLASS. All consideration received
by the Corporation for the issue and sale of such
Class D - Special Series 3, Class E - Special Series 3,
Class F - Special Series 3, Class G - Special Series 3,
Class M - Special Series 3, Class N - Special Series 3,
Class O - Special Series 3, Class Q - Special Series 3,
Class R - Special Series 3, Class S - Special Series 3,
Class T - Special Series 3, Class U - Special Series 3,
Class V - Special Series 3 and Class W - Special Series 3
(collectively, the "Special Series 3" shares) shall be
invested and reinvested with the consideration received by
-2-
<PAGE> 3
the Corporation for the issue and sale of all other shares now or
hereafter classified with the same alphabetical designation as the
particular Special Series 3 shares (a "Common Stock Group")
(irrespective of whether said shares have been classified as a part of
a series of said Common Stock Group and, if so classified as a part of
a series, irrespective of the particular series classification), along
with all income, earnings, profits, and proceeds thereof, including
any proceeds derived from the sale, exchange, or liquidation thereof,
and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, and any general assets of
the Corporation allocated to the particular Common Stock Group by the
Board of Directors in accordance with the Corporation's Charter. All
income, earnings, profits, and proceeds, including any proceeds
derived from the sale, exchange or liquidation of such shares, and any
assets derived from any reinvestment of such proceeds in whatever form
shall be allocated among shares of a Common Stock Group, (irrespective
of whether said shares have been classified as a part of a series of
said Common Stock Group and, if so classified as a part of a series,
irrespective of the particular series classification), in proportion
to their respective net asset values or in such other manner as
determined in accordance with law.
2. LIABILITIES BELONGING TO A CLASS. All of the
liabilities (including expenses) of the Corporation in respect of a
Common Stock Group and in respect of any general liabilities
(including expenses) of the Corporation allocated to shares of that
Common Stock Group in accordance with the Charter of the Corporation
and law shall be allocated among shares in the Common Stock Group
(irrespective of whether said shares have been classified as a part of
a series of said Common Stock Group and, if so classified as a part of
a series, irrespective of the particular series classification), in
proportion to their net asset values, or in such other manner as
determined in accordance with law, except that, subject to law:
(a) shares of each class and/or series
(collectively, "Series") of a Common Stock Group shall bear
the expenses and liabilities relating to any agreements or
arrangements entered into by or on behalf of the Corporation
pursuant to which an organization or other person agrees to
provide services with respect to such Series but not with
respect to another Series of the Common Stock Group ("Other
Series"), as well as any other expenses and liabilities
directly attributable to such Series which the Board of
Directors determines should be borne solely by such Series;
and
-3-
<PAGE> 4
(b) shares of a Series of a Common Stock Group
shall not bear the expenses and liabilities relating to any
agreements or arrangements entered into by or on behalf of the
Corporation pursuant to which an organization or other person
agrees to provide services with respect to an Other Series,
but not with respect to such Series of a Common Stock Group as
well as any other expenses and liabilities directly
attributable to shares of a Common Stock Group which the Board
of Directors determines should be borne solely by such Other
Series;
3. PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS,
RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS, AND TERMS
AND CONDITIONS OF REDEMPTION. Each share of a Common Stock Group
shall otherwise have the same preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as each other
share of that Common Stock Group (irrespective of whether said share
has been classified as part of a Series of said Common Stock Group
and, if so classified as part of a Series, irrespective of the
particular Series classification), except that:
(a)(i) on any matter that pertains to the
agreements, arrangements, expenses or liabilities described in
clause (a) of Section 2 above (or to any plan or other
document adopted by the Corporation relating to said
agreements, arrangements, expenses and liabilities) and is
submitted to a vote of shareholders of the Corporation, only
shares of the Series affected shall be entitled to vote,
provided that if said matter affects shares of an Other
Series, such other affected shares shall also be entitled to
vote, and in such case shares shall be voted in the aggregate
together with such other affected shares and not by Series
except where otherwise required by law or permitted by the
Board of Directors of the Corporation; and if any matter
submitted to a vote of the shareholders does not affect shares
of a Series, said shares shall not be entitled to vote (except
where otherwise required by law or permitted by the Board of
Directors) even though the matter is submitted to a vote of
the holders of shares of capital stock of the Corporation
other than shares of that Series;
(b) on any matter that pertains to the
agreements, arrangements, expenses or liabilities described in
clause (b) of Section 2 above (or any plan or other document
adopted by the Corporation relating to said agreements,
arrangements, expenses and
-4-
<PAGE> 5
liabilities) (collectively, "Agreements") and is submitted to
a vote of shareholders of the Corporation, a Series for which
services are not provided under a particular Agreement shall
not be entitled to vote, except where otherwise required by
law or permitted by the Board of Directors of the Corporation
and except that if said matter affects said Series such shares
shall be entitled to vote, and in such case shares of said
Series shall be voted in the aggregate together with all other
shares of capital stock of the Corporation voting on the
matter and not by Series except where otherwise required by
law or permitted by the Board of Directors of the Corporation;
(c) a contingent deferred sales charge may be
imposed on shares of a particular Series of a Common Stock
Group and may vary among shares within such Series;
(d) At such times, which may vary among the
holders of shares within the series, as may be determined by
the Board of Directors (or with the authorization of the Board
of Directors, the officers of the Corporation) in accordance
with the Investment Company Act of 1940, as amended, and
applicable rules and regulations of the National Association
of Securities Dealers, Inc. and reflected in the registration
statement relating to the Corporation's shares of a Common
Stock Group, shares of a Series of a Common Stock Group may be
automatically converted into shares of an Other Series of the
Common Stock Group based on the relative net asset values of
such series at the time of conversion, subject, however, to
any conditions of conversion that may be imposed by the Board
of Directors (or with the authorization of the Board of
Directors, the officers of the Corporation) and reflected in
the registration statement relating to the Common Stock Group
as aforesaid.
FOURTH: The total number of shares of capital stock
which the Corporation is presently authorized to issue remains Two
Hundred Billion (200,000,000,000) shares (of the par value of One Mill
($.001) each) of Common Stock classified as follows:
<TABLE>
<CAPTION>
Number of Shares
Classification Authorized
-------------- ----------------
<S> <C>
Class A 15,000,000,000
Class A-Special Series 1 15,000,000,000
Class A-Special Series 2 14,400,000,000
Class B 15,000,000,000
</TABLE>
-5-
<PAGE> 6
<TABLE>
<S> <C>
Class B-Special Series 1 15,000,000,000
Class B-Special Series 2 28,000,000,000
Class C 250,000,000
Class D 400,000,000
Class D-Special Series 3 600,000,000
Class E 100,000,000
Class E-Special Series 3 150,000,000
Class F 100,000,000
Class F-Special Series 3 150,000,000
Class G 100,000,000
Class G-Special Series 3 150,000,000
Class I 1,500,000,000
Class I-Special Series 1 3,000,000,000
Class I-Special Series 2 3,000,000,000
Class J 1,000,000,000
Class J-Special Series 1 1,000,000,000
Class K 15,000,000,000
Class K-Special Series 1 15,000,000,000
Class K-Special Series 2 7,000,000,000
Class L 15,000,000,000
Class L-Special Series 1 15,000,000,000
Class L-Special Series 2 7,000,000,000
Class M 40,000,000
Class M-Special Series 3 60,000,000
Class N 40,000,000
Class N-Special Series 3 60,000,000
Class O 40,000,000
Class O-Special Series 3 60,000,000
Class P 1,500,000,000
Class P-Special Series 1 1,500,000,000
Class P-Special Series 2 8,000,000,000
Class Q 40,000,000
Class Q-Special Series 3 60,000,000
Class R 40,000,000
Class R-Special Series 3 60,000,000
Class S 40,000,000
Class S-Special Series 3 60,000,000
Class T 40,000,000
Class T-Special Series 3 60,000,000
Class U 40,000,000
Class U-Special Series 3 60,000,000
Class V 40,000,000
Class V-Special Series 3 60,000,000
Class W 40,000,000
Class W-Special Series 3 60,000,000
Unclassified 100,000,000
</TABLE>
The aggregate par value of all shares having par value remains Two
Hundred Million Dollars ($200,000,000). The total number of shares the
Corporation is authorized to issue and the aggregate par value of all shares
having par value remains unchanged.
-6-
<PAGE> 7
IN WITNESS WHEREOF, Pacific Horizon Funds, Inc. has caused these
presents to be signed in its name and on its behalf by an Executive Vice
President and its corporate seal to be hereunto affixed and attested to by its
Assistant Secretary as of October 27th, 1995.
PACIFIC HORIZON FUNDS, INC.
Attest:
By:/s/ William B. Blundin
-----------------------------
William B. Blundin
Executive Vice President
/s/ George O. Martinez
- ----------------------
George O. Martinez
Assistant Secretary
-7-
<PAGE> 8
CERTIFICATE
THE UNDERSIGNED, Executive Vice President of PACIFIC HORIZON FUNDS,
INC., who executed on behalf of said Corporation the attached Articles
Supplementary of said Corporation, of which this Certificate is made a part,
hereby acknowledges, in the name and on behalf of said Corporation, the
attached Articles Supplementary to be the corporate act of said Corporation,
and certifies that to the best of his knowledge, information and belief the
matters and facts set forth in the attached Articles Supplementary with respect
to authorization and approval are true in all material respects, under the
penalties for perjury.
/s/ William B. Blundin
-----------------------
William B. Blundin
Executive Vice President
Dated: October 27th, 1995
<PAGE> 1
EXHIBIT 2(E)
PACIFIC HORIZON FUNDS, INC.
(the "Company")
AMENDMENT TO BY-LAWS
ADOPTED BY THE BOARD OF DIRECTORS
ON NOVEMBER 29, 1995
ARTICLE IV, SECTION 1 of the Company's By-Laws was amended in
its entirety as follows:
SECTION 1. OWNERSHIP OF SHARES. The ownership of Shares
shall be recorded on the Corporation's record books. No stock certificates
will be issued. The Corporation's record books shall be conclusive as to the
identity of record holders and as to the number of Shares held by such
Shareholder. All other provisions contained in these by-laws which relate to
stock certificates shall apply only to stock certificates which are outstanding
on December 9, 1995.
<PAGE> 1
EXHIBIT 5(F)
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of ___________, 1996 between PACIFIC
HORIZON FUNDS, INC., a Maryland Corporation (the "Company"), and Bank of
America National Trust and Savings Association (the "Adviser").
WHEREAS, the Company is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Company desires to retain the Adviser to furnish
investment advisory services to the Company;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Company hereby appoints the Adviser
to act as investment adviser to the Company's National Municipal Bond Fund
investment portfolio (the "Fund") for the period and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
a. In the event that the Company establishes one
or more investment portfolios other than the Fund with respect to which it
desires to retain the Adviser to act as investment adviser hereunder, it shall
notify the Adviser in writing. If the Adviser is willing to render such
services under this Agreement it shall so notify the Company in writing,
whereupon such investment portfolio shall become a "Fund" (as defined below)
hereunder and shall be subject to the provisions of this Agreement to the same
extent as the Fund except to the extent that said provisions (including those
relating to the compensation payable by the Fund to the Adviser) are modified
with respect to such Fund in writing by the Company and the Adviser at the
time. The Fund and any additional investment portfolios established hereunder
in accordance with this paragraph are sometimes collectively referred to herein
as the "Funds" and individually as a "Fund."
2. SERVICES. Subject to the supervision of the
Company's Board of Directors (the "Board"), the Adviser, in consultation with
any Sub-Adviser appointed pursuant to Section 3 hereof with respect to a
particular Fund, will provide a continuous investment program for each of the
Funds, including investment research and management with respect to all
securities
<PAGE> 2
and investments and cash equivalents in the Funds. The Adviser will determine
from time to time what securities and other investments will be purchased,
retained or sold by the Company with respect to each Fund. The Adviser will
provide the services under this Agreement in accordance with each Fund's
investment objective, policies and restrictions as stated in the Fund's
registration statement, as from time to time amended, and resolutions of the
Board. The Adviser further agrees that it:
a. Will conform with all applicable rules and
regulations of the Securities and Exchange Commission and will in addition
conduct its activities under this Agreement in accordance with other applicable
law, including but not limited to banking law.
(b) Will review, monitor and report to the Board
regarding the performance and investment procedures of any Sub- Adviser.
(c) Will assist and consult with any Sub-Adviser
appointed with respect to a particular Fund in connection with that Fund's
continuous investment program.
(d) Will place all orders for the purchase and sale
of portfolio securities for the account of each Fund with brokers or dealers
selected by the Adviser. In executing portfolio transactions and selecting
brokers or dealers, the Adviser will use its best efforts to seek on behalf of
the Company and each Fund the best overall terms available. In assessing the
best overall terms available for any transaction the Adviser shall consider all
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, both
for the specific transaction and on a continuing basis. In evaluating the best
overall terms available, and in selecting the broker or dealer to execute a
particular transaction, the Adviser may also consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided to any Fund and/or other
accounts over which the Adviser or any affiliate of the Adviser exercises
investment discretion. The Adviser is authorized, subject to the prior
approval of the Board, to pay to a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
any Fund which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if, but only if, the
Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer viewed in terms of that particular transaction or in terms of
the overall
<PAGE> 3
responsibilities of the Adviser to the particular Fund and to the Company. In
no instance will portfolio securities be purchased from or sold to the Adviser,
any Sub-Adviser (as defined in Section 3, hereinafter the "Sub-Advisor") or
Concord Holding Corporation, the Company's administrator (the "Administrator"),
or an affiliated person of any of them acting as principal or as broker, except
as permitted by law. In addition, the Adviser is authorized to take into
account the sale of shares of the Company in allocating to brokers or dealers
(including brokers and dealers that are affiliated with the Adviser or Concord)
purchase and sale orders for the Funds' portfolio securities, provided that the
Adviser believes that the quality of the transaction and the commission are
comparable to what they would be with other qualified firms. In executing
portfolio transactions for any Fund, the Adviser may, but shall not be
obligated to, to the extent permitted by applicable laws and regulations,
aggregate the securities to be sold or purchased with those of the Company's
other investment portfolios and its other clients where such aggregation is not
inconsistent with the policies set forth in the Company's registration
statement. In such event, the Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the transaction, in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Funds and such other clients.
In performing the investment services designated
hereunder, the Adviser, is authorized to purchase, sell or otherwise deal with
securities or other instruments for which (a) Bank of America National Trust
and Savings Association, (b) any affiliate of Bank of America National Trust
and Savings Association, (c) an entity in which Bank of America National Trust
and Savings Association has a direct or indirect interest, or (d) another
member of a syndicate or other intermediary (where an entity referred to in
(a), (b) or (c) above was a member of the syndicate), has acted, now acts or in
the future will act as an underwriter, syndicate member, market-maker, dealer,
broker or in any other similar capacity, whether the purchase, sale or other
dealing occurs during the life of the syndicate or after the close of the
syndicate, provided such purchase, sale or dealing is permitted under the
Investment Company Act of 1940 and the rules thereunder. Insofar, as permitted
by law any rules of or under applicable law prohibiting or restricting in any
way an agent or fiduciary from dealing with itself or from dealing with respect
to any matter in which it may or does have a personal interest shall not apply
to the Adviser, to the extent its actions are authorized under this paragraph.
(e) Will maintain all books and records with
respect to the securities transactions of the Funds, keep books of account with
respect to such Funds and furnish the Board such periodic special reports as
the Board may request.
<PAGE> 4
(f) Will maintain a policy and practice of
conducting its investment advisory operations independently of its commercial
banking operations. When the Adviser makes investment recommendations for a
Fund, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale
for the Fund's account are customers of its commercial department. In dealing
with commercial customers, the Adviser's commercial department will not inquire
or take into consideration whether securities of those customers are held by
the Funds.
(g) Will treat confidentially and as proprietary
information of the Company all records and other information relative to the
Company and prior or present Company shareholders or those persons or entities
who respond to inquiries concerning investment in the Company, and will not use
such records and information for any purpose other than performance of its
responsibilities and duties hereunder or under any other agreement with the
Company except after prior notification to and approval in writing by the
Company, which approval shall not be unreasonably withheld and may not be
withheld where the Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information
by duly constituted authorities, or when so requested by the Company. Nothing
contained herein, however, shall prohibit the Adviser from advertising to or
soliciting the public generally with respect to other products or services,
including, but not limited to, any advertising or marketing via radio,
television, newspapers, magazines or direct mail solicitation, regardless of
whether such advertisement or solicitation may coincidentally include prior or
present shareholders of the Company or those persons or entities who have
responded to inquiries regarding the Company.
3. SUB-ADVISER. It is understood that the Adviser may
from time to time employ or associate with itself such person or persons as the
Adviser believes to be fitted to assist it in the performance of this Agreement
(each a "Sub-Adviser"); provided, however, that the compensation of such person
or person shall be paid by the Adviser and that the Adviser shall be as fully
responsible to the Company for the acts and omissions of any such person as it
is for its own acts and omissions; and provided further, that the retention of
any Sub-Adviser shall be approved as may be required by the 1940 Act.
