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PROSPECTUS
JULY 30, 1996
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
An Investment Portfolio Offered by Pacific Horizon Funds, Inc.
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The PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND (the "Fund") is a diversified
mutual fund whose investment objective is to provide high current income
consistent with relative stability of principal. The Fund seeks to achieve its
objective through investment primarily in securities issued or guaranteed by the
U.S. Government, its agencies, instrumentalities or sponsored enterprises.
The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"), an open-end,
series management investment company. Bank of America National Trust and Savings
Association ("Bank of America" or the "investment adviser") serves as the Fund's
investment adviser. Based in San Francisco, California, Bank of America and its
affiliates have over $48 billion under management, including over $12 billion in
mutual funds.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 30, 1996 and is
incorporated by reference into this Prospectus.
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Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investment in the Fund involves investment
risk, including the possible loss of principal.
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LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature in connection
with the offering of the Fund's shares and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or its distributor. This Prospectus does not constitute an offer by the
Fund or by the distributor to sell, or a solicitation of any offer to buy, any
of the securities hereby in any jurisdiction to any person to whom it is
unlawful for the Fund or the distributor to make such offer in such
jurisdiction.
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<PAGE> 2
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 DURATION AND MATURITY
4 TYPES OF INVESTMENTS
5 FUNDAMENTAL LIMITATIONS
6 RISK FACTORS -- OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
SHAREHOLDER GUIDE 9 HOW TO BUY SHARES
9 What Is My Minimum Investment In The Fund?
9 How Are Shares Priced?
13 How Can I Buy Shares?
14 What Price Will I Receive When I Buy Shares?
15 What Else Should I Know To Make A Purchase?
15 HOW TO SELL SHARES
15 How Do I Redeem My Shares?
17 What NAV Will I Receive For Shares I Want To Sell?
17 What Kind of Paperwork Is Involved In Selling
Shares?
18 How Quickly Can I Receive My Redemption Proceeds?
18 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION 18
POLICIES
SHAREHOLDER SERVICES 19 CAN I USE THE FUND IN MY RETIREMENT PLAN?
19 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
20 WHAT IS TELETRADE?
21 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
21 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
21 CAN I ARRANGE PERIODIC WITHDRAWALS?
21 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
22 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 22 FUND MANAGEMENT
22 Expenses
22 Service Providers
23 Fee Waivers
TAX INFORMATION 24
MEASURING PERFORMANCE 25
DESCRIPTION OF SHARES 26
PLAN PAYMENTS 27
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DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
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</TABLE>
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. A Shares are offered at net asset value plus a front-end
sales load (see page 9 of the Prospectus for an explanation of net asset value
per share) and are subject to a shareholder servicing fee.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund for portfolio
management, maintenance of shareholder accounts, general administration,
shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A Shares and their estimated operating expenses expected to be incurred
during the first twelve months of operations. Actual expenses may vary. A
hypothetical example based on the summary is also shown.
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<TABLE>
<CAPTION>
A SHARES
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50 %
Sales Load Imposed on
Reinvested Dividends None
Maximum Contingent Deferred Sales
Load (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) None(1)
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees
(After Fee Waivers)+ 0.0 %
12b-1 Fee 0.0 %
Shareholder Services Fee 0.25 %
Other Expenses (After Expense
Reimbursements)+ 0.60 %
----
Total Operating Expenses (After Fee
Waivers and Expense
Reimbursements)+ 0.85 %
====
</TABLE>
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(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage(R)
or Advantage Plus(TM) Programs) are subject to a contingent deferred sales
load of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales load 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 load. 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 Fund. Absent fee waivers and/or expense reimbursement,
management fees would be 0.45% of the average net assets (annualized);
"Other Expenses" for the Fund's A Shares (based on estimates for the first
twelve months of operations) would be 1.79% of average net assets
(annualized); and "Total Operating Expenses" for the Fund's A Shares would
be 2.49% of average net assets (annualized).
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EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS
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<S> <C> <C>
A Shares(1)............................ $ 53 $ 71
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
load but does not assume deduction at redemption of maximum applicable
contingent deferred sales load under the Large Purchase Exemption.
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Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. The Short
Term Government Fund is new, and the above figures are based on estimates of
expenses expected during its first twelve months of operation. 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.
Absent fee waivers and/or expense reimbursement, management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.25% of the Fund's
average daily net assets; and
- - an administration fee payable at the annual rate of 0.20% of the Fund's
average daily net assets.
Currently, the most restrictive expense limitation limits the Fund's aggregate
annual expenses (including management fees) to 2.5% of the first $30 million of
the Fund's average daily net assets, 2% of the next $70 million and 1.5% of the
Fund's remaining average daily net assets.
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FUND INVESTMENTS
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INVESTMENT OBJECTIVE
The Pacific Horizon Short-Term Government Fund seeks high current income
consistent with relative stability of principal. The Fund seeks this objective
through investing primarily in securities issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or sponsored enterprises.
The Fund may be appropriate for investors who want:
- income from securities issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises; and
- relative stability of investment but are willing to accept some price and
yield variations.
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DURATION AND MATURITY
Under normal market and interest rate conditions, the investment adviser expects
that the Fund's average portfolio duration generally will be approximately the
same as a one-year U.S. Treasury bill (approximately one year). This means that
the Fund's net asset value fluctuation is expected to be similar to the price
fluctuation of a one-year U.S. Treasury bill. Under normal market and interest
rate conditions, the investment adviser does not expect the Fund's average
portfolio duration to exceed that of a two-year U.S. Treasury note
(approximately 1.9 years). However, there is no limitation on duration. Under
normal circumstances, it is expected that the average weighted maturity of the
Fund's investments will not exceed two years. Unlike maturity which indicates
when a security repays principal, "duration" incorporates the cash flows of all
interest and principal payments and the proceeds from calls and redemptions over
the life of a security. These payments are multiplied by the number of years
over which they are received to produce a value that is expressed in years
(i.e., duration).
TYPES OF INVESTMENTS
IN GENERAL. The Fund has a policy that it will invest primarily in securities
issued or guaranteed by the U.S. Government, its agencies, instrumentalities or
sponsored enterprises, including, but not limited to, direct obligations of the
U.S. Treasury, such as U.S. Treasury bills, certificates of indebtedness, notes
and bonds, and in repurchase agreements involving such securities. Other types
of U.S. Government obligations that the Fund may hold include obligations of
U.S. Government agencies, instrumentalities or sponsored enterprises including,
but not limited to, Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Tennessee Valley
Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan Marketing Association, or
Federal Home Loan Mortgage Corporation. Obligations of some of these agencies,
instrumentalities or sponsored enterprises, such as the Small Business
Administration or the Maritime Administration, 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, 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 supported by the credit of the instrumentality. 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.
Guarantees of the Fund's investment securities by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises assure only the
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payment of principal and interest on the guaranteed securities, and do not
guarantee the securities' yield or value, or the yield or value of the Fund's
shares. U.S. Government obligations ordinarily carry lower rates of interest
income than debt securities of other issuers with similar maturities.
The market value of debt securities, and thus the Fund's net asset value per
share, is expected to vary with changes in interest rates. The value of the
Fund'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 Fund's earnings. In an effort to preserve the capital of the Fund
when interest rates are generally rising, Bank of America may shorten the
average weighted maturity of the Fund'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 Fund's current return
based on its net asset value generally will be lower as a result of such action
than it would have been had such action not been taken.
MORTGAGE-RELATED SECURITIES GENERALLY. The Fund may invest in U.S. Government
securities which are collateralized by or represent interests in real estate
mortgages. The types of mortgage securities in which the Fund may invest include
the following: (i) adjustable rate mortgage securities; (ii) collateralized
mortgage obligations; (iii) real estate mortgage investment conduits; and (iv)
other securities collateralized by or representing interests in real estate
mortgages whose interest rates reset at periodic intervals and are issued or
guaranteed by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises.