4. SERVICES NOT EXCLUSIVE. The Adviser will for all
purposes herein be deemed to be an independent contractor and will, unless
otherwise expressly provided herein or authorized by the Board from time to
time, have no authority to act for or represent the Company in any way or
otherwise be deemed its agent. The investment management services furnished by
the Adviser hereunder are not deemed exclusive, and the Adviser will
<PAGE> 5
be free to furnish similar services to others so long as its services under
this Agreement are not impaired thereby.
5. BOOKS AND RECORDS. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Adviser hereby agrees that
all records which it maintains for the Company are the property of the Company
and further agrees to surrender promptly to the Company any such records upon
the Company's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
6. EXPENSES. During the term of this Agreement, the
Adviser will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Company.
7. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, the Company will pay the Adviser
and the Adviser will accept as full compensation therefor a fee, computed daily
and paid monthly (in arrears), at an annual rate of .35% of the net assets of
the National Municipal Bond Fund. Such fee as is attributable to a Fund will
be a separate charge to each such Fund and will be the several (and not joint
or joint and several) obligation of each such Fund.
If in any fiscal year the aggregate expenses of any Fund (as
defined under the securities regulations of any state having jurisdiction over
the Fund) exceed the expense limitations of any such state, the Adviser will
reimburse the Fund to the extent necessary to reduce such Fund's expenses below
such expense limitation. The obligation of the Adviser to reimburse any Fund
hereunder is limited in any fiscal year to the amount of its fee hereunder for
such fiscal year with respect to such Fund; provided, however, that
notwithstanding the foregoing, the Adviser will reimburse any Fund for excess
expenses regardless of the amount of fees paid to it during such fiscal year to
the extent that the securities regulations of any state having jurisdiction
over the Fund so require. Such expense reimbursement, if any, will be
estimated and accrued daily and paid on a monthly basis.
8. LIMITATION OF LIABILITY. Subject to the provisions
of Section 3 hereof concerning the Adviser's responsibility for the acts and
omissions of persons employed by or associated with the Adviser, the Adviser
will not be liable for any error of judgment or mistake of law or for any loss
suffered by the Company in connection with the performance of this Agreement,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for
<PAGE> 6
services or a loss resulting from willful misfeasance, bad faith or negligence
on the part of the Adviser in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
9. DURATION AND TERMINATION. This Agreement will become
effective with respect to the National Municipal Bond Fund on the date first
written above. This Agreement will become effective with respect to any
additional Fund on the date of receipt by the Company of notice from the
Adviser in accordance with Section 1(b) hereof that the Adviser is willing to
serve as investment adviser with respect to such Fund, provided that this
Agreement (as supplemented by the terms specified in any notice and agreement
pursuant to Section 1(b) hereof) shall have been approved by the shareholders
of the Fund in accordance with the requirements of the 1940 Act.
Unless sooner terminated as provided herein, this Agreement
will continue in effect until October 31, 1996. Thereafter, if not terminated,
this Agreement shall continue in effect as to a particular Fund for successive
annual periods, provided such continuance is specifically approved at least
annually (a) by the vote of a majority of those members of the Board who are
not interested persons of any party to this Agreement, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by the Board
or by vote of a majority of the outstanding voting securities of such Fund.
Notwithstanding the foregoing, this Agreement may be terminated as to any Fund
at any time, without the payment of any penalty, by the Company (by vote of the
Board or by vote of a majority of the outstanding voting securities of such
Fund), or by the Adviser, on sixty days' written notice. This Agreement will
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meaning as the
meaning of such terms in the 1940 Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. No amendment of this
Agreement will be effective as to a particular Fund until approved by vote of a
majority of the outstanding voting securities of such Fund.
11. NOTICES. Notices of any kind to be given to the
Adviser hereunder by the Company will be in writing and will be duly given if
mailed or delivered to the Adviser at 555 South Flower Street, 5th Floor, Los
Angeles, California 90071, Attention: Sandra C. Brown, or at such other
address or to such individual as will be so specified by the Adviser to the
Company. Notices of any kind to be given to the Company hereunder by the
<PAGE> 7
Adviser will be in writing and will be duly given if mailed or delivered to the
Company at 125 West 55th Street, New York, New York 10019, Attention: William
B. Blundin (with a copy to Association of American Universities, One DuPont
Circle, Suite 730, Washington, DC 20036, Attention: Cornelius J. Pings,
President), or at such other address or to such individual as will be so
specified by the Company to the Adviser.
12. MISCELLANEOUS. The captions in this Agreement are
included for convenience of reference only and in no way define or limit any of
the provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be
affected thereby. This Agreement will be binding upon and will inure to the
benefit of the parties hereto and their respective successors and will be
governed by the internal laws, and not the law of conflicts, of the State of
Maryland; provided that nothing herein will be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, as
amended, or any rule or regulation of the Securities and Exchange Commission
thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PACIFIC HORIZON FUNDS, INC.
By: ______________________________
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATIONS
By: ______________________________
Name:
Title:
<PAGE> 1
EXHIBIT 8(D)
TRANSFER AGENCY AGREEMENT
This Transfer Agency Agreement is made as of the 11th of December,
1995 between Pacific Horizon Funds, Inc., a Maryland corporation (herein called
the "Company"), having its principal office and place of business at 3435
Stelzer Road, Columbus, Ohio 43219-3035 and BISYS Fund Services, Inc., an Ohio
corporation having its principal office and place of business at 3435 Stelzer
Road, Columbus, Ohio 43219-3035 (herein called the "Transfer Agent").
WITNESSETH:
That for and in consideration of the mutual promises herein set
forth, the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases
shall have the following meanings:
1. "APPROVED INSTITUTION" shall mean an entity so
named in a Certificate. From time to time the Company may amend a previously
delivered Certificate by delivering to the Transfer Agent a Certificate naming
an additional entity or deleting any entity named in a previously delivered
Certificate.
2. "BOARD OF DIRECTORS" shall mean the Board of
Directors of the Company.
3. "CERTIFICATE" shall mean any notice, instruction,
or other instrument in writing, authorized or required by this Agreement to be
given to the Transfer Agent by the Company which is signed by any Officer, as
hereinafter defined, and actually received by the Transfer Agent.
4. "CLASS" shall mean a subclass of shares within
a particular Fund.
5. "CUSTODIAN" shall mean the financial institution
appointed as custodian under the terms and
<PAGE> 2
conditions of the Custody Agreement between the financial institution and the
Company, or its successor(s).
6. "COMPANY ACCOUNTANT" shall mean the entity
appointed as accountant under the terms and conditions of the Accounting
Services Agreement between the entity and the Company, or its successor(s).
7. "COMPANY BUSINESS DAY" shall be deemed to be each
day the Company is open for trading.
8. "MANAGER" shall mean Bank of America, NT&SA,
acting under the terms and conditions of the Management Agreement and includes
any successor and assigns.
9. "OFFICER" shall be deemed to be the Company's
Chairman of the Board, the Company's President, any Vice President of the
Company, any Assistant Vice President of the Company, the Company's Secretary,
the Company's Treasurer, the Company's Controller, any Assistant Controller of
the Company, any Assistant Treasurer of the Company, any Assistant Secretary of
the Company, and any other person duly authorized by the Board of Directors of
the Company to execute any Certificate, instruction, notice or other instrument
on behalf of the Company and named in the Certificate annexed hereto as
Appendix A, as such Certificate may be amended from time to time, and any
person reasonably believed by the Transfer Agent to be such a person.
10. "PROSPECTUS" shall mean with respect to a Class
of Shares, the last Company prospectus actually received by the Transfer Agent
from the Company with respect to such Class of Shares and with respect to which
the Company has indicated a Registration Statement under the Securities Act of
1933, as amended, has become effective, including the Statements of Additional
Information, incorporated by reference therein.
11. "FUNDS" shall mean the various portfolios of the
Company as described from time to time in the current and effective
Prospectuses.
12. "SHARES" shall mean all or any part of each Class
of shares of common stock of the Company listed in the Certificate, attached
hereto as Appendix B, as may be amended from time to time, which are from time
to time authorized and/or issued by the Company.
<PAGE> 3
13. "TRANSFER AGENT" shall mean BISYS Fund Services,
Inc., as transfer agent and dividend disbursing agent under the terms and
conditions of this Agreement, its successor(s) or assign(s).
14. "OUT-OF-POCKET EXPENSES" means amounts reasonably
necessary and actually paid to third parties by the Transfer Agent in the
provision of the Transfer Agent services or pursuant to this Agreement. Such
amounts will not include charges of legal counsel, but will otherwise include
amounts paid for the following purposes: (i) postage and all freight and other
delivery and bonding charges incurred by the Transfer Agent in delivering
materials to and from the Company and in delivering all materials to
shareholders; (ii) all direct telephone, telephone transmission, telecopy, or
other electronic transmission expenses incurred by the Transfer Agent in
communication with the Company's dealers, shareholders or others, as required
for the Transfer Agent to perform the services to be provided hereunder; (iii)
all charges related to the settlement of shareholder transactions, including
but not limited to NSCC/FUND SERV charges, bank wire charges, and checking
account charges; (iv) charges associated with satisfying Internal Revenue
Service tax reporting requirements; (v) expenses associated with Securities and
Exchange Commission examinations of Company books and records; (vi) paper
stocks and printing costs for statements, checks, envelopes, tax and other
forms; and (vii) such other expenses paid or incurred by Transfer Agent on
behalf of the Company at the request of the Manager.
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Company hereby appoints the Transfer Agent as
transfer agent of all the Shares of the Company and as dividend disbursing
agent during the period of this Agreement.
2. (a) The Transfer Agent hereby accepts
appointment as transfer agent and dividend disbursing agent and agrees to
perform the duties thereof as herein set forth, including those duties set
forth in Schedule I(a) hereto.
(b) The services and specific capabilities to
be provided under this Agreement by the Transfer Agent shall include those
specifically listed in this Agreement.
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<PAGE> 4
3. Upon the request of the Transfer Agent, the
Company shall deliver the following documents to the Transfer Agent:
(a) A copy of the Articles of Incorporation
of the Company and all amendments thereto certified by the Secretary of the
Company;
(b) A copy of the By-Laws of the Company
certified by the Secretary of the Company;
(c) A copy of a resolution of the Board of
Directors of the Company certified by the Secretary of the Company appointing
the Transfer Agent and authorizing the execution of this Transfer Agency
Agreement;
(d) A Certificate signed by the Secretary or
any Assistant Secretary of the Company specifying with respect to each Class or
Fund, the number of authorized Shares, the number of such authorized Shares
issued, and the number of such authorized Shares issued and currently
outstanding; the names and specimen signatures of the Officers of the Company;
and the name and address of the legal counsel for the Company;
(e) Copies of the Company's Registration
Statement, as amended to date, and the most recently filed Post- Effective
Amendment thereto, filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, together with any applications
filed in connection therewith; and
(f) Opinion of counsel for the Company with
respect to the validity of the authorized and outstanding Shares, whether such
Shares are fully paid and non-assessable and the status of such Shares under
the Securities Act of 1933, as amended, and any other applicable federal law or
regulation (I.E., if subject to registration, that they have been registered
and that the Registration Statement has become effective or, if exempt, the
specific grounds therefor).
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. The Company shall deliver to the Transfer Agent
the following documents on or before the effective
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<PAGE> 5
date of any increase or decrease in the total number of Shares authorized to be
issued:
(a) A certified copy of the amendment to the
Articles of Incorporation giving effect to such increase or decrease;
(b) In the case of an increase, an opinion of
counsel for the Company with respect to the validity of the Shares of the
Company and the status of such Shares under the Securities Act of 1933, as
amended, and any other applicable federal law or regulation (I.E., if subject
to registration, that they have been registered and that the Registration
Statement has become effective or, if exempt, the specific grounds therefor);
and
(c) In the case of an increase, if the
appointment of the Transfer Agent is expressly limited to the previously
authorized number of Shares, a certified copy of a resolution of the Board of
Directors of the Company increasing the authority of the Transfer Agent.
2. Prior to the issuance of any additional Shares of
the Company pursuant to actions such as stock dividends or stock splits, and
prior to any reduction in the number of Shares outstanding, the Company shall
deliver the following documents to the Transfer Agent:
(a) A certified copy of the resolution(s)
adopted by the Board of Directors and/or the shareholders of the Company
authorizing such issuance of additional Shares of the Company or such
reduction, as the case may be; and
(b) An opinion of counsel for the Company
with respect to the validity of the Shares of the Company and the status of
such Shares under the Securities Act of 1933, as amended, and any other
applicable federal law or regulation (I.E., if subject to registration, that
they have been registered and that the Registration Statement has become
effective, or, if exempt, the specific grounds therefor).
3. The Company is authorized to issue (a)
15,000,000,000 shares representing interests in the Treasury Money Market Fund-
Pacific Horizon shares; (b) 15,000,000,000 shares representing interests in the
Treasury Money Market Fund- Horizon Service shares; (c) 14,400,000,000 shares
representing interests in the Treasury Money Market Fund- Horizon shares; (d)
15,000,000,000 shares
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<PAGE> 6
representing interests in the Prime Money Market Fund- Pacific Horizon shares;
(e) 15,000,000,000 shares representing interests in the Prime Money Market
Fund- Horizon Service shares; (f) 28,000,000,000 shares representing interests
in the Prime Money Market Fund- Horizon shares; (g) 400,000,000 shares
representing interests in the Aggressive Growth Fund- A shares; (h) 600,000,000
shares representing interests in the Aggressive Growth Fund- B shares; (i)
100,000,000 shares representing interests in the U.S. Government Securities
Fund- A shares; (j) 150,000,000 shares representing interests in the U.S.
Government Securities Fund- B shares; (k) 100,000,000 shares representing
interests in the Capital Income Fund- A shares; (l) 150,000,000 shares
representing interests in the Capital Income Fund- B shares; (m) 100,000,000
shares representing interests in the California Tax-Exempt Bond Fund- A shares;
(n) 150,000,000 shares representing interests in the California Tax- Exempt
Bond Fund- B shares; (o) 1,500,000,000 shares representing interests in the
Tax-Exempt Money Market Fund- Pacific Horizon shares; (p) 3,000,000,000 shares
representing interests in the Tax-Exempt Money Market Fund- Horizon Service
shares; (q) 3,000,000,000 shares representing interests in the Tax-Exempt Money
Market Fund- Horizon shares; (r) 1,000,000,000 shares representing interests in
the California Tax-Exempt Money Market Fund- Pacific Horizon shares; (s)
500,000,000 shares representing interests in the California Tax-Exempt Money
Market Fund- Horizon Service shares; (t) 500,000,000 shares representing
interests in the California Tax-Exempt Money Market Fund- Horizon shares; (u)
15,000,000,000 shares representing interests in the Treasury Only Money Market
Fund- Pacific Horizon shares; (v) 15,000,000,000 shares representing interests
in the Treasury Only Money Market Fund- Horizon Service shares; (w)
7,000,000,000 shares representing interests in the Treasury Only Money Market
Fund- Horizon shares; (x) 15,000,000,000 shares representing interests in the
Government Money Market Fund- Pacific Horizon shares; (y) 15,000,000,000 shares
representing interests in the Government Money Market Fund- Horizon Service
shares; (z) 7,000,000,000 shares representing interests in the Government Money
Market Fund- Horizon shares; (aa) 40,000,000 shares representing interests in
the Flexible Bond Fund- A shares; (bb) 60,000,000 shares representing interests
in the Flexible Bond Fund- B shares; (cc) 40,000,000 shares representing
interests in the Blue Chip Fund- A shares; (dd) 60,000,000 shares representing
interests in the Blue Chip Fund- B shares; (ee) 40,000,000 shares representing
interests in the Asset Allocation Fund- A shares; (ff) 60,000,000 shares
representing interests in
-6-
<PAGE> 7
the Asset Allocation Fund- B shares; (gg) 40,000,000 shares representing
interests in the National Municipal Bond Fund- A shares; (hh) 60,000,000 shares
representing interests in the National Municipal Bond Fund- B shares; (ii)
40,000,000 shares representing interests in the Utilities Fund- A shares; (jj)
60,000,000 shares representing interests in the Utilities Fund- B shares; (kk)
40,000,000 shares representing interests in the Growth and Income Fund- A
shares; (ll) 60,000,000 shares representing interests in the Growth and Income
Fund- B shares; (mm) 40,000,000 shares representing interests in the
International Equity Fund- A shares; (nn) 60,000,000 shares representing
interests in the International Equity Fund- B shares; (oo) 40,000,000 shares
representing interests in the Short-Term Government Fund- A shares; (pp)
60,000,000 shares representing interests in the Short-Term Government Fund- B
shares; (qq) 40,000,000 shares representing interests in the International Bond
Fund- A shares; (rr) 60,000,000 shares representing interests in the
International Bond Fund- B shares; (ss) 40,000,000 shares representing
interests in the Corporate Bond Fund- A shares; and (tt) 60,000,000 shares
representing interests in the Corporate Bond Fund- B shares; each with par
value of $.001 per share. The Transfer Agent shall record issues of all shares
and shall notify the Company in case any proposed issue of shares by the
Company shall result in an over-issue as defined by Section 8-104(2) of Article
8 of the Maryland Commercial Law Article. In case any issue of shares would
result in such an over-issue, the Transfer Agent shall refuse to issue said
shares and shall not countersign and issue certificates (if any) for such
shares.