The Fund may also invest in mortgage-related securities which are issued by
private entities such as investment banking firms and companies related to the
construction industry. The privately issued mortgage-related securities in which
the Fund may invest include, but are not limited to: (i) privately issued
securities which are collateralized by pools of mortgages in which such
mortgages are guaranteed as to payment of principal and interest by an agency,
instrumentality or sponsored enterprise of the U.S. Government; (ii) privately
issued securities which are collateralized by pools of mortgages in which such
mortgages are guaranteed as to the payment of principal and interest by the
issuer and such guarantee is collateralized by U.S. Government securities; and
(iii) other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and which mortgage-related securities
are supported as to the payment of the principal and interest by the credit of
any agency, instrumentality or sponsored enterprise of the U.S. Government.
The privately issued mortgage-related securities provide for periodic payments
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Fund as income, and the principal portion
will be reinvested.
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund may not be changed without a vote by the
holders of a majority of the outstanding shares of the 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 Fund may not:
1. 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 may borrow from banks for temporary purposes in an amount not
exceeding 10% of the value of the total assets of the Fund; 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
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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.
2. Make loans, except investments in debt securities and repurchase agreements.
A complete list of the Fund's fundamental investment limitations is set out in
the Statement of Additional Information.
RISK FACTORS -- OTHER INVESTMENT
PRACTICES AND CONSIDERATIONS
MORTGAGE-RELATED SECURITIES. The Fund may invest in mortgage-related
securities. Purchasable mortgage-related securities are represented by pools of
mortgage loans assembled for sale to investors by various governmental agencies
such as the Government National Mortgage Association ("GNMA") and
government-related organizations such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
as well as by private issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
are otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If the Fund purchases a mortgage-related security
at a premium, the portion may be lost if there is a decline in the market value
of the security, whether resulting from increases in interest rates or
prepayment of the underlying mortgage collateral. As with other interest-bearing
securities, the prices of such securities are inversely affected by changes in
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true because
mortgages underlying securities are prone to prepayment in periods of declining
interest rates. For this and other reasons, a mortgage-related security's
maturity may be shortened by unscheduled prepayments on underlying mortgages
and, therefore, it is not possible to accurately predict the security's return
to the Fund. Mortgage-related securities provide regular payments consisting of
interest and principal. No assurance can be given as to the return the Fund will
receive when these amounts are reinvested.
Mortgage-related securities acquired by the Fund may include collateralized
mortgage obligations ("CMOs"), a type of derivative, issued by FNMA, FHLMC or
other U.S. Government agencies, instrumentalities or sponsored enterprises, as
well as by private issuers. CMOs provide an investor with a specified interest
in the cash flow of a pool of underlying mortgage or other mortgage-related
securities. Issuers of CMOs frequently elect to be taxed as pass-through
entities known as real estate mortgage investment conduits ("REMICs"). CMOs are
issued in multiple classes, each with a specified fixed or floating interest
rate and a final distribution date. The relative payment rights of the various
CMO classes may be structured in many ways. Generally, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other
classes having an earlier stated maturity date are paid in full. Sometimes,
however, CMO classes are "parallel pay," i.e. payments of principal are made to
two or more classes concurrently.
CMOs may involve additional risks other than those found in other types of
mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, which are unacceptable to a Fund based on the Fund's analysis
of the market value of the security.
Privately issued mortgage-related securities generally offer a higher yield than
mortgage-related securities issued by governmental agencies,
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instrumentalities or sponsored enterprises because of the absence of any direct
or indirect government or agency payment guarantees. However, timely payment of
interest and principal on mortgage loans in these pools may be supported by
various forms of insurance or guarantees, including individual loan, pool and
hazard insurance, subordination and letters of credit. The insurance and
guarantees are issued by government entities, private insurers, banks and
mortgage poolers. Although the market for such securities is becoming
increasingly liquid, some mortgage-related securities issued by private
organizations may not be readily marketable.
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Fund will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Company's Board of Directors. 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 Fund would be exposed
to possible loss due to adverse market activity 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").
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Fund
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, the Fund may purchase or sell
securities on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by the Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. Delayed settlement 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 Fund will set aside, in a segregated account, cash or liquid securities
equal to the amount of any when-issued, forward commitment or delayed settlement
transactions. When-issued purchases, forward commitments and delayed settlements
are not expected to exceed 25% of the value of the Fund'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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To assist in reducing
fluctuations in net asset value, the Fund may enter into contracts for the
purchase or sale for future delivery of U.S. Government securities,
mortgage-related securities or Eurodollar securities or may purchase put and
call options to buy or sell futures contracts. The Fund will engage in futures
and related options transactions only for bona fide hedging purposes.
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. These investment techniques would be used
to hedge against anticipated future changes in interest rates which otherwise
might adversely affect the value of the Fund's securities. The Fund may not
purchase or sell a futures contract or purchase a related option unless
immediately after any such transaction the sum of the aggre-
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gate amount of margin deposits on its existing futures positions and the amount
of premiums paid for related options does not exceed 5% of the Fund's total
assets (after taking into account certain technical adjustments). In order to
prevent leverage in connection with the purchase of futures contracts or call
options thereon by the Fund, 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 Fund's ability to engage
in options and futures transactions may be limited by tax considerations.
While transactions in futures contracts and options on futures contracts may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, while the Fund may benefit from the use of futures and options on futures
contracts, unanticipated changes in interest rates and securities prices may
result in a poorer overall performance than if the Fund had not entered into any
futures contracts or options transactions. Because perfect correlation between a
futures position and portfolio position that is intended to be protected is
impossible to achieve, the desired protection may not be obtained and the Fund
may be exposed to risk of loss. The loss incurred by the Fund in entering into
futures contracts is potentially unlimited. Futures markets are highly volatile
and the use of futures may increase the volatility of the Fund's net asset
value. In addition, because of the low margin deposits normally required in
futures trading, a relatively small price movement in a futures contract may
result in substantial losses to the Fund. Further, futures contracts and options
on futures contracts may be illiquid, and exchanges may limit fluctuations in
futures contract prices during a single day. More information about futures
contracts and related options may be found in the Statement of Additional
Information and Appendix A to the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or sold by the Fund.
In allocating purchase and sale orders for 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 Fund are not less favorable than what they
would be with any other qualified firm.
PORTFOLIO TURNOVER. Although no commissions are paid on bond transactions,
purchases and sales are at net prices which reflect dealers' mark-ups and
mark-downs, and a higher portfolio turnover rate for bond investments will
result in the payment of more dealer mark-ups and mark-downs than would
otherwise be the case. Turnover may impose other transaction costs and could
increase substantially the amount of income received by the Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). The Fund's annual portfolio turnover is not expected to
exceed 400%, although the Fund's annual portfolio turnover rate will not be a
limiting factor in making investment decisions.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
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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.
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INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs (one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs (more than one
participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
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HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = ----------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the Fund
pursuant to procedures adopted by the Company'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.
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A SHARES SALES LOAD. The front-end sales load ("front-end sales load" or "sales
load") 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:
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<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the contingent
deferred sales load.
- -------------------------------------------------------------------------------
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under
the Large Purchase Exemption does not apply to A Shares purchased under the
Daily Advantage(R) or Advantage Plus(TM) programs. To the extent that no other A
Share no-load exemption is available, the foregoing schedule of sales loads does
not apply to purchases of A Shares of $1,000,000 or more, or to purchases of A
Shares if the aggregate value of the A Shares that you beneficially own in any
Pacific Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000. If you
accumulate $1,000,000 or more of A Shares, on any additional purchase of A
Shares, the contingent deferred sales load described below will apply to such A
Shares when they are redeemed. In addition, if a customer purchases $1,000,000
or more of A Shares and redeems such shares, a contingent deferred sales load
will be imposed as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ----------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this load
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 load 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 load period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on
the following types of transactions:
- - reinvestment of dividends or distributions;
- - any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided
10
<PAGE> 12
appropriate notification of such status is given at the time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain open on the
Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES LOAD 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
load with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?"; (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales load
is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an exchange
and can be traced back to shares that were acquired with a sales load). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the
11
<PAGE> 13
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 load. If you want to
participate you can so indicate on your Account Application or make a subsequent
written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales load 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 or
Time 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.
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.
12
<PAGE> 14
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to Pacific Horizon
Short Term Government Fund) Pacific Horizon Funds, Inc.
to the address on the Account File No. 54634
Application. Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of Fund shares in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
- --------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------------------------------
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern
14
<PAGE> 16
time on a business day will be effected as of 4:00 p.m. Eastern time that day if
the order is actually received by the Transfer Agent not later than the next
business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients 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.
Certificates for shares will not be issued.
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
document(s) to the Transfer Agent.
15
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------------------------------
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
Pacific Horizon Send a signed, written request (each owner, including each
Short-Term Government Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds,
Inc.
P.O. Box 80221
Los Angeles, CA 90080-9909
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) to the address on the left.
- --------------------------------------------------------------------------------------------------------
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.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
- --------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------------------------------
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Fund itself imposes no charge when A Shares are redeemed
(except pursuant to the Large Purchase Exemption described above), if you
purchase shares through Bank of America or a Service Organization, they may
charge a fee for providing certain services in connection with investments in
Fund shares.
The 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 load will not be imposed upon such involuntary
redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests will need to
17
<PAGE> 19
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 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 load imposed on A Shares subject to the Large Purchase Exemption.
Shares so reinvested will be purchased at a price equal to the net asset value
next determined after the Transfer Agent receives a reinstatement request and
payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
- --------------------------------------------------------------------------------
DIVIDEND AND DISTRIBUTION POLICIES
- --------------------------------------------------------------------------------
Shareholders of the Fund are entitled to dividends and distributions arising
from the Fund's net investment income and net realized gains, if any. The Fund's
net realized gains (after reduction for capital loss carryforwards, if any) are
distributed at least annually. Dividends from the Fund's net investment income
are declared daily and paid no later than the fifth business day of
18
<PAGE> 20
the month next following the month in which it was declared.
You will automatically receive dividends and capital gain distributions in
additional shares of the Fund for which the dividend was declared without a
sales load unless you: (i) elect in writing to receive payment in cash; or (ii)
elect to participate in the Directed Distribution Plan described in the section
entitled "Can My Dividends From A Fund Be Invested In Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, at P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received and processed by the Transfer Agent.
- --------------------------------------------------------------------------------
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 load with respect to A Shares subject to the Large
Purchase Exemption will not be charged on redemptions in connection with minimum
required distributions from an IRA due to a shareholder having reached age
70 1/2. For details, contact the Fund's distributor at 800-332-3863. Investors
should also read the IRA Disclosure Statement and the Bank Custodial Agreement
for further details on eligibility, service fees and tax implications, and
should consult their tax advisers.
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. NO ADDITIONAL SALES
LOAD WILL BE INCURRED WHEN EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A
SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this load 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 load 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
19
<PAGE> 21
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 load 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.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in
20
<PAGE> 22
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example because of unusual market activity, you
are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales load.
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any
21
<PAGE> 23
other investment portfolio of the Company, or in like shares of any Time Horizon
Fund, provided such shares are held in a non-retirement account. To participate
in this program, known as the Directed Distribution Plan, check the appropriate
box and supply the necessary information on the Account Application or
subsequently send a written request to the Transfer Agent. Participants in the
Directed Distribution Plan are subject to the minimum initial investment
requirements of the particular fund involved. Investments will be made at a
price equal to the net asset value of the purchased shares next determined after
receipt of the distribution proceeds by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN
AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
- --------------------------------------------------------------------------------
THE BUSINESS OF THE FUND
- --------------------------------------------------------------------------------
FUND MANAGEMENT
The business affairs of 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."
EXPENSES
Operating expenses borne by the Fund include taxes, fees and expenses of the
Directors and Officers, administration, custodial and transfer agency fees,
certain insurance premiums, outside auditing and legal expenses, cost of
shareholder 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. Except as noted
in this Prospectus, the service contractors bear all expenses in connection with
the performance of their services, and the Fund bears the expenses incurred in
its operations.
SERVICE PROVIDERS
-----------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Fund. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking, business
credit and thrift
22
<PAGE> 24
offices in major U.S. cities. In addition, it has branches, corporate offices
and representative offices in 36 foreign countries.
In its advisory agreement, Bank of America has agreed to manage the Fund's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Fund'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 Fund for the acts and omissions
of the sub-adviser.
Portfolio management services for the Fund are conducted by the Fixed Income
Division of the Investment Management Services Group of Bank of America, and no
one person is primarily responsible for making recommendations to that
Committee.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.25% of the
Fund's average daily net assets. This amount may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers.")
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, 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.
Concord is an indirect, wholly owned subsidiary of The BISYS Group, Inc. Its
offices are located at 3435 Stelzer Road, Columbus, OH 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 Fund 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; calculate the net asset value of the Fund; calculate the dividends and
capital gains distributions paid to shareholders; and generally assist in all
aspects of the operations of the Fund.
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.20% of the Fund's
average daily net assets. These amounts may be reduced pursuant to undertakings
by Concord. (See the information below under "Fee Waivers.")
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia, PA
19101 serves as the Custodian of the Fund. BISYS Fund Services, Inc. is the
transfer and dividend disbursing agent of the Fund and is located at 3435
Stelzer Road, Columbus, OH 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
23
<PAGE> 25
waivers and expense reimbursements by Bank of America and other service
providers as well as by certain expense limitations imposed by state securities
regulators. Periodically, during the course of the Fund's fiscal year, Bank of
America, Concord and/or the Distributor may prospectively choose not to receive
fee payments and/or may assume certain Fund 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
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
well as in future years as long as such qualification is in the best interests
of its shareholders. As a result of this qualification, the Fund generally is
not required to pay federal income taxes to the extent its earnings are
distributed in accordance with the Code.
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.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be
24
<PAGE> 26
included in the tax basis of your exchanged shares for the purpose of
calculating your gain or loss from the exchange. It may be included in the tax
basis of the new shares, subject to this same limitation.
STATE AND LOCAL TAXES
A substantial portion of the dividends that you receive are derived from the
Fund's investments in U.S. Government obligations. These dividends may not be
entitled to the same exemptions from state and local taxes that would have been
available if you had purchased U.S. Government obligations directly. Because
state and local taxes may be different from the federal taxes described above,
you should consult your tax adviser regarding these taxes.
- --------------------------------------------------------------------------------
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE
ANNUAL TOTAL RETURN, AGGREGATE TOTAL RETURN AND YIELD.
PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE
FUTURE RESULTS.
- --------------------------------------------------------------------------------
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30-day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return 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 load for A Shares. The Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a
30-day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30-day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, the Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
Donoghue's Money Fund Report; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; 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
25
<PAGE> 27
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
U Common Stock, 60 million shares of Class U--Special Series 3 Common Stock; 50
million shares of Class U--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 U Common Stock are "A" Shares, Class
U--Special Series 3 Common Stock are "B" Shares. Class U--Special Series 5 are
"K" Shares. As of the date of this prospectus, "B" Shares and "K" Shares of the
Fund have not been offered to the public. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class U Common
Stock, Class U--Special Series 3 Common Stock or Class U--Special Series 5
Common Stock) into one or more series. For more information about the Company's
other portfolios, contact the Company at the telephone number listed on the
inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund upon liquidation. Fund shares have no
preemptive rights and only such conversion and exchange rights as the Board may
grant in its discretion. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). Only A Shares will vote on
matters relating solely to A Shares. 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.
26
<PAGE> 28
- --------------------------------------------------------------------------------
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES.
- --------------------------------------------------------------------------------
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of the Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
27
<PAGE> 29
SGB-0001
P A C I F I C H O R I Z O N M U T U A L F U N D S
SHORT-TERM
GOVERNMENT FUND
PROSPECTUS
July 30, 1996
NOT FDIC INSURED
<PAGE> 30
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
SHORT-TERM GOVERNMENT FUND
July 30, 1996
TABLE OF CONTENTS
Page
THE COMPANY............................................ 2
INVESTMENT OBJECTIVE AND POLICIES...................... 2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......... 14
ADDITIONAL INFORMATION CONCERNING TAXES................ 22
MANAGEMENT............................................. 24
GENERAL INFORMATION.................................... 43
Appendix A............................................. A-1
This Statement of Additional Information applies to the A Shares of the
Pacific Horizon Short-Term Government Fund (the "Fund") of the Company. This
Statement of Additional Information is meant to be read in conjunction with the
Prospectus dated July 30, 1996, as it may from time to time be revised (the
"Prospectus"), and is incorporated by reference in its entirety into the
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, no investment in A Shares of the Fund should be made solely upon the
information contained herein. Copies of the Prospectus relating to the Fund may
be obtained by calling Concord Financial Group, Inc. at 800-332-3863.