ARTICLE IV
ISSUANCE,
REDEMPTION AND TRANSFER OF SHARES
1. The Transfer Agent acknowledges that it has
received a copy of the Company's Prospectuses with respect to its currently
authorized Funds and Classes of Shares, which Prospectuses describe how sales
and redemption of Shares of the Company shall be made, and the Transfer Agent
agrees to accept purchase orders and redemption requests with respect to
Company Shares on each Company Business Day in accordance with such
Prospectuses. The Company agrees to notify the Transfer Agent as soon as
possible under the circumstances of any changes in the procedures set forth in
the Prospectus regarding such purchase and redemption procedures.
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<PAGE> 8
2. On each Company Business Day, a duly authorized
officer or employee of the Transfer Agent shall furnish the following
information by telephone call to an Officer of the Company or by such other
form to such other person as shall be agreed upon from time to time by the
Company and the Transfer Agent:
(a) The total dollar amount to be applied to
the purchase of Shares of each Class or Fund on such day, computed by
aggregating the amount so specified in such of the purchase orders described in
paragraph 1 of this Article IV with respect to which payment has been, or will
be, credited by the Custodian to the Company's custody account with the
Custodian on such day. The Transfer Agent shall also accept with respect to
each Company Business Day, at such times as are agreed upon from time to time
by the Transfer Agent and the Company, a computer tape consistent in all
respects with the Transfer Agent's tape layout package, as amended from time to
time, upon prior written notice to the Company or its Distributor, which is
believed by the Transfer Agent to be furnished by or on behalf of any Approved
Institution. The Transfer Agent shall not be liable for any loss or damage to
the Company or its shareholders in the event that a computer tape or electronic
data transmission from an Approved Institution is unable to be processed for
any reason beyond the control of the Transfer Agent, or if any of the
information on such tape or transmission is found to be incorrect.
(b) The total dollar amount of Shares of each
Class or Fund to be redeemed on such day, computed by aggregating the amount so
specified in (i) such of the redemption requests described in paragraph 1 of
this Article IV with respect to which the amount payable as redemption proceeds
has been, or will be, charged by the Custodian on such day, and (ii) all
computer tapes described in paragraph 2(a) of this Article IV with respect to
which the amount payable as redemption proceeds has been, or will be, charged
by the Custodian on such day.
3. On each Company Business Day, the Transfer Agent
shall, as of the time at which the Company computes the net asset value of each
Class or Fund of the Company, issue to and redeem from the shareholder accounts
specified in a purchase order, redemption request or computer tape, which in
accordance with the Prospectuses is effective on such Company Business Day, the
appropriate number of full and fractional Shares based on the net asset value
per Share of such Class or Fund specified in an advice received on
-8-
<PAGE> 9
such Company Business Day from the Company or the Company Accountant.
Notwithstanding the foregoing, if a redemption specified in a computer tape is
for a dollar value of Shares in excess of the dollar value of uncertificated
Shares in the specified account, the Transfer Agent shall not effect such
redemption in whole or in part and shall within twenty-four (24) hours orally
advise the Approved Institution which supplied such tape of the discrepancy.
4. In connection with a reinvestment of a dividend
or distribution on Shares of any Class or Fund of the Company, the Transfer
Agent shall, as of each Company Business Day, as specified in a Certificate or
resolution described in paragraph 1 of Article V, issue Shares of a Class or
Fund to the appropriate shareholder account, based on the net asset value per
Share of such Class or Fund specified in an advice received from the Company or
its Company Accountant on such Company Business Day.
5. On each Company Business Day, the Transfer Agent
shall supply the Company Accountant with a statement specifying with respect to
the immediately preceding Company Business Day (or the same day if a money
market portfolio): the total number of Shares of each Class or Fund (including
fractional Shares) issued and outstanding at the opening of business on such
day; the total number of Shares of each Class or Fund sold on such day,
pursuant to paragraph 3 of this Article IV; the total number of Shares of each
Class or Fund redeemed by the Transfer Agent on such day; the total number of
Shares of each Class or Fund, if any, sold on such day pursuant to paragraph 4
of this Article IV; and the total number of Shares of each Class or Fund issued
and outstanding. On the same day such statement is received by the Company
Accountant, the Company Accountant shall confirm the information contained
therein, after making any necessary corrections, by delivering to the Transfer
Agent a Certificate with respect to the same.
6. In connection with each purchase and each
redemption of Shares, and each reinvestment of a dividend or distribution of
Shares, the Transfer Agent shall send to the affected shareholder such
statements as are prescribed by the federal securities laws applicable to
transfer agents and as are described in the applicable Prospectuses. If the
Prospectuses indicate that certificates for Shares are available and if
specifically requested in writing by any shareholder, or if otherwise required
hereunder, the Transfer Agent shall countersign, issue and mail by first-class
mail to such shareholder at the address set forth in
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<PAGE> 10
the records of the Transfer Agent, a Share certificate for any full Shares
requested.
7. As of each Company Business Day, the Transfer
Agent shall furnish the Custodian with a written statement (which may be by
facsimile transfer) setting forth the number and dollar amount of each Class or
Fund of Shares to be redeemed on such Company Business Day in accordance with
paragraph 3 of this Article IV.
8. Upon receipt of a proper redemption request and
moneys paid to it by the Custodian in connection with a redemption of Shares,
the Transfer Agent shall cancel any Shares certificates relating to such
redeemed Shares or make an equivalent designation on the appropriate records
with respect to any uncertificated Shares relating to such redeemed Shares and,
after making appropriate deduction for any withholding of taxes required of it
by applicable law, (a) in the case of a redemption of Shares pursuant to a
redemption described in paragraph 1 of this Article IV, make payment in
accordance with the Company's redemption and payment procedures described in
the Prospectuses, and (b) in the case of a redemption of Shares pursuant to a
computer tape described in paragraph 2(a) of this Article IV, make payment by
directing a federal funds wire order to the account previously designated by
the Approved Institution specified in the computer tape.
9. The Transfer Agent shall not be required to issue
any Shares after it has received from an Officer of the Company or from an
appropriate federal or state authority written notification that the sale of
Shares has been suspended or discontinued, and the Transfer Agent shall be
entitled to rely upon such written notification.
10. Upon the issuance of any Shares in accordance
with this Agreement, the Transfer Agent shall not be responsible for the
payment of any original issue or other taxes required to be paid by the Company
in connection with such issuance of any Shares.
11. The Transfer Agent shall accept a computer tape
consistent with the Transfer Agent's tape layout package, as amended from time
to time upon prior notice to the Company or the Distributor, which is
reasonably believed by the Transfer Agent to be furnished by or on behalf of an
Approved Institution and is represented to be instructions with respect to the
transfer of Shares from one account of such Approved Institution to another
such account, and shall
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<PAGE> 11
effect the transfers specified in said computer tape. The Transfer Agent shall
not be liable for any losses to the Company or its shareholders in the event
that a computer tape or electronic data transmission from an Approved
Institution is unable to be processed for any reason beyond the control of the
Transfer Agent, or if any of the information on such tape or transmission is
found to be incorrect.
12. (a) Except as otherwise provided in
sub-paragraph (b) of this paragraph and in paragraph 14 of this Article IV,
Shares shall be transferred or redeemed upon presentation to the Transfer Agent
of Share certificates or instructions properly endorsed for transfer or
redemption, accompanied by such documents as the Transfer Agent deems necessary
to evidence the authority of the person making such transfer or redemption, and
bearing satisfactory evidence of the payment of any transfer taxes. In the
case of small estates where no administration is contemplated, the Transfer
Agent may, when furnished with an appropriate surety bond, and without further
approval of the Company, transfer or redeem Shares registered in the name of a
decedent where the current market value of the Shares being transferred does
not exceed such amount as may from time to time be prescribed by various
states. The Transfer Agent reserves the right to refuse to transfer or redeem
Shares until it is satisfied that the endorsement on the share certificate or
instructions is valid and genuine, and for that purpose it will require, unless
otherwise instructed by an authorized officer of the Company, a guarantee of
signature, acceptable to the Transfer Agent and in compliance with applicable
law. The Transfer Agent also reserves the right to refuse to transfer or
redeem Shares until it is satisfied that the requested transfer or redemption
is legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or redemptions which the Transfer Agent, in its
judgment, deems improper or unauthorized, or until it is satisfied that there
is no basis to any claims adverse to such transfer or redemption. The Transfer
Agent may, in effecting transfers and redemptions of Shares, rely upon those
provisions of the Uniform Act for the Simplification of Fiduciary Security
Transfers or the Uniform Commercial Code, as the same may be amended from time
to time and as is applicable to the transfer in question, and the Company shall
indemnify the Transfer Agent for any act performed or omitted by it in good
faith in reliance upon such laws.
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<PAGE> 12
(b) Notwithstanding the foregoing or any
other provision contained in this Agreement to the contrary, the Transfer Agent
shall be fully protected by the Company in the event the Transfer Agent does
not require any instruments, documents, assurances, endorsements or guarantees,
including, without limitation, any signature guarantees, in connection with a
redemption or transfer of Shares whenever the Transfer Agent reasonably
believes that requiring the same would be inconsistent with the transfer and
redemption procedures as described in the applicable Prospectus.
13. Notwithstanding any provision contained in this
Agreement to the contrary, the Transfer Agent shall not be required or expected
to require, as a condition to any transfer of any Shares pursuant to paragraph
12 of this Article IV or any redemption of any Shares pursuant to a computer
tape described in this Agreement, any documents, including, without limitation,
any documents of the kind described in sub-paragraph (a) of paragraph 12 of
this Article IV, to evidence the authority of the person requesting the
transfer or redemption and/or the payment of any share transfer taxes, and
shall be fully protected in acting in accordance with the applicable provisions
of this Article IV.
14. (a) As used in this Agreement, the terms
"computer tape" and "computer tape believed by the Transfer Agent to be
furnished by an Approved Institution" shall include any tape or electronic
transmission generated by the Transfer Agent to reflect information believed by
the Transfer Agent to have been input by an Approved Institution, via a remote
terminal or other similar link, into a data processing, storage, or collection
system, or similar system (the "System"), located on the Transfer Agent's
premises or utilized by the Transfer Agent. For purposes of paragraph 2 of
this Article IV, such computer tape shall be deemed to have been furnished at
such times as are agreed upon from time to time by the Transfer Agent and
Company only if the information reflected thereon was input into the System at
such times as are agreed upon from time to time by the Transfer Agent and the
Company.
(b) Nothing contained in this Agreement shall
constitute any agreement or representation by the Transfer Agent to permit, or
to agree to permit, any Approved Institution to input information into a
System.
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<PAGE> 13
(c) The Transfer Agent reserves the right to
approve in advance any Approved Institution, such approval not to be
unreasonably withheld. The Transfer Agent also reserves the right to terminate
any and all automated data communications, at its discretion, upon a reasonable
attempt to notify the Company when in the opinion of the Transfer Agent
continuation of such communications would jeopardize the accuracy and/or
integrity of the Company's records on the System.
ARTICLE V
DIVIDENDS AND DISTRIBUTIONS
1. The Company shall furnish to the Transfer Agent a
copy of a resolution of its Board of Directors, certified by the Secretary or
any Assistant Secretary, either (i) setting forth with respect to a Class or
Fund of Shares the date of the declaration of a dividend or distribution, the
date of accrual or payment, as the case may be, thereof, the record date as of
which Shareholders entitled to payment or accrual shall be determined, the
amount per Share of such dividend or distribution, the payment date on which
all previously accrued and unpaid dividends are to be paid, and the total
amount, if any, payable to the Transfer Agent on such payment date, or (ii)
authorizing the declaration of dividends and distributions on a daily or other
periodic basis and authorizing the Transfer Agent to rely on a Certificate
setting forth the information described in subsection (i) of this paragraph.
2. Upon the payment date specified in such
Certificate or resolution, the Company shall, in the case of a cash dividend or
distribution, cause the Custodian to pay to the Transfer Agent an amount of
cash, if any, sufficient for the Transfer Agent to make the payment, if any, as
of the payment date, specified in such Certificate or resolution, to the
shareholders who were of record on the record date who are entitled to receive
the cash dividend or distribution. The Transfer Agent shall, upon receipt of
any such cash, make payment of such cash dividends or distributions to the
shareholders of record as of the record date by: (i) mailing a check, payable
to the registered shareholder, to the address of record or dividend mailing
address, or transmitting payment through the Automated Clearing House System,
(ii) wiring such amounts, or transmitting such amounts through the Automated
Clearing House System, to the accounts previously designated by an Approved
Institution, or (iii) other appropriate means as
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provided in the applicable Fund's prospectus. The Transfer Agent shall not be
liable for any improper payments made in good faith and without negligence, in
accordance with a Certificate or resolution described in the preceding
paragraph. If the Transfer Agent shall not receive from the Custodian
sufficient cash to make payment of any cash dividend or distribution to all
shareholders of a Class or Fund of Shares of the Company as of the record date
who are entitled to receive the cash dividend or distribution, the Transfer
Agent shall, upon notifying the Company, withhold payment to all shareholders
of record as of the record date until sufficient cash is provided to the
Transfer Agent.
3. It is understood that the Transfer Agent shall in
no way be responsible for the determination of the rate or form of dividends or
capital gain distributions due to the shareholders. It is expressly agreed and
understood that the Transfer Agent is not liable for any loss as a result of
processing a distribution based on information provided in the Certificate or
by a Company Accountant that is incorrect. The Company agrees to pay the
Transfer Agent for any and all costs, both direct and Out-of-Pocket Expenses,
incurred in such corrective work as necessary to remedy such error.
4. It is understood that the Transfer Agent shall
file such appropriate information returns concerning the payment of dividend
and capital gain distributions with the proper federal, state and local
authorities as are required by law to be filed by the Company but shall in no
way be responsible for the collection or withholding of taxes due on such
dividends or distributions due to shareholders, except and only to the extent
required by applicable law. To the extent such collection or withholding of
taxes is required of the Transfer Agent, it shall pay on a timely basis to the
appropriate authority any amounts required to be remitted to the authority.
ARTICLE VI
CONCERNING THE COMPANY
1. The Company represents to the Transfer Agent
that:
(a) It is a corporation duly organized and
existing under the laws of the State of Maryland.
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(b) It is empowered under applicable laws and
by its Articles of Incorporation and By-Laws to enter into and perform this
Agreement.
(c) All requisite corporate proceedings have
been held to authorize it to enter into and perform this Agreement.
(d) It is an investment company registered
under the Investment Company Act of 1940 (the "1940 Act"), as amended.
(e) A registration statement under the
Securities Act of 1933, as amended, with respect to the Shares is effective.
The Company shall notify the Transfer Agent if such registration statement or
any state securities registrations have been terminated or a stop order has
been entered with respect to the Shares.
2. Each copy of the Articles of Incorporation of the
Company and any amendment thereto provided by the Company to the Transfer Agent
shall be certified by the Secretary of State (or other appropriate official) of
the state of organization, and if such Articles of Incorporation and/or
amendments are required by law also to be filed with a county or other officer
or official body, a certificate of such filing shall be filed with a certified
copy submitted to the Transfer Agent. Each copy of the Articles of
Incorporation and By-Laws and copies of all amendments thereto, and copies of
resolutions of the Board of Directors of the Company, shall be certified by the
Secretary or Assistant Secretary of the Company.
3. It shall be the sole responsibility of the
Company to deliver to the Transfer Agent the Company's currently effective
Prospectuses and, for purposes of this Agreement, the Transfer Agent shall not
be deemed to have notice of any information contained in such Prospectuses
until they are actually received by the Transfer Agent.
ARTICLE VII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent represents and warrants to the
Company that:
(a) It is a corporation duly organized and
existing under the laws of the State of Ohio.
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(b) It is empowered under applicable law and
by its Charter and By-laws to enter into and perform this Agreement.
(c) All requisite corporate proceedings have
been held to authorize it to enter into and perform this Agreement.
(d) It is duly registered as a transfer agent
under Section 17A of the Securities Exchange Act of 1934, as amended. The
Transfer Agent shall promptly give written notice to the Company and the
Manager in the event that its registration is revoked or a proceeding is
commenced that could result in such revocation.
2. The Transfer Agent shall not be liable and shall
be indemnified in acting upon any computer tape, writing or document reasonably
believed by it to be genuine and to have been signed or made by the proper
person or persons and shall not be held to have any notice of any change of
authority of any person until receipt of written notice thereof from the
Company or such person. It shall also be protected in processing Share
certificates which bear the proper countersignature of the Transfer Agent and
which it reasonably believes to bear the proper manual or facsimile signature
of the Officers of the Company.
3. The Transfer Agent upon notice to and consent of
the Company, which consent will not be unreasonably withheld, may establish
such additional procedures, rules and regulations governing the transfer or
registration of Share certificates as it may deem advisable and consistent with
such rules and regulations generally adopted by mutual fund transfer agents.
4. The Transfer Agent shall keep such records as are
specified in Schedules I and II hereto in the form and manner and for such
period as it may deem advisable and is agreeable to the Company but not
inconsistent with the rules and regulations of appropriate government
authorities, in particular Rules 31a-2 and 31a-3 under the 1940 Act, as
amended. The Transfer Agent may deliver to the Company from time to time at
its discretion, for safekeeping or disposition by the Company in accordance
with law, such records, papers, Share certificates which have been cancelled in
transfer, exchange or redemption, or other documents accumulated in the
execution of its duties as such Transfer Agent, as the Transfer Agent may deem
expedient, other than those which the Transfer Agent is required to
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maintain pursuant to applicable laws and regulations. The Company shall assume
all responsibility for any failure thereafter to produce any record, paper,
cancelled Share certificate, or other document so returned, if and when
required. The records maintained by the Transfer Agent pursuant to this
paragraph 4, which have not been previously delivered to the Company pursuant
to the foregoing provisions of this paragraph 4, shall be considered to be the
property of the Company, shall be made available upon request for inspection by
the officers, employees, and auditors of the Company or other persons
authorized by the Company and shall be delivered to the Company upon request
and in any event upon the date of termination of this Agreement, as specified
in Article VIII of this Agreement, in the form and manner kept by the Transfer
Agent on such date of termination or such earlier date as may be requested by
the Company. Upon reasonable request by the Company, the Transfer Agent shall
provide in hard copy or on microfilm, whichever the Transfer Agent shall elect,
any records included in any such delivery which are maintained by the Transfer
Agent on a computer disk or are similarly maintained.
5. The Transfer Agent shall not be liable for any
loss or damage, including counsel fees, resulting from its actions or omissions
to act or otherwise, except for any loss or damage arising out of its bad
faith, negligence, willful misfeasance or reckless disregard of its duties
under this Agreement.
6. In performing its services hereunder, the
Transfer Agent shall seek to attain the Performance Objectives set forth in
Schedule IV hereto. The Transfer Agent's failure to meet any Transfer Agent
performance objective shall not in and of itself constitute willful misconduct
or negligence under this Agreement.
7. (a) The Company shall indemnify and hold
harmless the Transfer Agent from and against all claims (whether with or
without basis in fact or law), demands, expenses (including attorneys' fees)
and liabilities of any and every nature which the Transfer Agent may sustain or
incur or which may be asserted against the Transfer Agent by any person as a
result of any action taken or omitted to be taken by the Transfer Agent in good
faith and without negligence or willful misconduct or in reliance upon (i) any
provision of this Agreement; (ii) the Prospectuses; (iii) any instruction or
order including, without limitation, any computer tape reasonably believed by
the Transfer Agent to
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have been received from an Approved Institution; (iv) any instrument or order
reasonably believed by it to be genuine and to be signed, countersigned or
executed by any duly authorized Officer of the Company; (v) any Certificate or
other instruction of an Officer; or (vi) any opinion of legal counsel for the
Company or the Transfer Agent. The Company shall indemnify and hold harmless
the Transfer Agent from and against all claims (whether with or without basis
in fact or law), demands, expenses (including attorneys' fees) and liabilities
of any nature which the Transfer Agent may sustain or incur or which may be
asserted against the Transfer Agent by any person by reason of or as a result
of any action taken or omitted to be taken by the Transfer Agent in good faith
in connection with its appointment or in reasonable reliance upon any law, act,
regulation or any interpretation of the same even though such law, act or
regulation may have been altered, changed, amended or repealed thereafter.
(b) The Transfer Agent shall indemnify and
hold harmless the Company, its officers, trustees, employees and agents from
and against all claims (whether with or without basis in fact or law), demands,
expenses (including attorneys' fees) and liabilities of any and every nature
which the Company may sustain or incur or which may be asserted against the
Company by any person as a result of any action taken or omitted to be taken by
the Transfer Agent which constitutes bad faith, negligence, reckless disregard
or willful misfeasance or arising out of a failure of the Transfer Agent to
comply with this Agreement or a breach by the Transfer Agent of any
representation or warranty contained in this Agreement or the attached Exhibits
or Schedules.
(c) Neither party ("Indemnified Party") shall
settle nor make any compromise of any claim, demand, expense or liability to
which it may seek indemnity pursuant to paragraph 7(a) of this Article VII
(each, an "Indemnifiable Claim") without the express written consent of the
other party ("Indemnifying Party"). The Indemnified Party shall notify the
Indemnifying Party within 15 days of receipt of notification of an
Indemnifiable Claim, provided that the failure by the Indemnified Party to
furnish such notification shall not impair its right to seek indemnification
from the Indemnifying Party unless the Indemnifying Party's ability to
adequately defend the Indemnifiable Claim is impaired as a result of such
failure, and further provided, that if as a result of the Indemnified Party
failure to provide the Indemnifying Party with timely
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notice of the initiation of litigation, a judgment by default is entered, prior
to seeking indemnification from the Indemnifying Party, the Indemnified Party,
at its own cost and expense, shall oppose such judgment. The Indemnifying
Party shall have the right to defend any Indemnifiable Claim at its own
expense, provided that such defense shall be conducted by counsel selected by
the Indemnifying Party and reasonably acceptable to the Indemnified Party. The
Indemnified Party may join in such defense at its own expense, but to the
extent that it shall so desire, the Indemnifying Party shall direct such
defense. The Indemnifying Party shall not settle any Indemnifiable Claim
without the express written consent of the Indemnified Party if the Indemnified
Party determines that such settlement would have an adverse effect on the
Indemnified Party beyond the scope of this Agreement. In such event, each of
the Indemnifying Party and the Indemnified Party shall be responsible for their
own defense at their own cost and expense, and such claim shall not be deemed
an Indemnifiable Claim hereunder. If the Indemnifying Party fails or refuses
to defend an Indemnifiable Claim, the Indemnified Party may provide its own
defense at the cost and expense of the Indemnifying Party.
(d) Notwithstanding any provision in this
Agreement to the contrary, the Indemnifying Party shall not indemnify the
Indemnified Party against any liability or expense arising out of the
Indemnifying Party's negligence, willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties and obligations under this
Agreement. The Indemnified Party shall indemnify and hold harmless the
Indemnifying Party from and against any and all claims (whether with or without
basis in fact or law), losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by the Indemnified Party as a result of the Indemnified
Party's bad faith, negligence, willful misfeasance, gross negligence or
reckless disregard of its duties under this Agreement.
(e) Notwithstanding any provision in this
Agreement to the contrary, the Transfer Agent may not avoid liability under
this Agreement for any loss or damage by reason of its reliance on (i) a
Certificate signed by an Officer that is associated with or employed by the
Transfer Agent or any of its affiliates (an "Affiliated Officer"); (ii) any
other instruction of an Affiliated Officer or (iii) information provided by a
Company Accountant that is associated with or employed by the Transfer Agent or
any of
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its affiliates (an "Affiliated Company Accountant"), if such loss or damage was
the result of an Affiliated Officer's or an Affiliated Company Accountant's
negligence, willful misfeasance, bad faith, or reckless disregard of its duties
and obligations under this Agreement.
8. Excluded from the consideration of whether the
Transfer Agent has been negligent or has breached this Agreement shall be any
period of time, and only such period of time, during which the Transfer Agent's
performance is materially affected by reason of circumstances beyond its
control (collectively, "Causes"), including without limitation mechanical
breakdowns of equipment (including any alternative power supply and operating
systems software), flood or catastrophe, acts of God, failures of
transportation, communication or power supply, strikes, lockouts, work
stoppages or other similar circumstances.
9. The obligations of the parties hereto under
paragraphs 2, 5, 6, 7 and 8 of Article VII shall survive termination of this
Agreement.
10. At any time, the Transfer Agent may apply to an
Officer of the Company that is not associated with or employed by the Transfer
Agent or any of its affiliates, for written instructions with respect to any
matter arising in connection with the Transfer Agent's duties and obligations
under this Agreement, and the Transfer Agent shall not be liable for any action
taken or omitted by it in good faith in accordance with such written
instructions. Such application by the Transfer Agent for written instructions
from an Officer of the Company may set forth in writing any action proposed to
be taken or omitted by the Transfer Agent with respect to its duties or
obligations under this Agreement and the date on and/or after which such action
shall be taken. The Transfer Agent shall not be liable for any action taken or
omitted in accordance with a proposal included in any such application on or
after the date specified therein unless, prior to taking or omitting any such
action, the Transfer Agent has received written instructions in response to
such application specifying the action to be taken or omitted. The Transfer
Agent may consult with counsel of the Company, or upon notice to and consent of
the Company and Manager, its own counsel, at the expense of the Company and
shall be fully protected with respect to anything done or omitted by it in good
faith in accordance with the advice or opinion of counsel to the Company or its
own counsel.
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11. The Transfer Agent shall issue and mail
subscription warrants for Shares of capital stock, Shares representing stock
dividends, exchanges or splits, or act as conversion agent upon receiving
written instructions from an Officer and such other documents as the Transfer
Agent may deem necessary.
12. The Transfer Agent shall supply shareholder lists
to the Company upon receiving a request therefor from an Officer of the
Company.
13. (a) The Transfer Agent shall treat
confidentially and as proprietary information of the Company records and other
information relative to the Company and to persons who are at any time
shareholders of the Company, and shall not use such records and information for
any purpose other than the performance of its responsibilities and duties
hereunder. In case of any request or demand for the inspection of the
shareholder records of the Company, the Transfer Agent shall endeavor to notify
the Company promptly and to secure instructions from an Officer as to such
inspection. The Transfer Agent reserves the right, however, to exhibit the
shareholder records to any person whenever it receives an opinion from its
counsel that there is a reasonable likelihood that the Transfer Agent will be
held liable for the failure to exhibit the shareholder records to such person;
provided, however, that in connection with any such disclosure the Transfer
Agent shall promptly notify the Company and the Manager that such disclosure
has been made or is to be made.
(b) The obligations of confidentiality in
Paragraph 13(a) shall survive termination or cancellation of this Agreement and
shall not apply to any information which a party has in its possession when
disclosed to it by the other party, information which a party develops,
information which is or becomes known to the public other than by breach of
this Agreement, or information rightfully received by either party from a
third-party without the obligation of confidentiality.
14. At the request of an Officer of the Company, the
Transfer Agent shall address and mail such appropriate notices to shareholders
as the Company may direct.
15. Notwithstanding any of the foregoing provisions
of this Agreement, the Transfer Agent shall be under no duty or obligation to
inquire into, and shall not be liable for:
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(a) The legality of the issue or sale of any
Shares, the sufficiency of the amount to be received therefor, or the authority
of the Approved Institution or of the Company to request such sale or issuance;
(b) The legality of a transfer of Shares, or
of a redemption of any Shares, the propriety of the amount to be paid therefor,
or the authority of the Approved Institution or of the Company to request such
transfer or redemption;
(c) The legality of the declaration of any
dividend by the Company, or the legality of the issue of any Shares in payment
of any share dividend; or
(d) The legality of any recapitalization or
readjustment of Shares.
16. The Transfer Agent shall be entitled to receive
and the Company hereby agrees to pay to the Transfer Agent for its performance
hereunder, including its performance of the duties and functions set forth in
Schedule I hereto, (i) its reasonable Out-of-Pocket Expenses (including legal
expenses and attorneys' fees) incurred in connection with its performance
hereunder and (ii) such compensation as may be agreed upon in writing from time
to time by the Transfer Agent and the Company.
17. The Transfer Agent shall have no duties or
responsibilities whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement, and no covenant or obligation shall
be implied in this Agreement against the Transfer Agent.
18. Purchase and Price of Services.
(a) The Company shall compensate the Transfer
Agent for, and the Transfer Agent will provide, beginning on the execution date
of this Agreement and continuing until the termination of this Agreement as
provided herein, the Services set forth herein in Schedule I(a).
(b) The current unit prices for the Services
shall be as set forth in Schedule III (the "Schedule III Fee Schedule"). At
least 90 days prior to the end of each calendar year, the Transfer Agent may
negotiate with the Company to adjust the Schedule III Fee Schedule for the
following calendar year upon the approval of the Board of
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Directors of the Company. Notwithstanding the above, at any time the Transfer
Agent shall be entitled to increased fees or one-time charges due to changes in
legal or regulatory requirements; provided that such increased fees or one-time
charges shall be subject to the approval of the Board of Directors of the
Company, which approval shall not be unreasonably withheld.
19. Billing and Payment.
(a) The Transfer Agent shall bill the Company
as follows: (i) monthly in arrears for Accounts maintained and in arrears for
any Out-of-Pocket Expenses incurred by the Transfer Agent; provided, however,
that with respect to Out-of-Pocket Expenses, the Transfer Agent shall provide
the Company monthly with an amount to be advanced to the Transfer Agent for
estimated postage expenses for the following month. Documentation to support
reconciliation of actual postal charges shall be provided to the Company
monthly. The Transfer Agent may from time to time request the Company to make
additional advances when appropriate.
(b) The Company shall pay the Transfer Agent
in immediately available funds at Columbus, Ohio within thirty (30) days of the
date of the bill, provided the bill is received in proper order and on a timely
basis.
20. Transfer Agent shall provide the Company
and the Manager with annual financial statements not later than 90 days after
the end of each of Transfer Agent's fiscal years. These financial statements
shall be prepared in accordance with generally accepted accounting principles
and shall be audited by an independent firm of certified public accountants.
Upon the Company's request, Transfer Agent shall provide the Company and the
Manager with its quarterly financial statements no later than 45 days after the
end of each fiscal quarter.
ARTICLE VIII
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party notice in writing specifying the date of
such termination, which shall be not less than 90 days after the date of
receipt of such notice. Notwithstanding the foregoing, the Company may at any
time terminate this Agreement in accordance with the provisions of Schedule IV
hereto.
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2. If either party fails to observe, keep or perform
any material term or condition of this Agreement, or if a voluntary or
involuntary petition is commenced by or against either party under Title 11 of
the United States Code or a party becomes insolvent, or should any substantial
part of either party's property be subject to any levy, seizure, assignment,
application or sale for or by any creditor or government agency, the other
party may terminate this Agreement in whole or in part. The party seeking to
terminate this Agreement shall give the other party written notice of any of
the foregoing claimed to be a basis for termination, and the Agreement shall
terminate 30 days after the receipt of the notice if the party receiving the
notice has then failed to correct or remedy the situation. The party charged
with alleged material breach may initiate the procedures in Article IX
Paragraph 5 and, in that case, termination shall not be effective during the
pendency of such procedures. In the event such notice is given by the Company,
it shall be accompanied by a copy of a resolution of the Board of Directors of
the Company, certified by the Secretary or any Assistant Secretary, electing to
terminate this Agreement.
3. In the event such notice is given by the Transfer
Agent, the Company shall, on or before the termination date, deliver to the
Transfer Agent a copy of a resolution of its Board of Directors certified by
the Secretary or an Assistant Secretary designating a successor transfer agent
or transfer agents. In the absence of such designation by the Company, the
Company shall, upon the date specified in the notice of termination of this
Agreement and delivery of the records maintained hereunder, be deemed to be its
own transfer agent and the Transfer Agent shall thereby be relieved of all
duties and responsibilities pursuant to this Agreement.
4. In the event this Agreement is terminated as
provided herein, upon the written request of the Company, the Transfer Agent
shall deliver the records of the Company on electromagnetic media to the
Company or its successor transfer agent. The Company shall be responsible to
the Transfer Agent for the reasonable costs and expenses associated with the
preparation and delivery of such media, including copies of computer ready
formats, to the extent such costs were approved by the Company prior to such
costs being incurred. Upon termination as described in this Article VIII, for
so long as the Transfer Agent continues to perform any one or more of the
services contemplated by this Agreement or any Schedule hereto, the provisions
of this
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Agreement, including without limitation the provisions dealing with
indemnification, shall continue in full force and effect. Fees and out-of-
pocket expenses incurred by the Transfer Agent but unpaid by the Company upon
such termination shall be immediately due and payable upon and notwithstanding
such termination. Subsequent to such termination, for a reasonable fee the
Transfer Agent shall provide the Company with reasonable access to any Company
documents or records remaining in its possession and previously provided to the
Company.
ARTICLE IX
MISCELLANEOUS
1. Representatives of the Company's independent
outside auditors ("Auditors") shall have the right from time to time to perform
on-site audits at the facility of the Transfer Agent which do not result in an
unreasonable disruption of the business of the Transfer Agent. Such audits
shall be conducted in accordance with an audit program, the scope and frequency
of which shall be agreed upon from time to time in good faith by the parties.