Capitalized terms used but not defined herein have the same meaning as in the
Prospectus.
<PAGE> 31
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund is a new portfolio that is expected to commence operations
in 1996.
The Company also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus for the Fund describes the investment objective of the
Fund. The following is a discussion of the various investments of and techniques
employed by the Fund. The following information supplements and should be read
in conjunction with the descriptions of the investment objective and policies in
the Prospectus.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in the Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions.
Subject to the general control of the Company's Board of Directors,
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") is responsible for, makes decisions with respect to, and
places orders for, all purchases and sales of portfolio securities for the Fund.
There is generally no stated commission in the case of securities
traded in the over-the-counter market, but the price includes an undisclosed
commission or mark-up. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. Purchases and sales of portfolio securities for the Fund are normally
principal transactions without brokerage commissions.
-2-
<PAGE> 32
In executing portfolio transactions and selecting brokers or dealers,
it is the Fund's policy to seek the best overall terms available. The investment
advisory agreement between the Fund and Bank of America provides that, in
assessing the best overall terms available for any transaction, Bank of America
shall consider factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In addition, the
investment advisory agreement authorizes Bank of America, subject to the
approval of the Board of Directors of the Company to cause the Fund 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 or 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.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Company
or the Fund may be the primary beneficiary of the brokerage or research services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be useful
to Bank of America in serving both the Company and other clients and,
conversely, services obtained by the placement of business of other clients may
be useful to Bank of America in carrying out its obligations to the Company. In
connection with its investment management services with respect to the Fund,
Bank of America will not acquire certificates of deposit or other securities
issued by it or its affiliates, and will give no preference to certificates of
deposit or other securities issued by Service Organizations. In addition,
portfolio securities in general will be purchased from and sold to affiliates of
the Company, 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
-3-
<PAGE> 33
permitted under the Investment Company Act of 1940 (the "1940 Act") and the
rules thereunder.
The Fund may participate, if and when practicable, in bidding for the
purchase of securities of the U.S. Government, its agencies, instrumentalities
or sponsored enterprises 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 of the Company, believes
such practice to be in the interest of the Fund.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Fund with those to be sold
or purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Company as of the close of its most recent fiscal year. As
of February 29, 1996: (a) the Treasury Fund held the following securities,
Repurchase Agreement with Dean Witter, Reynolds, Inc. in the principal amount of
$130,000,000; Repurchase Agreement with Goldman Sachs & Co. in the principal
amount of $375,000,000; Repurchase Agreement with Merrill Lynch & Co., Inc. in
the principal amount of $130,000,000; and Repurchase Agreement with Morgan
Stanley, Inc. in the principal amount of $130,000,000; (b) the Government Fund
held the following securities, Repurchase Agreement with Morgan Stanley Group in
the principal amount of $20,000,000; (c) the Prime Fund held the following
securities, Merrill Lynch & Co., Inc. commercial paper in the principal amount
of $50,000,000; Bear Stearns Cos., Inc. monthly variable rate obligation in the
principal amount of $100,000,000; Merrill Lynch & Co., Inc. monthly variable
rate obligation in the principal amount of $50,000,000; Merrill Lynch & Co.,
Inc. quarterly variable rate obligation in the principal amount of $50,000,000;
Merrill Lynch & Co., Inc. quarterly variable rate obligation in the principal
amount of $50,000,000; Dean Witter Discover & Co. quarterly variable rate
obligation in the principal amount of $50,000,000; Goldman Sachs Group L.P.
master note in the principal amount of $220,000,000; Morgan Stanley Group, Inc.
master note in the principal amount of $200,000,000, Repurchase Agreement with
Dean Witter Reynolds, Inc. in the principal amount of $105,000,000; Repurchase
Agreement with Morgan Stanley Group, Inc. in the principal amount of
$105,000,000; Repurchase Agreement with Morgan Stanley Group, Inc. in the
principal amount of $105,000,000; (d) the U.S. Government Securities Fund held
the following securities, Merrill Lynch & Co., Inc. commercial paper in the
principal amount of $3,000,000; (e) the Corporate Bond
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<PAGE> 34
master portfolio held the following securities, Goldman Sachs Group LP corporate
obligation in the principal amount of $1,500,000; and Lehman Brothers corporate
obligation in the principal amount of $1,000,000; (f) the Intermediate Bond
master portfolio held the following securities, Morgan Stanley Group medium term
note in the amount of $2,000,000 and Merrill Lynch Mtg. Inv. Inc. $16,000; (g)
the Blue Chip master portfolio held the following securities, Dean Witter common
stock in the principal amount of $2,821,875; and (h) the Asset Allocation master
portfolio held the following securities, Dean Witter common stock in the
principal amount of $1,085,750; Lehman Brothers corporate obligations in the
principal amount of $1,000,000; Morgan Stanley Group medium term note in the
principal amount of $1,500,000; Merrill Lynch & Co., Inc. collateralized
mortgage obligation in the principal amount of $8,000; and Merrill Lynch
commercial paper in the principal amount of $3,500,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co.,
Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean
Witter Reynolds, Inc. and Paine Webber are considered to be regular brokers and
dealers of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the descriptions of such
investments in the Prospectus.
REPURCHASE AGREEMENTS. The Fund is permitted to enter into repurchase
agreements with respect to its portfolio securities. Pursuant to such
agreements, the Fund acquires securities from financial institutions such as
banks and broker-dealers as are deemed to be creditworthy subject to the
seller's agreement to repurchase and the agreement of the Fund to resell such
securities at a mutually agreed upon date and price. Repurchase agreements
maturing in more than seven days are considered illiquid investments and
investments in such repurchase agreements along with any other illiquid
securities will not exceed 10% of the value of the net assets of the Fund.
Although securities subject to a repurchase agreement may bear maturities
exceeding ten years, the Fund intends to only enter into repurchase agreements
having maturities not exceeding 60 days. The Fund is not permitted to enter into
repurchase agreements with Bank of America or its affiliates, and will give no
preference to repurchase agreements with Service Organizations. The repurchase
price generally equals the price paid by the 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 custodian or sub-custodian of the Company or
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<PAGE> 35
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 investment 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 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 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 1940 Act.
U.S. GOVERNMENT OBLIGATIONS. The Fund makes investments in U.S.
Government obligations. 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.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
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. In such a case, the Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the commitment. It may be
expected that the net assets of the Fund will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. The Fund does not intend to engage in these transactions for
speculative purposes but primarily in order to hedge against anticipated changes
in interest rates. Because the 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 the Fund's
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
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<PAGE> 36
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,
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 securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
FUTURES. The Fund may purchase and sell futures contracts on U.S.
Government Securities, mortgage-related securities and Euro-dollar securities
(as well as purchase related options). A futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the value of a specified obligation at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. No
physical delivery of the underlying securities is normally made. The Fund may
not purchase or sell futures contracts and purchase related options unless
immediately after any such transaction the aggregate initial margin that is
required to be posted by the 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 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. In connection with a futures transaction, unless the transaction is
covered in accordance with SEC positions, the Fund will maintain a segregated
account with its custodian or sub-custodian consisting of cash or liquid high
grade debt securities equal to the entire amount at risk (less margin deposits)
on a continuous basis.