The Auditors may obtain a reasonable number of copies of records and accounts
directly related to the services to be supplied hereunder by the Transfer
Agent. Except as provided in clause (c) below, nothing in this paragraph shall
be deemed to permit the Auditors to have access to any records or information
concerning (a) any other customer of the Transfer Agent, (b) the manner or
method used by the Transfer Agent in establishing the fees it charges any
customer, including the Company or (c) the Transfer Agent's internal operating
procedures, provided that the Transfer Agent shall permit officers or employees
of the Auditors to have access to such internal operating procedures to the
extent necessary for the proper completion of such audit, and the expression of
their unqualified opinion in the Company's semi-annual report on Form N-SAR and
the performance of any other services required by applicable law, provided such
Auditors have agreed to keep such internal operating procedures confidential
and treat such information as proprietary information of the Transfer Agent.
2. During the term of this Agreement, at no
additional cost to the Company, the Transfer Agent shall provide a facility
capable of safeguarding the transfer agency and dividend disbursing records of
the Company in case of damage to the primary facility providing those
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services (the "Back-Up Facility"). Transfer of the transfer agency and
dividend records of the Company to the Back-Up Facility shall be at the
Transfer Agent's expense, shall commence immediately after damage to the
primary facility results in an inability to provide the transfer agency and
dividend disbursing services, and shall be completed within 72 hours of
commencement. After the primary facility has recovered, the Transfer Agent
shall again utilize it to provide the transfer agency and dividend disbursing
services to the Company at no additional cost to the Company. The Transfer
Agent shall use reasonable efforts to provide the services described in this
Agreement from the Back-Up Facility.
3. The Transfer Agent represents that it has and is
currently registered as a transfer agent with the Securities and Exchange
Commission ("SEC") and has complied with the SEC's regulations for registered
transfer agents. The Transfer Agent agrees that it will continue to be
registered with the SEC as a transfer agent for the duration of this Agreement.
Should the Transfer Agent fail to be registered with the SEC as a transfer
agent at any time during this Agreement, the Company may, upon written notice
to the Transfer Agent, immediately terminate this Agreement.
4. The following procedures will be adhered to in
all disputes arising under this Agreement which the parties cannot resolve
informally. The aggrieved party shall notify the other party in writing of the
nature of the dispute with as much detail as possible about the deficient
performance of the other party. Representatives of the parties shall meet (in
person or by telephone) within seven days of the date of the written
notification to reach an agreement about the nature of the deficiency and the
corrective action to be taken by the respective parties. The representatives
of the parties shall produce a report about the nature of the dispute in detail
to their respective management. If the representatives of the parties are
unable to agree on corrective action, the managers to whom the representatives
of the parties report or their successors ("Management") shall meet or
otherwise act to facilitate an agreement within 14 days of the date of the
written notification. If Management cannot resolve the dispute, or agree upon
a written plan of corrective action to do so, within seven days after their
initial meeting or other action, or if the agreed upon completion dates in the
written plan of corrective action are exceeded, either party may request
arbitration as provided for in this Agreement. Except as otherwise
specifically provided, neither party
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shall terminate this Agreement for breach or initiate arbitration or other
dispute resolution procedures unless and until this dispute resolution
procedure has been employed or waived in writing by both parties.
5. (a) Any controversy or claim between or among the
parties, including, but not limited to, those arising out of or relating to
this Agreement or any agreements or instruments relating hereto or delivered in
connection herewith and any claim based on or arising from an alleged tort,
shall at the request of any party be determined by arbitration. The
arbitration shall be conducted in accordance with the United States Arbitration
Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this
Agreement, and under the auspices and rules of the American Arbitration
Association then in effect. The parties submit to personal jurisdiction in San
Francisco, California. Each party may serve a single request for production of
documents. If disputes arise concerning these requests, the arbitrator(s)
shall have sole and complete discretion to determine the disputes. The
arbitrator(s) shall give effect to statutes of limitation in determining any
claim, and any controversy concerning whether an issue is arbitrable shall be
determined by the arbitrator(s). The arbitrator(s) shall deliver a written
opinion setting forth findings of fact and the rationale for the decision. The
arbitrator(s) shall reconsider the decision once upon the motion and at the
expense of a party.
(b) The confidentiality provisions of Article
VII Paragraph 13 of this Agreement shall apply to the arbitration proceeding,
all evidence taken and the opinion. Judgment upon the decision rendered by the
arbitrator(s) may be entered in any court having jurisdiction. The institution
and maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.
(c) No provision of this paragraph 5 of
Article IX shall limit the right of a party to this Agreement to obtain
provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration. The exercise of a
remedy does not waive the right of either party to resort to arbitration.
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(d) If a legal action or arbitration is
commenced in connection with the enforcement of this Agreement or any
instrument or agreement required under this Agreement, the prevailing party
shall be entitled to attorneys' fees actually incurred (including allocated
costs for in-house legal services), costs and necessary disbursements incurred
in connection with such action or proceeding, as determined by the court or
arbitrator(s).
6. The Company agrees that prior to effecting any
change in any Prospectus which would increase or alter the duties and
obligations of the Transfer Agent hereunder, it shall advise the Transfer Agent
of such proposed change prior to the intended date of the same.
7. (a) Notices of any kind to be given to the
Manager hereunder shall be in writing and shall be duly given if mailed or
delivered to the Manager at the following address:
Bank of America NT&SA With a copy to:
555 South Flower Street, 5th Floor Arthur A. Fritz, Esq.
Los Angeles, CA 90071 Bank of America NT&SA
Attn: Debra McGinty-Poteet 555 South Flower Street
8th Floor
Los Angeles, CA 90071
or at such other address or to such individual as shall be so specified by the
Manager.
(b) Notices of any kind to be given to the
Transfer Agent hereunder shall be in writing and shall be duly given if mailed
or delivered to the Transfer Agent at the following address:
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
Attention: Stephen G. Mintos
or at such other address or to such individual as shall be so specified by the
Transfer Agent.
(c) Notices of any kind to be given to the
Company shall be in writing and shall be duly given if mailed or delivered to
the Company at the following address:
Pacific Horizon Funds, Inc. With a copy to:
3435 Stelzer Road Drinker Biddle & Reath
-28-
<PAGE> 29
Columbus, Ohio 43219 1345 Chestnut Street
Attention: Stephanie L. Blaha Suite 1100
Philadelphia, PA 19107
Attention: Michael P. Malloy
8. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both parties to this
Agreement.
9. This Agreement shall extend to and shall be
binding upon the parties hereto, and their respective successors and assigns.
This Agreement shall not be assignable by either party without the written
consent of the other party. This Agreement will automatically terminate in the
event of its assignment, as described hereunder, or as such term is defined in
the 1940 Act.
10. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland (without reference to
principles of conflicts of law).
11. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
12. The provisions of this Agreement are intended to
benefit only the Transfer Agent and the Company, and no rights shall be granted
to any other person by virtue of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers, thereunto duly authorized, as of
the day and year first above written.
BISYS FUND SERVICES, INC. PACIFIC HORIZON FUNDS, INC.
By: /s/ J. David Huber By: /s/ Cornelius J. Pings
----------------------- ------------------------
(Signature) (Signature)
J. David Huber Cornelius J. Pings
------------------------ ------------------------
(Name) (Name)
President
------------------------ ------------------------
(Title) (Title)
-29-
<PAGE> 30
TRANSFER AGENCY AGREEMENT
APPENDIX A
I, Cornelius J. Pings, President, and I, W. Bruce McConnel, III,
Secretary, of PACIFIC HORIZON FUNDS, INC., a Maryland corporation (the
"Company"), do hereby certify that:
The following individuals have been duly authorized by the Board of
Directors of the Company in conformity with the Company's Declaration of Trust
and By-Laws to execute any Certificate, instruction, notice or other
instrument, including an amendment to Appendix B or Schedule I hereto, or to
give oral instructions on behalf of the Company, and the signatures set forth
opposite their respective names are their true and correct signatures.
<TABLE>
<CAPTION>
NAME SIGNATURE
---- ---------
<S> <C>
Cornelius J. Pings /s/ Cornelius J. Pings
- ------------------ --------------------------------
Richard E. Stierwalt /s/ Richard E. Stierwalt
- -------------------- --------------------------------
William B. Blundin /s/ William B. Blundin
- ------------------ --------------------------------
Irimga McKay /s/ Irimga McKay
- --------------- --------------------------------
Stephanie L. Blaha /s/ Stephanie L. Blaha
- ------------------ --------------------------------
Mark E. Nagle /s/ Mark E. Nagle
- ------------- --------------------------------
Martin R. Dean /s/ Martin R. Dean
- -------------- --------------------------------
W. Bruce McConnel, III /s/ W. Bruce McConnel, III
- ---------------------- --------------------------------
George O. Martinez /s/ George O. Martinez
- ------------------ --------------------------------
PACIFIC HORIZON FUNDS, INC.
By: /s/ Cornelius J. Pings
----------------------
Cornelius J. Pings
President
Dated as of: By: /s/ W. Bruce McConnel, III
January 30, 1996 --------------------------
W. Bruce McConnel, III
Secretary
</TABLE>
<PAGE> 31
TRANSFER AGENCY AGREEMENT
APPENDIX A
I, Cornelius J. Pings, President, and I, W. Bruce McConnel, III,
Secretary, of PACIFIC HORIZON FUNDS, INC., a Maryland corporation (the
"Company"), do hereby certify that:
The following individuals have been duly authorized by the Board of
Directors of the Company in conformity with the Company's Declaration of Trust
and By-Laws to execute any Certificate, instruction, notice or other
instrument, including an amendment to Appendix B or Schedule I hereto, or to
give oral instructions on behalf of the Company, and the signatures set forth
opposite their respective names are their true and correct signatures.
<TABLE>
<CAPTION>
NAME SIGNATURE
---- ---------
<S> <C>
Cornelius J. Pings /s/ Cornelius J. Pings
- ------------------ ---------------------------------
Richard E. Stierwalt /s/ Richard E. Stierwalt
- -------------------- ---------------------------------
William B. Blundin /s/ William B. Blundin
- ------------------ ---------------------------------
Irimga McKay /s/ Irimga McKay
- ---------------- ---------------------------------
W. Bruce McConnel, III /s/ W. Bruce McConnel, III
- ---------------------- ---------------------------------
PACIFIC HORIZON FUNDS, INC.
By: /s/ Cornelius J. Pings
----------------------
Cornelius J. Pings
President
Dated as of: By: /s/ W. Bruce McConnel, III
December 11, 1995 --------------------------
W. Bruce McConnel, III
Secretary
</TABLE>
<PAGE> 32
TRANSFER AGENCY AGREEMENT
APPENDIX B
I, Cornelius J. Pings, President, and I, W. Bruce
McConnel, III, Secretary, of PACIFIC HORIZON FUNDS, INC., a Maryland
corporation (the "Company"), do hereby certify that:
The following is a list of the Classes and Funds of the
Company issued and/or authorized as of the date of this Transfer Agency
Agreement:
<TABLE>
<CAPTION>
CLASS FUND
- ----- ----
<S> <C>
Class A Treasury Fund-Pacific Horizon Shares
Class A-Special Series 1 Treasury Fund-Horizon Service Shares
Class A-Special Series 2 Treasury Fund-Horizon Shares
Class B Prime Fund-Pacific Horizon Shares
Class B-Special Series 1 Prime Fund-Horizon Service Shares
Class B-Special Series 2 Prime Fund-Horizon Shares
Class D Aggressive Growth Fund-A Shares
Class D-Special Series 3 Aggressive Growth Fund-B Shares
Class E U.S. Government Securities Fund-A Shares
Class E-Special Series 3 U.S. Government Securities Fund-B Shares
Class F Capital Income Fund-A Shares
Class F-Special Series 3 Capital Income Fund- B Shares
Class G California Tax-Exempt Bond Fund-A Shares
Class G-Special Series 3 California Tax-Exempt Bond Fund-B Shares
</TABLE>
<PAGE> 33
<TABLE>
<S> <C>
Class I Tax-Exempt Money Fund-Pacific Horizon
Shares
Class I-Special Series 1 Tax-Exempt Money Fund-Horizon Service
Shares
Class I-Special Series 2 Tax-Exempt Money Fund-Horizon Shares
Class J California Tax-Exempt Money Market
Fund-Pacific Horizon Shares
Class J-Special Series 1 California Tax-Exempt Money Market
Fund-Horizon Service Shares
Class J-Special Series 2 California Tax-Exempt Money Market
Fund-Horizon Shares
Class K Treasury Only Fund-Pacific Horizon Shares
Class K-Special Series 1 Treasury Only Fund-Horizon Service Shares
Class K-Special Series 2 Treasury Only Fund-Horizon Shares
Class L Government Fund-Pacific Horizon Shares
Class L-Special Series 1 Government Fund-Horizon Service Shares
Class L-Special Series 2 Government Fund-Horizon Shares
Class M Flexible Bond Fund-A Shares
Class M-Special Series 3 Flexible Bond Fund-B Shares
Class N Blue Chip Fund-A Shares
Class N-Special Series 3 Blue Chip Fund-B Shares
Class O Asset Allocation Fund-A Shares
Class O-Special Series 3 Asset Allocation Fund-B Shares
Class Q National Municipal Bond Fund-A Shares
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
Class Q-Special Series 3 National Municipal Bond Fund-B Shares
Class R Utilities Fund-A Shares
Class R-Special Series 3 Utilities Fund-B Shares
Class S Growth and Income Fund-A Shares
Class S-Special Series 3 Growth and Income Fund-B Shares
Class T International Equity Fund-A Shares
Class T-Special Series 3 International Equity Fund-B Shares
Class U Short-Term Government Fund-A Shares
Class U-Special Series 3 Short-Term Government Fund-B Shares
Class V International Bond Fund-A Shares
Class V-Special Series 3 International Bond Fund-B Shares
Class W Corporate Bond Fund-A Shares
Class W-Special Series 3 Corporate Bond Fund-B Shares
</TABLE>
By:/s/ Cornelius J. Pings
---------------------------
Cornelius J. Pings
President
Dated as of: By:/s/ W. Bruce McConnel, III
December 11, 1995 ---------------------------
W. Bruce McConnel, III
Secretary
<PAGE> 35
SCHEDULE I(A)
DESCRIPTION OF SERVICES
In consideration of the fees to be paid in such manner and
at such times as the Company and the Transfer Agent may agree, the Transfer
Agent shall provide the services set forth below:
Examine and process new accounts, subsequent payments,
liquidations, transfers, exchanges, telephone transactions, draft check
redemptions, automatic withdrawals, certificate deposits,NSCC trades, wire
order trades, direct trades, dividends, capital gains, daily trade
confirmations, dividend statements, dealer statements.
DAILY ACTIVITY
Maintain the following shareholder information on computer
recordkeeping systems or in such other manner as the Transfer
Agent shall determine:
Name and Address, including Zip Code;
Balance of uncertificated Shares;
Balance of certificated Shares;
Certificate number, number of Shares, issuance date of each
certificate outstanding and cancellation date for each certificate
no longer outstanding, if issued;
Balance of Shares having paid a commission;
Balance of dollars available for redemption;
Dividend code (daily accrual, monthly reinvest, monthly cash or
quarterly cash);
Type of account code (regular account, Automatic Withdrawal Plan);
Dealer, Branch and Salesperson information;
Establishment date indicating the date an account was opened,
carrying forward pre-conversion data as available;
<PAGE> 36
Original establishment date for accounts opened by exchange;
W-9 withholding status and periodic reporting;
State of residence code;
Social Security or taxpayer identification number, and indication
of certification (SSN also usable as a reference for on-line
account lookup);
Historical transactions on the account for the most recent 18
months, or other period as mutually agreed to from time-to-time;
Indication as to whether phone transactions can be accepted for
this account;
Beneficial owner code, i.e. male, female, joint tenant, etc.;
An alternate or "secondary" account number issued by a dealer (or
bank, etc.) to a customer for use in inquiry and transaction input
by "remote accessors" (Company client institutions with remote
terminal access or transmission capability).
FUNCTIONS
Answer all investor and dealer telephone and/or written inquiries,
except those concerning Company policy or requests for investment
advice which will be referred to the Company or those which the
Company chooses to answer, and provide a staff until 8:00 pm
Eastern time on each business day in connection therewith.
Deposit Company Share certificates into accounts upon receipt of
instructions from the investor or other authorized person, if
issued.
Examine and process transfers of Shares insuring that all transfer
requirements and legal documents have been supplied.
Process and confirm address changes.
Process standard account record changes as required, i.e. dividend
codes, dealer and salesperson codes, etc.
-2-
<PAGE> 37
Microfilm source documents for transactions, such as account
applications and correspondence.
Use of master account application to establish individual
participant accounts.
Perform backup withholding for those accounts which federal
government regulations indicate is necessary.
Perform withholdings on liquidations, if applicable, for employee
benefit plans.