Successful use of futures contracts by the Fund is subject to Bank of
America's ability to predict correctly movements in the direction of interest
rates. There are several
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<PAGE> 37
risks in connection with the use of futures contracts by the Fund as a hedging
device. One risk arises because of the imperfect correlation between movements
in the price of the futures contract and movements in the price of the
securities which are the subject of the hedge. The price of the futures contract
may move more than or less than the price of the securities being hedged. If the
price of the futures contract moves less than the price of the securities which
are the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the futures contract. If the
price of the futures contract moves more than the price of the hedged
securities, the Fund involved will experience either a loss or gain on the
futures contract which will not be completely offset by movements in the price
of the securities which are the subject of the hedge.
It is also possible that, where the Fund has sold futures contracts to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Fund may decline. If this occurred, the Fund
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 Fund intends to purchase or sell futures contracts only on
exchanges or boards of trade where there appear to be active secondary markets,
there is no assurance that a liquid secondary market on any exchange or board of
trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures investment position, and in the
event of adverse price movements, the Fund 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
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<PAGE> 38
commodity exchanges which limit the amount of fluctuation in a futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions.
Options on Futures Contracts. The acquisition of put and call options
on a futures contract will give the Fund 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 Fund 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 Fund will engage in the purchase and sale of futures contracts and
options on such futures contracts primarily to hedge its portfolio against
changes in interest rates. The Fund may buy adjustable rate mortgage securities
("ARMs") which frequently have embedded caps which limit how high the interest
rates of the ARMs may rise over periods of time. In order to hedge against
changes in market value caused by the embedded caps in the ARMs, the Fund may
engage in futures and related options contracts.
For additional information concerning Futures and options thereon,
please see Appendix A to this Statement of Additional Information.
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<PAGE> 39
MORTGAGE-RELATED SECURITIES. The Funds may purchase mortgage-backed
securities that are secured by entities, including but not limited to, the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
commercial banks, trusts, financial companies, finance subsidiaries of
industrial companies, savings and loan associations, mortgage banks and
investment banks.
There are a number of important differences among the agencies,
instrumentalities and sponsored enterprises of the U.S. Government that issue
mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by GNMA include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by FNMA include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA, are not backed by or entitled to the full faith and credit
of the United States and are supported by the right of the issuer to borrow from
the Treasury. FNMA is a government-sponsored organization owned entirely by
private stockholders. Fannie Maes are guaranteed as to timely payment of
principal and interest by FNMA. Mortgage-related securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
The Fund may invest in multiple class pass-through securities,
including collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by
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<PAGE> 40
U.S. Government agencies, instrumentalities or sponsored enterprises, including
FNMA and FHLMC, or by trusts formed by private originators of, or investors in,
mortgage loans. In general, CMOs and REMICs are debt obligations of a legal
entity that are collateralized by, and multiple class pass-through securities
represent direct ownership interests in, a pool of residential mortgage loans or
mortgage pass-through securities (the "Mortgage Assets"), the payments on which
are used to make payments on the CMOs or multiple pass-through securities.
Investors may purchase beneficial interests in REMICs, which are known as
"regular" interests or "residual" interests. The Fund does not intend to
purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of principal
will be made on any class of sequential pay CMOs or REMIC Certificates until all
other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment
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<PAGE> 41
date to one or more classes of REMIC Certificates (the "PAC Certificates"), even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the Certificates.
The scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally guarantees
ultimate collection of all principal of the related mortgage loans without
offset or deduction. FHLMC also guarantees timely payment of principal on
certain Pcs, referred to as "Gold Pcs."
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by a
fund of the Company. The Fund may also invest in securities, interests or
obligations of companies or entities which have a deposit, loan, commercial
banking or other business relationship with Bank of America or any of its
affiliates (including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities purchased by a fund of the
Company).
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<PAGE> 42
OTHER INVESTMENT LIMITATIONS
The investment objective of the Fund is fundamental. 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 "General Information -
Miscellaneous"). The following is a complete list of fundamental policies which
may not be changed for the Fund without such a vote of shareholders.
THE FUND 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
another investment company.
2. Underwrite the securities of other issuers, provided that all of the
assets of the Fund may be invested in another investment company.
3. Purchase or sell real estate, except that the Fund may, to the
extent appropriate to its investment objective, invest in securities and
instruments guaranteed by agencies or instrumentalities of the U.S. Government,
and securities issued by companies which invest in real estate or interests
therein.
4. Purchase securities on margin (except for such short-term credits as
may be necessary for the clearance of transactions), make short sales of
securities or maintain a short position. For this purpose, the deposit or
payment by the Fund 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. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs. This restriction shall
not apply to securities issued by companies which purchase or sell commodities
or commodity contracts or which invest in such programs, or to futures contracts
or options on futures contracts.
6. Purchase securities of other investment companies to the extent
prohibited by the 1940 Act.
7. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers
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<PAGE> 43
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 or
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.
8. Purchase securities of any issuer if as a result it would own more
than 10% of the voting securities of such issuer; provided that all of the
assets of the Fund may be invested in another investment company.
9. Borrow money for the purpose of obtaining investment leverage or
issue senior securities (as defined in the 1940 Act), provided that the Fund may
borrow from banks for temporary purposes in an amount not exceeding 10% of the
value of the total assets of the Fund; 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.
10. Make loans, except investments in debt securities and repurchase
agreements.
* * *
In order to permit the sale of the Fund's shares in certain states, the
Company may make commitments more restrictive than the investment policies and
limitations described above.
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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectus. Additional information is
contained below.
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<PAGE> 44
Portfolio securities for which market quotations are readily available
(other than debt securities with remaining maturities of 60 days or less) are
valued at the last reported sale price or (if none is available) the mean
between the current quoted bid and asked prices provided by investment dealers.
Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the Board of Directors of the Company. Debt securities with
remaining maturities of 60 days or less are valued on an amortized cost basis
unless the Board determines that such basis does not represent fair value at the
time. Under this method such securities are valued initially at cost on the date
of purchase or, in the case of securities purchased with more than 60 days to
maturity, are valued at their market or fair value each day until the 61st day
prior to maturity. Thereafter, absent unusual circumstances, a constant
proportionate amortization of any discount or premium is assumed until maturity
of the security.
A pricing service may be used to value certain portfolio securities
where the prices provided are believed to reflect the fair value of such
securities. In valuing securities the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely on quoted prices. The methods used by the
pricing service and the valuations so established will be utilized under the
general supervision of the Board.
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges available to certain shareholders as described in the
Prospectus, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension, profit-
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code) although more than one
beneficiary is involved; or "a qualified group" which has been in existence for
more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount, provided
that the purchases are made through a central administrator or a single dealer,
or by other means which result in economy of sales effort or expense. A
"qualified group" must have more than 10 members, must be available to arrange
for group meetings between representatives of the Fund and the members, and must
be able to arrange for mailings to members at reduced or no
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<PAGE> 45
cost to the Distributor. The value of shares eligible for the Right of
Accumulation privilege may also be used as a credit toward completion of the
Letter of Intent privilege. Such shares will be valued at their offering price
prevailing on the date of submission of the Letter of Intent. Distributions on
shares held in escrow pursuant to the Letter of Intent privilege will be
credited to the shareholder, but such shares are not eligible for the Fund's
Exchange Privilege.
The computation of the hypothetical offering price per share of an A
Share for the Fund based on the value of the Fund's net assets at inception and
the Fund's A Shares outstanding on such date is as follows:
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT
FUND
----
<S> <C>
Net Assets $10.00
Outstanding Securities 1
Net Asset Value Per Share $10.00
Sales Load, 4.50 percent
of offering price (4.71 percent
of net asset value per share) $0.47
Maximum Offering Price to Public $10.47
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION
Shares in the Fund for which orders for wire redemption are received on
a business day before 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 A Shares subject to the Large
Purchase Exemption) will normally be wired in federal funds on the next business
day to the commercial bank specified by the investor on the Account Application
(or other bank of record on the investor's file with the Transfer Agent). To
qualify to use the wire redemption privilege, the payment for Fund shares must
be drawn on, and redemption proceeds paid to, the same bank and account as
designated on the Account Application (or other bank of record as described
above). If the proceeds of a particular redemption are to be wired to another
bank, the request must be in writing and signature guaranteed. Shares for which
orders for wire redemption are received after the close of regular trading hours
on the New York Stock Exchange or on a non-business day will be redeemed as of
the close of trading on such Exchange on the next day on which shares of the
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<PAGE> 46
Fund are priced and the proceeds (less any applicable contingent deferred sales
charge on A Shares subject to the Large Purchase Exemption) will normally be
wired in federal funds on the next business day thereafter. Redemption proceeds
(less any applicable contingent deferred sales charge on A Shares subject to the
Large Purchase Exemption) will be wired to a correspondent member bank if the
investor's designated bank is not a member of the Federal Reserve System.