Prepare and mail shareholder reporting forms relative to
processing performed, including 5498s, 1042s, and 1099s.
Solicit missing taxpayer identification numbers.
Provide remote access inquiry to Company records via Company supplied hardware.
REPORTS PROVIDED
- ----------------
Daily Journals Reflecting all Shares and dollar
activity for the previous day
Blue Sky Report Supply information monthly for
Company's preparation of Blue Sky
Reporting
N-SAR Report Supply monthly correspondence,
redemption and liquidation
information for use in
Company's N-SAR Report
12b-1 Report/ Supply monthly dealer
Average Asset Reporting reallowance, commission and other
fee reporting
Additionally, the following will be provided at the Company's
request to the Company at no charge:
1. Shareholder listings:
- by beneficial owner code
- by tax status code
- by state code
- by establishment date
- by dividend code
- by account plan type
-3-
<PAGE> 38
- top ten shareholders.
2 Dealer Transaction Totals.
3. Monthly average daily balance reports.
Prepare and mail copies of summary statements to dealers and
investment advisers;
Generate and mail confirmation statements for all financial
transactions. Send copies of financial transaction confirmations
to the dealer specified, as well as investment advisor and
possibly other indicated interested parties, if requested;
Monthly management report as Company and Transfer Agent agree that
will provide summary information of Company activity and quality
of services delivered.
DIVIDEND ACTIVITY
- -----------------
Reinvest or pay in cash including reinvesting in other funds
within the fund group serviced by the Transfer Agent as described
in each Company prospectus.
Distribute capital gains simultaneously with income dividend.
DEALER SERVICES
- ---------------
Prepare and mail confirmation statements to dealers daily.
Prepare and mail copies of statements to dealers, same frequency
as investor statements.
Allow on-line access to institutions designated by the Company
from time to time.
SHAREHOLDER MEETINGS
- ---------------------
Proxy mailing.
Prepare certified list of Shareholders, hard copy or microfiche as
requested by the Company.
Address and mail proxies and related material. Tabulate returned
proxies and supply daily reports when sufficient proxies have been
received (material must be
-4-
<PAGE> 39
adaptable to mechanical equipment as reasonably specified by the
Transfer Agent)
PERIODIC ACTIVITIES
- -------------------
Mail transaction confirmation statements daily to investors.
Address and mail two (2) periodic financial reports (an annual
report and semi-annual report) to fully disclosed recordholders
(material must be adaptable to Transfer Agent's mechanical
equipment as reasonably specified by the Transfer Agent).
Mail periodic statement to investors.
Compute, prepare and furnish all necessary reports to Governmental
authorities: Forms 1096, 1099DIV, 1099B, 1042 and 1042S.
Enclose various marketing material as designated by the Company in
statement mailings, i.e. monthly and quarterly statements
(material must be adaptable to mechanical equipment as reasonably
specified by the Transfer Agent).
-5-
<PAGE> 40
SCHEDULE II
RECORDS MAINTAINED BY TRANSFER AGENT
- Account applications
- Cancelled certificates plus stock powers and supporting
documents
- Checks including check registers, reconciliation records,
any adjustment records and tax withholding documentation
- Indemnity bonds for replacement of lost or missing checks
- Liquidation, redemption, withdrawal and transfer requests
including stock powers, signature guarantees and any
supporting documentation
- Proxy records for shareholder meetings held within the
previous twelve (12) months (held with the Transfer
Agent's Compliance Department)
- State and federal tax records
- Journals (or other records of original entry) containing
itemized daily record of all sales and redemptions
- Separate ledger accounts (or other records) showing number
of shares held by each shareholder of record (including
details with respect to periodic investment plans,
dividend reinvestment plans, etc.)
-6-
<PAGE> 41
SCHEDULE III
FEE SCHEDULE - PACIFIC HORIZON FUNDS, INC.
Annual Base Fee Per Portfolio $10,000.00
Annual Open Account Fee
(Non-Daily Dividend) $15.00 per account
Annual Open Account Fee
(Daily Dividend) $17.75 per account
Annual Close Account Fee $3.00 per account
Annual IRA Fee $20.00 per TIN
- - Out-of-pocket charges will be billed on a pass-through basis.
- - BISYS agrees to annual percentage increases not to exceed the Consumer
Price Index.
- - The above schedule is based upon a three year contract. Additional fee
concessions are possible for an extended service contract.
- - All conversion costs will be absorbed by BISYS.
<PAGE> 42
SCHEDULE IV
TRANSFER AGENT PERFORMANCE OBJECTIVES
PACIFIC HORIZON FUNDS, INC.
The performance objectives set forth below represent what the Company believes
should be reasonably obtainable by the Transfer Agent, given the typical daily
variables associated with any transfer agent operation (i.e., transaction
volume fluctuations).
IF THE TRANSFER AGENT FAILS TO MEET THE PERFORMANCE LEVELS DESCRIBED BELOW AS
"ACCEPTABLE" FOR ONE OR MORE OF THE LISTED FUNCTIONS BASED ON A
TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR MONTH PERIOD, THE TRANSFER
AGENT SHALL CREDIT THE COMPANY ON THE COMPANY'S INVOICE FOR THE NEXT MONTH TEN
PERCENT (10%) OF THE SERVICE FEES THE TRANSFER AGENT INVOICED THE COMPANY FOR
THE MONTH THE PERFORMANCE LEVELS WERE NOT MET.
IF THE TRANSFER AGENT FAILS TO MEET THE PERFORMANCE LEVELS DESCRIBED BELOW AS
"MARGINAL" FOR ANY ONE OR MORE OF THE LISTED FUNCTIONS BASED ON A
TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR MONTH PERIOD, THE TRANSFER
AGENT SHALL CREDIT THE COMPANY ON THE COMPANY'S INVOICE FOR THE NEXT TWENTY
PERCENT (20%) OF THE SERVICE FEES THE TRANSFER AGENT INVOICED THE COMPANY FOR
THE MONTH PRIOR TO THE MONTH THE PERFORMANCE LEVELS WERE NOT MET.
This Agreement may be immediately terminated upon written notice by the Company
to the Transfer Agent in the event that the TRANSFER AGENT FAILS TO MEET THE
PERFORMANCE LEVELS DESCRIBED BELOW AS "UNACCEPTABLE" FOR ANY ONE OR MORE OF THE
LISTED FUNCTIONS BASED ON A TRANSACTION- VOLUME WEIGHTED AVERAGE OVER A
CALENDAR MONTH PERIOD and not cured by the Transfer Agent within a subsequent
period of 30 days. Notice of such failure to meet performance objectives shall
be provided in writing by the Company to the Transfer Agent.
-1-
<PAGE> 43
SCHEDULE IV (cont.)
Performance Standards
<TABLE>
<CAPTION>
Function Objective Acceptable Marginal Unacceptable
<S> <C> <C> <C> <C>
New Account Set Up/ Processed day of 97.5% 95.0% 92.5%
Processing receipt
Transaction Processed day of 97.5% 95.0% 92.5%
Processing receipt
Maintenance Processed within 85.0% 80.0% 75.0%
Processing 2 days
Quality of Entry-New Error rate of: 99.0% 98.0% 97.05
Accounts
Quality of Entry- Error rate of: 99.0% 98.0% 97.0%
Financial
Transactions
Quality of Entry- Error rate of: 99.0% 97.0% 96.0%
Clerical Transactions
Research Turnaround* Within 1 day 90.0% 80.0% 75.0%
<FN>
* For items other than those that occurred after BISYS became
Transfer Agent.
</TABLE>
-2-
<PAGE> 1
EXHIBIT 9(T)
AMENDMENT NO. 6 TO ADMINISTRATION AGREEMENT
This Amendment No. 6, dated as of the ___ day of ________, 1996, is
entered into between PACIFIC HORIZON FUNDS, INC. (the "Company"), a Maryland
corporation, and Concord Holding Corporation, a Delaware corporation
("Concord").
WHEREAS, the Company and Concord have entered into an Administration
Agreement (the "Administration Agreement") dated as of November 13, 1989, as
amended, pursuant to which the Company retained Concord as its Administrator to
provide administrative services for the Aggressive Growth Fund, Capital Income
Fund, U.S. Government Securities Fund, California Tax-Exempt Bond Fund, Blue
Chip Fund, Flexible Bond Fund, Asset Allocation Fund, National Municipal Bond
Fund, Utilities Fund, Growth and Income Fund, Corporate Bond Fund, Short-Term
Government Fund, International Bond Fund and International Equity Fund;
WHEREAS, the Company has notified Concord that it is reorganizing the
National Municipal Bond Fund (the "Fund") into a nonfeeder fund and that it
desires to retain Concord to act as the Administrator therefor, and Concord has
notified the Company that it is willing to serve as the Administrator for the
Fund;
WHEREAS, the Company desires that the Fund shall become a "Fund" as
that term is defined in the Administration Agreement, and such Fund shall
become subject to the provisions of said Administration Agreement to the same
extent as the other Funds except to the extent said provisions are modified
below; and
WHEREAS, the parties wish to amend the Administration Agreement and to
rescind Amendment No. 4 to the Administration Agreement to the extent said
Agreement applies to the Fund;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. RESCISSION OF AMENDMENT NO. 4 TO THE ADMINISTRATION AGREEMENT
AS IT RELATES TO THE FUND. Amendment No. 4 is rescinded as it relates to the
Fund.
2. APPOINTMENT. The Company hereby appoints Concord as
Administrator of the National Municipal Bond Fund for the period and on the
terms set forth in the Administration Agreement. Concord accepts such
appointment and agrees to perform the duties
<PAGE> 2
and services set forth in the Administration Agreement, for the compensation
herein provided.
3. COMPENSATION. For the services provided and the expenses
assumed as Administrator pursuant to the Administration Agreement with respect
to the Fund, the Company will pay Concord a fee, computed daily and paid
monthly, at the annual rate of ___% of the Fund's average daily net assets.
Except to the extent amended hereby, the Administration Agreement
shall remain unchanged and in full force and effect and is hereby ratified and
confirmed in all respects as amended hereby.
This Amendment may be executed in one or more counterparts and all
such counterparts will constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 6
as of the date and year first above written.
PACIFIC HORIZON FUNDS, INC.
By:
---------------------------
Title
CONCORD HOLDING CORPORATION
By:
---------------------------
Title
-2-
<PAGE> 1
EXHIBIT 11
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference
to our Firm under the caption "Counsel" in the Statements of Additional
Information that are included in Post-Effective Amendment No. 47 to the
Registration Statement (No. 2-81110) on Form N-1A under the Securities Act of
1933 and the Investment Company Act of 1940, as amended, of Pacific Horizon
Funds, Inc. This consent does not constitute a consent under section 7 of the
Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under said section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath
--------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
April 30, 1996
<PAGE> 1
EXHIBIT 15 (F)
PACIFIC HORIZON FUNDS, INC.
DISTRIBUTION AND SERVICES PLAN
------------------------------
This Distribution and Services Plan (the "Plan") has been
adopted by the Board of Directors of Pacific Horizon Funds, Inc. (the
"Company") in connection with the Class A-Special Series 3 Shares of the
Treasury Fund, Class B-Special Series 3 Shares of the Prime Fund (collectively
with the Class A-Special Series 3 Shares of the Treasury Fund, the "S Shares"),
Class A-Special Series 4 Shares of the Treasury Fund, Class B-Special Series 4
Shares of the Prime Fund and Class J-Special Series 4 Shares of the California
Tax-Exempt Money Market Fund (collectively with the Class A-Special Series 4
Shares of the Treasury Fund and the Class B-Special Series 4 Shares of the
Prime Fund, the "X Shares")(all such S and X Shares collectively called
"Shares" and such funds collectively called the "Funds"), in conformance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act").
SECTION 1. EXPENSES. The Company may incur expenses under
the Plan in an amount not to exceed: 1.00% annually of the average daily net
assets of a Fund's outstanding S Shares; and .55% annually of the average daily
net assets of a Fund's outstanding X Shares.
SECTION 2. DISTRIBUTION PAYMENTS. The Company may pay the
distributor of the Company (the "Distributor") (or any other person) a fee (a
"Distribution Fee"): of up to .75% annually of the average daily net assets of
a Fund's outstanding S Shares; and of up to .30% annually of the average daily
net assets of a Fund's outstanding X Shares. Such Distribution Fee shall be
calculated and accrued daily, paid monthly and shall be in consideration for
distribution services and the assumption of related expenses (including the
payment of commissions and transaction fees) in conjunction with the offering
and sale of Shares of the Funds. In determining the amounts payable on behalf
of a Fund under the Plan, the net asset value of such Shares shall be computed
in the manner specified in the Company's then current Prospectuses and
Statement of Additional Information describing such Shares.
SECTION 3. DISTRIBUTION EXPENSES AND ACTIVITIES COVERED BY
PLAN. Payments to the Distributor under Section 2 shall be used by the
Distributor to cover expenses and activities primarily intended to result in
the sale of Shares, including the
<PAGE> 2
payment of commissions and transaction fees. Such expenses and activities may
include but are not limited to: (a) direct out-of-pocket promotional expenses
incurred by the Distributor in advertising and marketing Shares; (b) expenses
incurred in connection with preparing, printing, mailing, and distributing or
publishing advertisements and sales literature; (c) expenses incurred in
connection with printing and mailing Prospectuses and Statements of Additional
Information to other than current shareholders; (d) periodic payments or
commissions to one or more securities dealers, brokers, financial institutions
or other industry professionals, such as investment advisors, accountants, and
estate planning firms, including any of the Company's service providers
(severally, "a Distribution Organization") with respect to a Fund's Shares
beneficially owned by customers for whom the Distribution Organization is the
Distribution Organization of record or holder of record of such Shares; (e) the
direct or indirect cost of financing the payments or expenses included in (a)
and (d) above; or (f) for such other services as may be construed by any court
or governmental agency or commission, including the Securities and Exchange
Commission (the "Commission"), to constitute distribution services under the
1940 Act or rules and regulations thereunder. Such distribution services shall
be provided pursuant to a distribution and administrative servicing agreement
("Distribution and Administrative Servicing Agreement"). Any organization
providing distribution assistance may also become a service organization (as
defined in Section 4) and receive administrative servicing fees pursuant to a
Distribution and Administrative Servicing Agreement under this Plan.
SECTION 4. ADMINISTRATIVE SERVICES COVERED BY PLAN. The
Company may also pay securities dealers, brokers, financial institutions or
other industry professionals, such as investment advisors, accountants, and
estate planning firms, including any of the Company's service providers
(severally, a "Service Organization") for administrative support services
provided with respect to its customers' Shares. Such administrative support
services shall be provided pursuant to a Distribution and Administrative
Servicing Agreement.
SECTION 5. ADMINISTRATIVE SERVICING FEES COVERED BY PLAN.
Fees paid to a Service Organization shall be in consideration for the
administrative support services provided pursuant to its Distribution and
Administrative Servicing Agreement and may be paid at an annual rate of up to
.25% of the average daily net assets of a Fund's outstanding Shares owned of
record or beneficially by that Service Organization's customers for whom such
Service Organization is the dealer of record or holder of record or with whom
it has a servicing relationship. Such fees shall be calculated and accrued
daily, paid monthly, and computed in the manner set forth in the Distribution
and Administrative Servicing Agreement.
-2-
<PAGE> 3
SECTION 6. EXPENSES ALLOCATED, COMPLIANCE. Amounts paid by a
Fund must be for distribution and/or shareholder administrative support
services rendered for or on behalf of the holders of the Fund's Shares.
However, joint distribution financing with respect to such Shares (which may
involve other investment funds or companies that are affiliated persons of the
Company or affiliated persons of the Distributor) shall be permitted in
accordance with applicable regulations of the Commission as in effect from time
to time.
SECTION 7. REPORTS TO COMPANY. So long as this Plan is in
effect, the Distributor shall provide the Company's Board of Directors, and the
Directors shall review, at least quarterly, a written report of the amounts
expended pursuant to the Plan and the purposes for which such expenditures were
made.
SECTION 8. APPROVAL OF PLAN. This Plan will become effective
with respect to a particular Fund's Shares (a) on the date the public offering
of such shares commences after the approval by written consent of the sole
shareholder of outstanding Shares of that Fund, and (b) upon the approval by a
majority of the Board of Directors, including a majority of those directors who
are not "interested persons" (as defined in the 1940 Act) of the Company and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreements entered into in connection with the Plan (the
"Disinterested Directors"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the approval of the Plan.
SECTION 9. CONTINUANCE OF PLAN. Unless sooner terminated in
accordance with the terms hereof, this Plan shall continue until October 31,
1996, and thereafter, shall continue in effect for so long as its continuance
is specifically approved at least annually by the Company's Board of Directors
in the manner described in Section 8(b) hereof.
SECTION 10. AMENDMENTS. This Plan may be amended at any time
by the Board of Directors provided that (a) any amendment to increase
materially the costs which the Shares of a Fund may bear for distribution
pursuant to the Plan shall be effective only upon approval by a vote of a
majority of the outstanding Shares affected by such matter, and (b) any
material amendments of the terms of the Plan shall become effective only upon
approval in the manner described in Section 8(b) hereof.