Immediate notification by the correspondent bank to the investor's bank is
necessary to avoid a delay in crediting the funds to the investor's bank
account. Proceeds of less than $1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Fund's Prospectus. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
SUPPLEMENTARY PURCHASE INFORMATION
IN GENERAL. As described in the Prospectus, Shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the Fund
and described in the Prospectus. Purchase orders will be effected only on
business days.
A Shares in the Fund are sold with a sales load, except for such
exemptions as noted in the Prospectus. A Shares which are subject to the Large
Purchase Exemption are subject to a contingent deferred sales load. The
contingent deferred sales load discussed under the Large Purchase Exemption does
not apply to A Shares under the Daily Advantage(R) or Advantage Plus(TM)
Programs. These exemptions to the imposition of a sales load on A Shares are due
to the nature of the investors and/or the reduced sales efforts that will be
necessary in obtaining such investments. A Shares are also subject to a
shareholder
-17-
<PAGE> 47
servicing fee. Service Organizations may be paid by the Distributor at the
Company's expense for shareholder services. Depending on the terms of the
particular account, Bank of America, its affiliates, and Service Organizations
also may charge their customers fees for automatic investment, redemption and
other services provided. Such fees may include, for example, account maintenance
fees, compensating balance requirements or fees based upon account transactions,
assets or income. Bank of America or the particular Service Organization is
responsible for providing information concerning these services and any charges
to any customer who must authorize the purchase of Fund shares prior to such
purchase.
Persons or organizations wishing to purchase Company shares through
their accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions.
Initial purchases of shares into a new account may not be made by wire.
However, persons wishing to make a subsequent purchase of Company shares into an
already existing account by wire should telephone the Transfer Agent at (800)
346-2087. The investor's bank must be instructed to wire federal funds to the
Transfer Agent, referring in the wire to the particular fund in which such
investment is to be made; the investor's portfolio account number; and the
investor's name.
The Transfer Agent may charge a fee to act as Custodian for IRAs,
payment of which could require the liquidation of shares. A Shares subject to
the Large Purchase Exemption liquidated by the Transfer Agent as fees for
custodial services to IRA accounts will not be subject to the contingent
deferred sales charge. All fees charged are described in the appropriate form.
Shares may be purchased in connection with these plans only by direct remittance
to the Transfer Agent. Purchases for IRA accounts will be effective only when
payments received by the Transfer Agent are converted into federal funds.
Purchases for these plans may not be made in advance of receipt of funds.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the
-18-
<PAGE> 48
ACH member bank normally two business days after receipt of the redemption
request.
EXCHANGE PRIVILEGE. Shareholders in the Pacific Horizon Family of Funds
have an exchange privilege whereby they may exchange all or part of their shares
for like shares of another investment portfolio in the Pacific Horizon Family of
Funds or for like shares of an investment portfolio of Time Horizon Funds. By
use of the exchange privilege, the investor authorizes the Transfer Agent to act
on telephonic, telegraphic or written exchange instructions from any person
representing himself or herself to be the investor and believed by the Transfer
Agent to be genuine. The Transfer Agent's records of such instructions are
binding. The exchange privilege may be modified or terminated at any time upon
notice to shareholders. For federal income tax purposes, exchange transactions
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
Exchange transactions described in Paragraphs A, B, C, D, and E, below
will be made on the basis of the relative net asset values per share of the
investment portfolios involved in the transaction.
A. A Shares of any investment portfolio purchased with a sales load,
as well as additional shares acquired through reinvestment of
dividends or distributions on such shares, may be exchanged
without a sales load for other A Shares of any other investment
portfolio in the Pacific Horizon Family of Funds or for like
shares of Time Horizon Funds.
B. A Shares subject to the Large Purchase Exemption acquired
pursuant to an exchange transaction will continue to be subject
to any applicable contingent deferred sales charge. However, A
Shares subject to the Large Purchase Exemption that have been
acquired through an exchange of A Shares may be exchanged for
other A Shares or for like shares of Time Horizon Funds without
the payment of a contingent deferred sales charge at the time of
exchange. In determining the holding period for calculating the
contingent deferred sales charge payable on redemption of A
Shares, the holding period of the shares originally held will be
added to the holding period of the shares acquired through
exchange.
C. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds or like shares of the Time Horizon Funds acquired
by a previous exchange
-19-
<PAGE> 49
transaction involving shares on which a sales load has directly
or indirectly been paid (e.g. A Shares purchased with a sales
load or issued in connection with an exchange transaction
involving A Shares that had been purchased with a sales load), as
well as additional shares acquired through reinvestment of
dividends or distributions on such shares, may be redeemed and
the proceeds used to purchase without a sales load A Shares of
any other investment portfolio within 90 days of your redemption
trade date. To accomplish an exchange transaction under the
provisions of this paragraph, investors must notify the Transfer
Agent of their prior ownership of shares and their account
number.
D. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for shares
of any other investment portfolio in the Pacific Horizon Family
of Funds that is offered without a sales load.
E. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds purchased without a sales load may be exchanged
without a sales load for A Shares in any other portfolio in the
Pacific Horizon Family of Funds.
Except as stated above, a sales load will be imposed when shares of any
investment portfolio in the Pacific Horizon Family of Funds that were purchased
or otherwise acquired without a sales load are exchanged for A Shares of another
investment portfolio in the Pacific Horizon Family or for like shares of Time
Horizon Funds which are sold with a sales load.
Exchange requests received on a business day prior to the time shares
of the investment portfolios involved in the 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.
-20-
<PAGE> 50
Depending on the terms of the customer account at Bank of America or a
Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1996, the holidays on
which the New York Stock Exchange is closed are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The contingent
deferred sales charge with respect to A Shares subject to the Large Purchase
Exemption is not charged on involuntary redemptions. The Company will not
require a shareholder to redeem shares of a Fund if the balance held of record
by the shareholder is less than $500 solely because of a decline in the net
asset value of the Fund's shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or undesirable,
the Company may make payment wholly or partly in securities or other property.
Additionally, the Company has made an undertaking to the State of Texas that it
may only make payment of such proceeds wholly or in part in "readily marketable"
securities or other property. (If the Company determines that such undertaking
is no longer in its best interests, it will revoke such commitment. In such an
event, the Fund will no longer be able to sell its shares in the State of
Texas.) In such an event, a shareholder would incur transaction costs in selling
the securities or other property. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to
-21-
<PAGE> 51
each shareholder during any ninety-day period to the lesser of $250,000 or 1% of
the net asset value at the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
The Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, the Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year the Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
Fund and would be eligible for the dividends received deduction in the case of
corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any), net of certain deductions
for each taxable year. In general, the Fund's investment company taxable income
will be its taxable income, including dividends, interest, and short-term
capital gains (the excess of net short-term capital gain over net long-term
capital loss), subject to certain adjustments and excluding the excess of net
long-term capital gain for the taxable year over the net short-term capital loss
for such year (if any). The Fund will be taxed on its undistributed investment
company taxable income, if any. As stated, the Fund intends to distribute at
least 90% of its investment company taxable income (if any) for each taxable
year. To the extent such income is distributed by the Fund (whether in cash or
additional shares), it will be taxable to shareholders as ordinary income.