SECTION 11. TERMINATION. This Plan, as to any Fund or any
Class of any Fund, is terminable without penalty at any time by (a) a vote of a
majority of the Disinterested Directors, or (b) a vote of a majority of such
outstanding Shares of such Class.
-3-
<PAGE> 4
SECTION 12. SELECTION/NOMINATION OF DIRECTORS. While this
Plan is in effect, the selection and nomination of those Disinterested
Directors shall be committed to the discretion of such Disinterested Directors.
SECTION 13. MISCELLANEOUS. The captions in this Agreement
are included for convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their construction or effect.
-4-
<PAGE> 5
PACIFIC HORIZON FUNDS, INC.
(the "Company")
FORM OF DISTRIBUTION AND ADMINISTRATIVE SERVICING AGREEMENT
to
DISTRIBUTION AND SERVICES PLAN
Ladies and Gentlemen:
We wish to enter into this Distribution and Administrative Servicing Agreement
("Agreement") with you concerning the provision of distribution and
administrative support services to your customers ("Clients") who may from time
to time be the record or beneficial owners of "S" and/or "X" shares (such
shares referred to herein as the "Shares") of one or more of the Company's
investment portfolios (individually, a "Fund" and collectively, the "Funds"),
which are listed on Appendix A.
The terms and conditions of this Agreement are as follows:
SECTION 1. You agree to provide reasonable assistance in connection with the
distribution of Shares to Clients as reasonably requested from time to time by
us and/or the following administrative support services* to your Clients who
may from time to time own of record or beneficially a Fund's Shares: (i)
processing dividend and distribution payments from a Fund on behalf of Clients;
(ii) providing information periodically to your Clients showing their positions
in the Shares; (iii) arranging for bank wires; (iv) responding to routine
Client inquiries concerning their investment in Shares; (v) providing the
information to the Funds necessary for accounting or sub-accounting; (vi) if
required by law, forwarding shareholder communications from a Fund (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to Clients; (vii) aggregating and
processing purchase, exchange, and redemption requests from Clients and placing
net purchase, exchange, and redemption orders for your customers; (viii)
providing customers with a service that invests the assets of their accounts in
the Shares pursuant to specific or pre-authorized instructions; (ix)
establishing and maintaining accounts and records relating to Clients that
invest in Shares; (x) assisting customers in changing dividend options, account
designations and addresses; (xi) developing, maintaining and operating systems
necessary to support sweep accounts; and
__________________________________
* Services may be added or deleted in a particular Agreement. For
example, administrative support, distribution or certain
administrative support services may be deleted.
<PAGE> 6
(xii) other similar services we may reasonably request to the extent you are
permitted to so under applicable law.
SECTION 2. You will provide such office space and equipment, telephone and
personnel (which may be any part of the space, equipment and facilities
currently used in your business, or any personnel employed by you) as may be
reasonably necessary or beneficial in order to provide the aforementioned
services to Clients.
SECTION 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us, a Fund, or its Shares
except those contained in our then current prospectus for such Shares, copies
of which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
SECTION 4. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us in
any matter or in any respect. You will not engage in activities pursuant to
this Agreement which constitute acting as a broker or dealer under state law
unless you have obtained the licenses required by law. You and your employees
will, upon request, be available during normal business hours to consult with
us or our designees concerning the performance of your responsibilities under
this Agreement.
SECTION 5. In consideration of the services and facilities provided by you
hereunder, we will pay to you, and you will accept as full payment therefore, a
fee at the annual rate of ____% (____% and ____% for distribution services and
administrative support services, respectively) and ____% (____% and ____% for
distribution services and administrative support services, respectively) of the
average daily net assets of the particular Fund's outstanding S and X Shares,
respectively, owned of record or beneficially by your Clients from time to time
for whom you are the dealer of record or holder of record or with whom you have
a servicing relationship ("Clients' Shares"). Said fee will be computed daily
and payable monthly. For purposes of determining the fees payable under this
Section 5, the average daily net asset value of the Clients' Shares will be
computed in the manner specified in our then current Registration Statement in
connection with the computation of the net asset value of the particular Fund's
Shares for purposes of purchases and redemptions. The fee rate stated above
may be prospectively increased or decreased by us, in our sole discretion, at
any time upon notice to you. Further, we may, in our discretion and without
notice, suspend or withdraw the sale of Shares, including the sale of such
Shares to you for the account of any Client(s).
SECTION 6. You acknowledge that you will provide to the Funds' Board of
Directors, at least quarterly, a written report of the
-2-
<PAGE> 7
amounts expended pursuant to this Agreement and the purposes for which such
expenditures were made. In connection with such revenues, you will furnish us
or our designees with such information as we or they may reasonably request
(including, without limitation, periodic certifications confirming the
provision to Clients of some or all of the services described herein), and will
otherwise cooperate with us and our designees (including, without limitation,
any auditors designated by us), in connection with the preparation of reports
to the Funds' Board of Directors concerning this Agreement and the monies paid
or payable by us pursuant hereto, as well as any other reports or filings that
may be required by law.
SECTION 7. We may enter into other similar Servicing Agreements with any other
person or persons without your consent.
SECTION 8. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) the compensation payable to you hereunder and the
receipt of such compensation by you hereunder, together with any other
compensation you receive from Clients in connection with the investment of
their assets in Shares of the Funds, is permissible under applicable law, will
be disclosed to your Clients, will be authorized by your Clients and will not
be excessive or unreasonable; and (ii) (a) you are a member of the National
Association of Securities Dealers, Inc. ("NASD"), that such membership has not
been suspended, and that you agree to maintain membership in the NASD, or (b)
you will not engage in activity which would require you to be licensed as a
broker/dealer under federal and state securities laws or (c) you are a foreign
broker/dealer not eligible for membership in the NASD, and are fully licensed
and legally empowered to act as a securities broker-dealer under the laws of
each jurisdiction in which you conduct such business. You further agree to
abide by all applicable laws, including without limitation, all applicable
provisions of the Investment Company Act of 1940, as amended, the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended
and all applicable rules and regulations thereunder.
SECTION 9. This Agreement will become effective on the date a fully executed
copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until October 31, 1996, and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by the Funds in the
manner described in Section 12 hereof. This Agreement is terminable with
respect to any Class of Shares, without penalty, at any time by the Funds
(which termination may be by vote of a majority of our Disinterested Directors
as defined in Section 12 hereof or by vote of the holders of a majority of the
outstanding Shares of such Class) or by you upon notice to the other party
hereto. This Agreement will terminate
-3-
<PAGE> 8
in the event of its assignment (as defined in the Investment Company Act of
1940 (the "Act")).
SECTION 10. All notices and other communications to either you or us will be
duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address shown above.
SECTION 11. This Agreement will be construed in accordance with the laws of
the State of New York without giving effect to principles of conflict of laws.
SECTION 12. This Agreement has been approved by vote of a majority of (i) the
Company's Board of Directors and (ii) those Directors who are not "interested
persons" (as defined in the Act) of the Company and have no direct or indirect
financial interest in the operation of the Distribution and Services Plan
adopted by us regarding the provision of administrative support services to the
record or beneficial owners of Shares or in any agreements related thereto
("Disinterested Directors"), cast in person at a meeting called for the purpose
of voting on such approval.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated
-4-
<PAGE> 9
below and promptly return it to us, Concord Financial Group, Inc., 125 W. 55th
Street, New York, New York 10019.
Very truly yours,
CONCORD FINANCIAL GROUP, INC.
By:____________________________________________________
Authorized Officer
Accepted and Agreed to:
_______________________________________________________
Name of Organization
By:___________________________________________________
Authorized Officer
Date:_______________________________
______________________________________________________
Taxpayer Identification Number
_____________________________________________
Account Number
_____________________________________________
Dealer Code
-5-
<PAGE> 10
APPENDIX A
----------
Please check the appropriate boxes to indicate the Funds of the
Company for which you wish to act as a service organization with respect to the
Shares:
/ / Treasury Fund - S Shares (Class A - Special Series 3)
/ / Prime Fund - S Shares (Class B - Special Series 3)
/ / Treasury Fund - S Shares (Class A - Special Series 4)
/ / Prime Fund - X Shares (Class B - Special Series 4)
/ / California Tax-Exempt Money Market Fund - X Shares
(Class J - Special Series 4)
___________________________________________
(Service Organization Name)
By:________________________________________
________________________________________
Authorized Officer
Dated:_____________________________________
A-1
<PAGE> 1
EXHIBIT 18
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
FOR OPERATION OF A MULTI-CLASS SYSTEM
-------------------------------------
I. INTRODUCTION
---------------
On February 23, 1995, the Securities and Exchange Commission
(the "Commission") adopted Rule 18f-3 under the Investment Company Act of 1940,
as amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution structure without the need to obtain an exemptive
order under Section 18 of the 1940 Act. Rule 18f-3, which became effective on
April 3, 1995, requires an investment company to file with the Commission a
written plan specifying all of the differences among classes, including the
various services offered to shareholders, different distribution arrangements
for each class, methods for allocating expenses relating to those differences
and any conversion features or exchange privileges. The Company operated a
multi-class distribution structure pursuant to an exemptive order granted by
the Commission on November 17, 1989. On April 27, 1995, the Board of Directors
of the Company authorized the Company to operate its current multi-class
distribution structure in compliance with Rule 18f-3.
II. ATTRIBUTES OF CLASSES
-------------------------
A. Generally
---------
MONEY MARKET FUNDS
The Company is authorized to offer five classes of shares --
Pacific Horizon Shares, Horizon Shares, Horizon Service Shares, Class S Shares
and Class X Shares -- in the Prime Fund and Treasury Fund. The Company is
authorized to offer four classes of shares -- Pacific Horizon Shares, Horizon
Shares, Horizon Service Shares, and Class X Shares -- in the California
Tax-Exempt Money Market Fund. The Company is authorized to offer three classes
of shares -- Pacific Horizon Shares, Horizon Shares, and Horizon Service Shares
in the Treasury Only, Government, and Tax-Exempt Money. The Prime Fund,
Treasury Fund, California Tax-Exempt Money Market Fund, Treasury Only Fund,
Government Fund, and Tax-Exempt Money Fund are each referred herein as a
"Fund," and collectively as the "Money Market Funds."
<PAGE> 2
NON-MONEY MARKET FUNDS
The Company is authorized to offer three classes of shares --
Class A Shares, Class B Shares and Class K Shares -- in the Aggressive Growth,
Capital Income, U.S. Government Securities, Corporate Bond, Blue Chip, Asset
Allocation, Flexible Bond, Utilities, Short- Term Government, Growth and
Income, International Bond, International Equity, California Tax-Exempt Bond
and National Municipal Bond Funds. The Aggressive Growth, Capital Income, U.S.
Government Securities, Corporate Bond, Blue Chip, Asset Allocation, Flexible
Bond, Utilities, Short-Term Government, Growth and Income, International Bond,
International Equity Funds, California Tax-Exempt Bond and National Municipal
Bond Funds are each referred to herein as a "Fund," and collectively as the
"Non-Money Market Funds."
ALL FUNDS
In general, shares of each class shall be identical except for
different expense variables (which will result in different returns for each
series), certain related rights, certain distribution and shareholder services
and certain sales charges. More particularly, the Pacific Horizon Shares,
Horizon Shares, Horizon Service Shares, Class X Shares and Class S Shares of
the Money Market Funds and Class A Shares, Class B Shares and Class K Shares of
the Non-Money Market Funds shall represent interests in the same portfolio of
investments of the particular Fund, and shall be identical in all respects,
except for: (a) the impact of expenses assessed to the Pacific Horizon Shares
pursuant to a Special Management Services Agreement, expenses assessed to the
Horizon Service Shares and Class A Shares pursuant to the Shareholder Services
Plan adopted for such class, expenses assessed to Class S Shares, Class X
Shares, Class K Shares and Class B Shares pursuant to the Distribution and
Services Plan adopted for such class, the sales charges imposed on Class A
shares and Class B Shares and any other incremental expenses subsequently
identified that should be properly allocated to one class so long as any
subsequent changes in expense allocations are reviewed and approved by a vote
of the Board of Directors, including a majority of the independent directors;
(b) the fact that a class shall vote separately on matters which pertain to the
Special Management Services Agreement, Shareholder Services Plan or
Distribution and Services Plan adopted for that class and any matter submitted
to shareholders relating to such class's expenses; and (c) the different
exchange privileges, sales charges and conversion features of the class of
shares; (d) the designation of each class of shares of the particular Fund; and
(e) the different shareholder services relating to a class of shares.
- 2 -
<PAGE> 3
B. Distribution and Servicing Arrangements, Expenses and Sales Charges
-------------------------------------------------------------------
1. Money Market Funds
------------------
PACIFIC HORIZON SHARES
Pacific Horizon Shares are currently available for purchase by
individuals directly from the Company's distributor, by clients of Bank of
America National Trust and Savings Assoc., N.A., ("Bank of America") through
their qualified trust and agency accounts and by clients of certain
institutions such as banks or broker-dealers ("Service Organizations").
Pacific Horizon Shares shall not initially be subject to a sales charge (except
as provided below) but shall initially be subject to a servicing fee payable
pursuant to a Special Management Services Agreement which shall not initially
exceed .32% (on an annual basis) of the average daily net asset value of each
Fund's (other than the California Tax-Exempt Money Market Fund) Pacific Horizon
Shares outstanding from time to time and .35% (on an annual basis) of the
average daily net asset value of the California Tax-Exempt Money Market Fund's
Pacific Horizon Shares outstanding from time to time.
Shareholder services under the Special Management Services
Agreement initially shall consist of (i) developing and monitoring the investor
programs offered from time to time; (ii) providing dedicated walk-in and
telephone facilities to handle shareholder inquires and serve investor needs;
(iii) providing and maintaining specialized systems for the automatic
investments of customers of Bank of America, Concord Holding Corporation and
selected broker/dealers; (iv) maintaining the registration or qualification of
the Fund's shares for sale under state securities laws; (v) with respect to the
Prime and Treasury Funds only, pay for the operation of arrangements that
facilitate same-day purchases by customers of Bank of America through the use
of a joint repurchase agreement; (vi) assuming the expense of payments made to
third parties for services provided in connection with the investments of their
customers in Pacific Horizon Shares; and (vii) providing various services (such
as the provision of a facility to receive purchase and redemption orders) for
shareholders who have made a minimum initial investment of less than $500,000.
Pacific Horizon Shares of the Prime Fund acquired through
exchange of shares ("B Shares") of Time Horizon Funds offered with a contingent
deferred sales charge ("CDSC") will be subject to a maximum CDSC of up to 5%
upon redemption in accordance with the prospectus for B Shares of Time Horizon
Funds. For purposes of computing the CDSC, the length of time of ownership
will be measured from the date of the original purchase
- 3 -
<PAGE> 4
of B Shares and will not include any period of ownership of the Pacific Horizon
Shares of the Prime Fund.
HORIZON SHARES
Horizon Shares are currently offered to institutional
investors and shall not be available for purchase by individuals directly.
Horizon Shares are not currently subject to a sales charge or a fee payable
pursuant to a Shareholder Services Plan.
HORIZON SERVICE SHARES
Horizon Service Shares are currently offered to institutional
investors such as Bank of America or the Company's administrator (also referred
to as "Shareholder Organizations"), who are compensated by the Money Market
Funds for providing shareholder services pursuant to a Shareholder Services
Agreement to their customers who are the beneficial owners of the Horizon
Service Shares. Horizon Service Shares are not available for purchase by
individuals directly. Horizon Service Shares are not currently subject to a
sales charge but shall be subject to a shareholder servicing fee payable
pursuant to a Shareholder Services Plan adopted for that class which shall not
initially exceed .25% (on an annualized basis) of the average daily net asset
value of the Horizon Service Shares beneficially owned by the customers of
Shareholder Organizations.
The services provided by Shareholder Organizations may
initially include the following: (i) aggregating and processing purchase and
redemption requests from customers for Horizon Service Shares and placing net
purchase and redemption orders with the distributor; (ii) providing customers
with a service that invests the assets of their accounts in Horizon Service
Shares pursuant to specific or preauthorized instructions; (iii) processing
dividend payments from a Fund on behalf of customers; (iv) providing
information periodically to customers regarding their position in Horizon
Service Shares; (v) arranging for bank wires; (vi) responding to customer
inquiries regarding services performed by the Shareholder Organizations; (vii)
providing sub-accounting with respect to Horizon Service Shares beneficially
owned by customers or the information necessary for sub-accounting; (viii)
forwarding shareholder communications from a Fund to customers; and (ix) other
similar services if requested by a Fund.