The Fund will not be treated as a regulated investment company under
the Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to the Fund's principal
-22-
<PAGE> 52
business of investing in stock and securities (and options and futures with
respect to stocks and securities) (the "Short-Short Test"). Interest (including
original issue discount and accrued market discount) received by the Fund upon
maturity or disposition of a security held for less than three months will not
be treated as gross income derived from the sale or other disposition of such
security within the meaning of this requirement. However, any other income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
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 longer than six months, any loss on the sale or exchange of
those shares will be treated as long-term capital loss to the extent of the
capital gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum nominal rate of 28%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of 35% (or
at a maximum effective marginal rate of 39% in the case of corporations having
taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specific percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or
-23-
<PAGE> 53
dividends or (iii) who have failed to certify to the Company when required to do
so either that they are subject to backup withholding or that they are "exempt
recipients."
OTHER INFORMATION
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Fund may be subject to the tax laws of such states or localities.
Income distributions may be taxable to shareholders under state or
local law as dividend income even though all or a portion of such distributions
may be derived from interest on 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 Fund or its
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of Fund shares should consult
their tax advisers with specific reference to their own tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses, 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 of
Suite 410 Musick, Peeler & Garrett
Pasadena, CA 91101-3005 (until April, 1993);
Trustee, Master Investment
Trust, Series I and Master
Investment Trust, Series
II (registered investment
</TABLE>
-24-
<PAGE> 54
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
companies) (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher Capital
4 Upper Newport Plaza Advisors, Incorporated,
Suite 100 (registered investment
Newport Beach, CA 92660-2629 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 Asset
Page Mill Asset Management (a private
Management investment company) since
433 California Street 1991; Manager, Corporate
Suite 900 Investments, Hewlett
San Francisco, CA 94104 Packard Company from 1979
to 1991; Trustee, Master
Investment Trust, Series I
and Master Investment
Trust, Series II (since
1993); Director, Morgan
Grenfell Small Cap Fund
(since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989) (registered
investment companies);
former Trustee, SunAmerica
Fund Group (previously
Equitec Siebel Fund Group)
from 1984 to 1992.
</TABLE>
-25-
<PAGE> 55
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive Director,
1977 to 1988, Pacific Rim
Bankers Program (a non-
profit educational
institution); Dean
Emeritus, 1981 to date,
Dean, 1964-81, Graduate
School of Business
Administration, University
of Washington; Director,
Washington Federal Savings
& Loan Association;
Trustee, Seafirst
Retirement Funds (since
1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American Universities,
Universities President February 1993 to date;
One DuPont Circle Provost, 1982 to January
Suite 730 1993, Senior Vice
Washington, DC 20036 President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master Investment
Trust, Series I and Master
Investment Trust, Series
II (since 1995).
Kenneth L. Trefftzs 83 Director Private Investor; formerly
11131 Briarcliff Drive Distinguished Emeritus
San Diego, CA 92131-1329 Professor of Finance and
Chairman of the Department
of Finance and Business
Economics of the Graduate
School of Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
Corporation (insurance and
financial services holding
company); Director, Source
Capital, Inc. (closed-end
investment company);
Director of three open-end
investment companies
managed by First Pacific
Advisors, Inc.; formerly
Chairman of the Board of
Directors (or Trustees) of
nineteen investment
companies managed by
</TABLE>
-26-
<PAGE> 56
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
American Capital Asset
Management, Inc.
J. David Huber 49 Executive Employee of BISYS Fund
BISYS Fund Services Vice President Services, Inc., June 1987
3435 Stelzer Road to present; President of
Columbus, OH 43219 Master Investment Trust,
Series I, Master
Investment Trust Series II
and Seafirst Retirement
Funds (since 1996).
Michael Brascetta 37 Executive Senior Vice President of
BISYS Fund Services Vice President Shareholder Services,
3435 Stelzer Road BISYS Fund Services, Inc.,
Columbus, OH 43219 April 1996 to present;
Employee, The Vanguard
Group, 1981 to April 1996.
Irimga McKay 35 Vice Senior Vice President,
1230 Columbia Street President July 1993 to date, prior
5th Floor thereto First Vice
La Jolla, CA 92037 President of the
Administrator and
Distributor, November 1988
to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst Retirement
Funds (since 1993);
Regional Vice President,
Continental Equities, June
1987 to November 1988;
Assistant Wholesaler, VMS
Realty Partners (a real
estate limited
partnership), May 1986 to
June 1987.
Stephanie L. Blaha 36 Vice Manager of Client Services
BISYS Fund Services President of the Administrator,
3435 Stelzer Road March 1995 to date, prior
Columbus, OH 43219 thereto Assistant Vice
President of the
Administrator and
Distributor, October 1991
to March 1995; Vice
President, Seafirst
Retirement Funds, Master
Investment Trust, Series I
and Master Investment
Trust, Series II (since
1996); Account Manager,
AT&T American Transtech,
Mutual Fund Division, July
1989 to October 1991.
</TABLE>
-27-
<PAGE> 57
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Mark E. Nagle 36 Treasurer Senior Vice President,
BISYS Fund Services Fund Accounting Services
3435 Stelzer Road The BISYS Group, Inc.,
Columbus, OH 43219 September 1995 to Present;
Treasurer, Seafirst
Retirement Funds and
Master Investment Trust,
Series II (since 1996)
Senior Vice President
Fidelity Institutional
Retirement Services (1993
to September 1995);
Fidelity Accounting &
Custody Services (1981 to
1993).
Lisa Ling 36 Assistant Employee, BISYS Fund
BISYS Fund Services Treasurer Services, Inc., November
3435 Stelzer Road 1995 to present; Assistant
Columbus, OH 43219 Treasurer, Master
Investment Trust Series II
and Seafirst Retirement
Funds (since 1996);
employee, Federated
Investors, October 1982 to
November 1995.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle & Reath.
Philadelphia National Bank
Building, Suite 1100
Philadelphia, PA 19107
George O. Martinez 35 Assistant Senior Vice President
BISYS Fund Services Secretary and Director of Legal and
3435 Stelzer Road Compliance Services, of
Columbus, OH 43219 the Administrator, since
April 1995; Assistant
Secretary, Seafirst Retirement Funds
and Master Investment
Trust, Series II (since
1995); prior thereto, Vice
</TABLE>
-28-
<PAGE> 58
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
President and Associate
General Counsel, Alliance
Capital Management, L.P.
Alaina V. Metz 28 Assistant Chief Administrator,
BISYS Fund Services Secretary Administrative and
3435 Stelzer Road Regulatory Servcies, BISYS
Columbus, OH 43219 Fund Services, Inc., June
1995 to present; Assistant
Secretary of Seafirst
Retirement Funds (since
1996); Supervisor, Mutual
Fund Legal Department,
Alliance Capital
Management, May 1989 to
June 1995.
</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. Hanson. 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 recognition of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum until
February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. Effective September 1, 1996, Mr. Trefftzs
will become a director emeritus of the Company and will receive a retirement
benefit of $60,000 on January 1, 1997. The Funds, and each other fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 29, 1996, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $388,155; none of this amount was allocated to the Fund.
Each director is also reimbursed for out-of-pocket expenses incurred as a
director. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Company. As of the date of this Statement of
Additional Information, the directors and officers of the Company, as a group,
own less than 1% of the
-29-
<PAGE> 59
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 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"
-30-
<PAGE> 60
of the Company within 120 days following the director's death or resignation and
may be authorized as a single sum cash payment or as not more than ten annual
payments (beginning the first anniversary of the director's date of death or
resignation and continuing for one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director is
neither secured nor funded by the Company but shall be binding upon its
successors in interest. The payment of benefits under the retirement plan has no
priority or preference over the lawful claims of the Company's creditors or
shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information as of February 29, 1996 about
the fees received by directors of the Company as directors and/or officers of
the Company and as directors and/or trustees of the Fund Complex:
-31-
<PAGE> 61
<TABLE>
<CAPTION>
==============================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX**
NAME OF PERSON/ FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY EXPENSES* RETIREMENT DIRECTORS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $76,215 $0 $0 $85,000
Director+
- ---------------------------------------------------------------------------------------------
Douglas B. Fletcher $28,555 $0 $0 $29,055
Vice Chairman of
the Board
- ---------------------------------------------------------------------------------------------
Robert E. Greeley $31,395 $0 $0 $44,055
Director++
- ---------------------------------------------------------------------------------------------
Kermit O. Hanson $27,485 $0 $0 $32,055
Director
- ---------------------------------------------------------------------------------------------
Cornelius J. Pings $29,555 $0 $0 $30,055
President and
Chairman of the
Board+++
- ---------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $28,555 $0 $0 $29,055
Director
=============================================================================================
</TABLE>
- ------------------------------
* For the fiscal year ended February 29, 1996, the Company accrued on the
part of all of the directors an aggregate of $65,739 in retirement
benefits.