CLASS S SHARES
Class S Shares are currently available only to customers of
Bank of America or a Service Organization who purchase such shares through a
Sweep Account offered by Bank of America or the Service Organization. Class S
Shares shall not initially be subject to a sales charge. Class S Shares shall
- 4 -
<PAGE> 5
initially be subject to distribution and shareholder servicing fee payable
pursuant to the Distribution and Services Plan adopted for that class which
shall not initially exceed 1.00% of the average daily net asset value of
outstanding Class S Shares. Distribution expenses under the Distribution and
Services Plan include: (i) direct out-of-pocket promotional expenses incurred
by the distributor in advertising and marketing Class S shares; (ii) expenses
incurred in connection with preparing, printing, mailing, and distributing or
publishing advertisements and sales literature for Class S shares; (iii)
expenses incurred in connection with printing and mailing prospectuses and
statements of additional information to other than current Class S
shareholders; (iv) periodic payments or commissions to one or more securities
dealers, brokers, financial institutions or other industry professionals, such
as investment advisors, accountants, and estate planning firms (severally, "a
Distribution Organization") with respect to a Fund's Class S shares
beneficially owned by customers for whom the Distribution Organization is the
Distribution Organization of record or holder of record of such Class S shares;
(v) the direct or indirect cost of financing the payments or expenses included
in (i) and (iv) above; and (vi) for such other services as may be construed, by
any court or governmental agency or commission, including the Commission, to
constitute distribution services under the 1940 Act or rules and regulations
thereunder.
Shareholder services provided pursuant to this Distribution and
Services Plan include: (i) processing dividend and distribution payments from a
Fund on behalf of its clients; (ii) providing information periodically to its
clients showing their positions in Class S shares; (iii) arranging for bank
wires; (iv) responding to routine client inquiries concerning their investment
in Class S shares; (v) providing the information to the Funds necessary for
accounting or sub-accounting; (vi) if required by law, forwarding shareholder
communications from a Fund (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
its clients; (vii) aggregating and processing purchase and redemption requests
from its clients and placing net purchase and redemption orders for its
clients; (viii) establishing and maintaining accounts and records relating to
clients that invest in Class S shares; (ix) assisting clients in changing
dividend options, account designations and addresses; (x) developing,
maintaining and operating systems necessary to support Sweep Accounts; or (xi)
other similar services if requested by the Company.
CLASS X SHARES
Class X Shares are currently available only to customers of BA
Investment Services, Inc. or Service Organizations who purchase such shares
through a Sweep Account
- 5 -
<PAGE> 6
offered by BA Investment Services, Inc. or Service Organizations. Class X
Shares shall not initially be subject to a sales charge. Class X Shares also
shall initially be subject to a distribution and shareholder servicing fee
payable pursuant to the Distribution and Services Plan adopted for that class
which shall not initially exceed 0.55% of the average daily net asset value of
outstanding Class X Shares. Distribution expenses and shareholder services
under the Distribution and Services Plan for Class X Shares are identical to
those provided under the Distribution and Services Plan for Class S Shares.
2. Non-Money Market Funds
----------------------
CLASS A SHARES
Class A Shares are currently offered to the general public and
shall initially be subject to a front-end sales charge which shall not
initially exceed 4.50% of the offering price of Class A Shares. There is no
front-end sales charge imposed on combined purchases of Class A Shares in
excess of $1 million "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. Class A Shares are also currently subject to a fee payable pursuant
to a Shareholder Service Plan which currently does not initially exceed .25%
(on an annual basis) of the average daily net asset value of the Class A
Shares.
Services provided under the Shareholder Service Plan adopted
for the class currently 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 Class A Shares.
Support services provided by Service Organizations may include, among other
things: (i) establishing and maintaining accounts and records relating to
clients that invest in Fund shares; (ii) processing dividend and distribution
payments from the Funds on behalf of clients; (iii) providing information
periodically to clients regarding their positions in shares; (iv) arranging for
bank wires; (v) responding to client inquiries concerning their investments in
Fund shares; (vi) providing the information to the Funds necessary for
accounting or subaccounting; (vii) if required by law, forwarding shareholder
communications from the Funds (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
clients; (viii) assisting in processing exchange and redemption requests from
clients; (ix) assisting clients in changing dividend options, account
designations and addresses; and (x) providing such other similar services.
- 6 -
<PAGE> 7
CLASS B SHARES
Class B Shares of the Non-Money Market Funds shall initially
be offered to the general public and may be offered through broker-dealers or
other organizations acting on behalf of their customers. Class B Shares shall
be subject to a CDSC which initially shall be payable on certain share
redemptions made within six years of the purchase date at a rate which shall
not initially exceed 5.00% of the lower of (1) the net asset value of the
redeemed shares or (2) the original purchase price of the redeemed shares.
Class B Shares are also currently subject to (i) a fee payable pursuant to a
Distribution and Services Plan which currently does not initially exceed 1.00%
(on an annual basis) of the average daily net asset value of the Class B
Shares.
Distribution expenses under the Distribution and Services Plan
include: (i) direct out-of-pocket promotional expenses incurred by the
distributor in advertising and marketing Class B shares; (ii) expenses incurred
in connection with preparing, printing, mailing, and distributing or publishing
advertisements and sales literature for Class B shares; expenses incurred in
connection with printing and mailing Prospectuses and Statements of Additional
Information to other than current Class B shareholders; (iii) periodic payments
or commissions to one or more Distribution Organizations with respect to a
Fund's Class B shares beneficially owned by customers for whom the Distribution
Organization is the Distribution Organization of record or holder of record of
such Class B shares; (iv) the direct or indirect cost of financing the payments
or expenses included in (i) and (iii) above; or (v) for such other services as
may be construed, by any court or governmental agency or commission, including
the Commission, to constitute distribution services under the 1940 Act or rules
and regulations thereunder.
Shareholder services provided pursuant to this Distribution
and Services Plan include: (i) processing dividend and distribution payments
from a Fund on behalf of its clients; (ii) providing information periodically
to its clients showing their positions in Class B shares; (iii) arranging for
bank wires; (iv) responding to routine client inquiries concerning their
investment in Class B shares; (v) providing the information to the Fund
necessary for accounting or sub-accounting; (vi) if required by law, forwarding
shareholder communications from a Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to its clients; (vii) aggregating and processing purchase, exchange,
and redemption requests from its clients and placing net purchase, exchange,
and redemption orders for its clients; (viii) providing clients with a service
that invests the assets of their accounts in Class B shares pursuant to
specific or pre-authorized instructions; (ix) establishing and maintaining
- 7 -
<PAGE> 8
accounts and records relating to clients that invest in Class B shares; (x)
assisting clients in changing dividend options, account designations and
addresses; or (xi) other similar services if requested by the Company.
CLASS K SHARES
Class K Shares are currently available only to (a) businesses
or other organizations that participate in the 401(k) Daily Advantage(R)
Retirement Plan Program sponsored by Bank of America and (b) individuals
investing proceeds from a redemption of shares from another unaffiliated
open-end investment company on which such individual paid a front-end sales
load. Class K Shares shall not initially be subject to a sales charge. Class
K Shares also shall initially be subject to a distribution and shareholder
servicing fee payable pursuant to the Distribution and Services Plan adopted
for that class which shall not initially exceed 0.75% of the average daily net
asset value of outstanding Class K Shares. Distribution expenses under the
Distribution and Services Plan for Class K Shares are identical to those
provided under the Distribution and Services Plan for Class S Shares.
Shareholder services provided pursuant to the Distribution and
Services Plan include (i) processing dividend and distribution payments from a
Fund on behalf of clients; (ii) providing statements periodically to clients
showing their positions in the shares; (iii) providing the information to the
Funds necessary for accounting or sub-accounting; (iv) if required by law,
forwarding shareholder communications from a Fund (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to clients; (v) aggregating and processing purchase, exchange,
and redemption requests from clients and placing net purchase, exchange, and
redemption orders for customers; (vi) establishing and maintaining accounts and
record relating to clients that invest in shares; and (vii) other similar
services that the Company may reasonably request to the extent permitted under
applicable law. Payments under the Distribution and Services Plan are not
intended for distribution services if not permitted by the Employee Retirement
Income Security Act of 1974, as amended.
C. Conversion Features
-------------------
1. Money Market Funds
------------------
The Company does not currently offer a conversion feature to
holders of Pacific Horizon Shares, Horizon Shares, Horizon Service Shares,
Class S Shares or Class X Shares.
- 8 -
<PAGE> 9
2. Non-Money Market Funds
----------------------
CLASS A SHARES
The Company does not currently offer a conversion feature to
holders of Class A Shares.
CLASS B SHARES
Class B Shares acquired by purchase currently convert
automatically into Class A Shares, based on relative net asset value, eight
years after the beginning of the calendar month in which the shares were
purchased.
Class B Shares acquired through reinvestment of dividends or
distributions currently will convert automatically into Class A Shares at the
earlier of eight years after the beginning of the calendar month in which the
reinvestment occurred or the date of conversion of the most recently purchased
Class B Shares that were not acquired through reinvestment of dividends or
distributions.
CLASS K SHARES
The Company does not currently offer a conversion feature to
holders of Class K Shares.
D. Shareholder Services
--------------------
1. Exchange Privileges
-------------------
Money Market Funds
------------------
Only holders of Pacific Horizon Shares are currently permitted
to exchange their shares in a Fund for like Shares of another Fund of the
Company or for like shares of any Time Horizon Fund provided, however, that
Pacific Horizon Shares of the Prime Fund acquired through an exchange of B
Shares of an investment portfolio of Time Horizon Funds may only be exchanged
for B Shares of an investment portfolio of Time Horizon Funds and, provided
further that such other shares may legally be sold in the state of the
investor's residence. When Pacific Horizon Shares are exchanged for shares of
another Fund of the Company which are sold with a sales load, the applicable
sales load, shall be deducted.
B Shares of Time Horizon Funds offered with a CDSC may be
exchanged for Pacific Horizon Shares and Class S Shares of the Prime Fund and
Class S Shares of the Treasury Fund. Such exchange-acquired Pacific Horizon
Shares of the Prime Fund will
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<PAGE> 10
be subject to a CDSC upon redemption in accordance with the prospectus for B
Shares of Time Horizon Funds.
Non-Money Market Funds
----------------------
CLASS A SHARES
Holders of Class A Shares are currently permitted to exchange
their shares for Class A Shares of other Non-Money Market Funds, for Pacific
Horizon Shares of the Money Market Funds or for like shares of any Time Horizon
Fund. Holders of Class A Shares who purchased their shares with a front-end
sales charge generally shall be permitted to exchange their shares without
paying an additional front-end sales charge on shares acquired through the
exchange. Customers who purchase Class A Shares of a Fund in excess of $1
million without a front-end sales charge, exchange their shares for Shares of
another Pacific Horizon Fund or for like shares of any Time Horizon Fund and
redeem such shares within one year or two years of their initial purchase will
be subject to a 1.00% or 0.50% CDSC, respectively.
CLASS B SHARES
Holders of Class B Shares shall initially be permitted to
exchange their shares for Class B Shares of other Funds of the Company or for
like shares of any Time Horizon Fund without paying a CDSC at the time the
exchange is made.
CLASS K SHARES
Holders of Class K Shares shall initially be permitted to
exchange their shares for Class K Shares of other Funds of the Company or for
like shares of any Time Horizon Fund.
2. Individual Retirement Accounts ("IRAs")
---------------------------------------
Money Market Funds
------------------
Currently, the Company only makes IRAs, including IRAs set up
under a Simplified Employee Pension Plan and IRA "Rollover Accounts," available
to holders of Pacific Horizon Shares in each Money Market Fund other than the
California Tax-Exempt Money Market Fund and the Tax-Exempt Money Fund.
Non-Money Market Funds
----------------------
The Company currently makes IRAs available to only holders of
Class A Shares and to holders of Class B Shares. IRAs will not be available to
Class K Shares.
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<PAGE> 11
3. Automatic Investment Program
----------------------------
Money Market Funds
------------------
Only holders of Pacific Horizon Shares of each Money Market
Fund currently have an automatic investment plan whereby a shareholder may
purchase Pacific Horizon Shares of a Money Market Fund at regular intervals
selected by the investor.
Non-Money Market Funds
----------------------
CLASS A SHARES
Holders of Class A Shares currently have an automatic
investment plan whereby, a shareholder may purchase Class A Shares of a Fund at
regular intervals selected by the investor.
CLASS B SHARES
Holders of Class B Shares shall initially have an automatic
investment plan whereby, in general, a shareholder may purchase Class B Shares
of a Fund at regular intervals selected by the investor.
CLASS K SHARES
Holders of Class K Shares shall initially have an automatic
investment plan whereby, in general, a shareholder may purchase Class K Shares
of a Fund at regular intervals selected by the investor.
4. Direct Deposit Program
----------------------
Money Market Funds
------------------
Only holders of Pacific Horizon Shares currently have a direct
deposit program whereby a shareholder who receives payments from the federal
government may purchase Pacific Horizon Shares by having these payments
automatically deposited into his or her Fund account.
Non-Money Market Funds
----------------------
CLASS A SHARES
Holders of Class A Shares currently have a direct deposit
program whereby a shareholder who receives payments from the federal government
may purchase Class A Shares of a Fund by having these payments automatically
deposited into his or her Fund Account.
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<PAGE> 12
CLASS B SHARES
Holders of Class B Shares shall initially have a direct
deposit program whereby a shareholder who receives payments from the federal
government may purchase Class B Shares of a Fund by having these payments
automatically deposited into his or her Fund Account.
CLASS K SHARES
Holders of Class K Shares shall initially have a direct
deposit program whereby a shareholder who receives payments from the federal
government may purchase Class K Shares of a Fund by having these payments
automatically deposited into his or her Fund Account.
5. Automatic Withdrawal Plan
-------------------------
Money Market Funds
------------------
Only holders of Pacific Horizon Shares currently have an
automatic withdrawal plan whereby a shareholder may request withdrawal of a
certain dollar amount on a monthly, quarterly, semi-annual or annual basis.
Non-Money Market Funds
----------------------
CLASS A SHARES
Holders of Class A Shares currently have an automatic
withdrawal plan whereby a shareholder may request withdrawal of a certain
dollar amount on a monthly, quarterly, semi-annual or annual basis.
CLASS B SHARES
Holders of Class B Shares shall initially have an automatic
withdrawal plan whereby a shareholder may request withdrawals of a certain
dollar amount on a monthly, quarterly, semi-annual or annual basis.
CLASS K SHARES
Holders of Class K Shares shall initially have an automatic
withdrawal plan whereby a shareholder may request withdrawals of a certain
dollar amount on a monthly, quarterly, semi-annual or annual basis.
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<PAGE> 13
E. Methodology for Allocating Expenses Between Classes
---------------------------------------------------
Expenses of each Fund will be apportioned to each class of
shares depending upon the nature of the expense item.
Specifically, before determining the daily dividend rates and
yields, the following expense items shall be calculated as follows:
1. General Operating Expenses
--------------------------
Operating expenses which are attributable to all classes of
shares ("operating expenses") will be allocated among the classes of shares
based on their net asset value at the end of the day. Operating expenses will
include fees paid to Bank of America under the Investment Advisory Agreement,
fees paid to Concord Holding Corporation under the Basic Administrative
Services Agreement and all other expenses such as custody fees, transfer agent
fees and audit fees, except those specifically listed below.
2. Class-Specific Expenses
-----------------------
SHAREHOLDER SERVICES FEES
In addition to their respective pro-rata share of operating
expenses, Horizon Service Shares shall initially bear a shareholder services
fee which is calculated at an annual rate not to exceed .25% of the average
daily net asset value of such outstanding shares at the end of the day,
Pacific Horizon Shares shall initially bear a special management services fee
which is presently calculated at an annual rate not to exceed .32% (.35% for
the California Tax-Exempt Money Fund) of the average daily net asset value of
such outstanding shares at the end of the day, and Class A Shares shall
initially bear a shareholder services fee which is calculated at an annual rate
not to exceed .25% of the average daily net asset value of such outstanding
shares at the end of the day.
DISTRIBUTION AND SERVICES FEES
In addition to their respective pro-rata share of operating
expenses, Class B Shares shall initially bear a distribution and shareholder
services fee which is presently calculated at an annual rate not to exceed .75%
and .25%, respectively, of the average daily net asset value of such
outstanding shares at the end of the day. Class S Shares shall initially bear
a distribution and shareholder services fee which is calculated at an annual
rate not to exceed .75% and .25%, respectively, of the average daily net asset
value of such
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<PAGE> 14
outstanding shares at the end of the day. Class X Shares shall initially bear
a distribution and shareholder services fee which is presently calculated at an
annual rate not to exceed .30% and .25%, respectively, of the average daily net
asset value of such outstanding shares at the end of the day. Class K Shares
shall initially bear a distribution and shareholder services fee which is
presently calculated at an annual rate not to exceed .75% and .75%,
respectively, of the average daily net asset value of such outstanding shares
at the end of the day. The total of all distribution and shareholder service
fees may not exceed, in the aggregate, the annual rate of 0.75% of the average
daily net assets of the Fund's Class K shares.
Approved: April 23, 1996
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