** The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Trust I, Master Investment Trust, Series II, Time Horizon Funds
and World Horizon Funds.
+ Mr. Collins was President and Chairman of the Board the Company
until August 31, 1995.
++ Mr. Greeley became a director of the Company on April 25, 1994.
+++ Mr. Pings became President and Chairman of the Board of the Company on
August 31, 1995. At February 29, 1996, $10,000, $3,500 and $3,500 in
deferred compensation was payable to Mr. Pings for services as
President of the Company, trustee of Master Investment Trust, Series I
and Master Investment Trust, Series II, respectively.
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to the
Company since the commencement of its operations. In the investment advisory
agreement with the Fund, 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 Fund. In rendering its advisory services,
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Bank of America may utilize Bank officers from one or more of the departments of
the Bank which are authorized to exercise the fiduciary powers of Bank of
America with respect to the investment of trust assets. In some cases, these
officers may also serve as officers, and utilize the facilities, of wholly-
owned subsidiaries and other affiliates of Bank of America or its parent
corporation. In addition, the agreement also provides that Bank of America may,
in its discretion, provide advisory services through its own employees or
employees of one or more of its affiliates that are under the common control of
Bank of America's parent, BankAmerica Corporation; provided such employees are
under the management of Bank of America.
For the services provided and expenses assumed pursuant to the
investment advisory agreement, the Fund has agreed to pay Bank of America fees,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of the Fund. The fees payable to Bank of America are not
subject to reduction as the value of the Fund's net assets increases. From time
to time, Bank of America may waive fees or reimburse the Fund for expenses
voluntarily or as required by certain state securities laws. See "Management --
Administrator" for instances where Bank of America is required to make expense
reimbursements to the Fund.
The investment advisory agreement will be in effect until October 31,
1996, and will continue in effect from year to year thereafter only so long as
such continuation is approved at least annually by (i) the Board of Directors of
the Company or the vote of a "majority," as defined in the 1940 Act, of the
outstanding voting securities of the Fund, and (ii) a majority of those
directors of the Company who are not "interested persons," as defined in the
1940 Act, of any party to the investment advisory agreement, acting in person at
a meeting called for the purpose of voting on such approval. The investment
advisory agreement will terminate automatically in the event of its
"assignment," as defined in the 1940 Act. In addition, the investment advisory
agreement is terminable at any time without penalty upon 60 days' written notice
by the Board of Directors of the Company, by vote of the holders of a majority
of the Fund's outstanding voting securities, or by Bank of America.
The investment advisory agreement provides that Bank of America shall
not be liable for any error of judgment or mistake of law or for any loss
suffered in connection with the performance of the investment advisory
agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
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THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board of Governors") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but do
not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent and custodian to such an investment company. In 1981,
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board of Governors did
not exceed its authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
Bank of America believes that if the questions were properly presented,
a court should hold that Bank of America may perform the services for the Fund
contemplated by the investment advisory agreement, administration agreement, the
Prospectus, and this Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a
national bank may perform services comparable to those performed by Bank of
America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Fund or from continuing to purchase Fund shares for the accounts of its
customers.
On the other hand, as described herein, the Fund is currently
distributed by Concord Financial Group, Inc. 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
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that Bank of America would consider the possibility of offering to perform some
or all of the services now provided by Concord Financial Group, Inc. From time
to time, legislation modifying such restriction has been introduced in Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of an
investment company. If this or similar legislation were enacted, the Company
expects that Bank of America's parent bank holding company would consider the
possibility of one of its non-bank subsidiaries offering to perform some or all
of the services now provided by Concord Financial Group, Inc. It is not
possible, of course, to predict whether or in what form such legislation might
be enacted or the terms upon which Bank of America or such a non-bank affiliate
might offer to provide services for consideration by the Company's Board of
Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with offices at 125
W. 55th Street, 11th Floor, New York, New York 10014 and 3435 Stelzer Road,
Columbus, Ohio 43219 is an indirect wholly-owned subsidiary of The BISYS Group,
Inc. The Administrator also services as administrator to several other
investment companies. The Administrator provides administrative services to the
Fund as described in the Fund's Prospectus. The administration agreement will
continue in effect until October 31, 1996 and thereafter for successive periods
of one year, provided that each such extension is specifically approved by (a) 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 the Fund. The agreement is terminable at any time without penalty by the
Company's Board of Directors or by vote of a majority of the outstanding voting
securities of the Fund upon 60 days' notice to the Administrator, or by the
Administrator upon 90 days' notice to the Company.
The Company has agreed to pay the Administrator a fee for its services
as administrator, accrued daily and payable monthly, at the annual rates of
0.20% of the average daily net assets of the Fund. The fees payable to the
Administrator are not subject to reduction as the value of the Fund's net assets
increases. From time to time, the Administrator may waive fees or reimburse the
Fund for expenses, either voluntarily or as required by certain state securities
laws.
If total expenses borne (directly or indirectly) by the Fund in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, the Company may deduct
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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
in proportion to the fee otherwise payable for such year. Such amount, if any,
will be estimated, reconciled and effected or paid, as the case may be, on a
monthly basis. As of the date of this Statement of Additional Information, the
most restrictive expense limitation that may be applicable to the Fund 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 the Fund as a result of competitive pressures and in order
to preserve and protect the business and reputation of the Administrator and
Bank of America. This will have the effect of increasing yield to investors at
the time such fees are not received or amounts are assumed and decreasing yield
when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the administration agreement.
The administration agreement each provide that BISYS shall not be
liable for any error of judgment or mistake of law or any loss suffered by the
Company or the Fund in connection with the performance of the administration
agreement agreement, except a loss resulting from willful misfeasance, bad faith
or negligence in the performance of its duties or from the reckless disregard by
it of its obligations and duties thereunder.
DISTRIBUTOR AND PLAN PAYMENTS
Concord Financial Group, Inc. (the "Distributor"), an indirect,
wholly-owned subsidiary of The BISYS Group, Inc., acts as distributor of the
shares of the Company. Shares are sold on a continuous basis by the Distributor.
The Distributor has agreed to use its best efforts to solicit orders for the
sale of the Company's shares although it is not obliged to sell any particular
amount of shares. The distribution agreement shall continue in effect with
respect to the Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement shall continue automatically for successive terms of one
year, provided that such continuance is specifically approved at least annually
by (a) a vote of a majority of those members of the Board of Directors of the
Company who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on
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such approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Fund as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Directors of the
Company or by a vote of a "majority of the outstanding voting securities" of the
Fund on 60 days' written notice to the Distributor, or by the Distributor at any
time, without the payment of any penalty, on 90 days' written notice to the
Company. The agreement will automatically and immediately terminate in the event
of its "assignment."
THE SHAREHOLDER SERVICES PLAN. In addition to the sales loads described
above, the Distributor is entitled to payment by the Company for certain
shareholder servicing expenses in addition to the sales loads on A Shares
described above and in the Prospectus under the Shareholder Services Plan (the
"Plan") adopted by the Company for its A Shares. Under the Plan for A Shares,
the Company pays the Distributor, with respect to the Fund, for (a)
non-distribution shareholder services provided by the Distributor to Service
Organizations and/or the beneficial owners of Fund shares, including, but not
limited to shareholder servicing provided by the Distributor at facilities
dedicated for Company use, provided such shareholder servicing is not
duplicative of the servicing otherwise provided on behalf of the Fund, and (b)
fees paid to Service Organizations (which may include the Distributor itself)
for the provision of support services for shareholders for whom the Service
Organization is the dealer of record or holder of record or with whom the
Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (ii) processing dividend and distribution
payments from the Fund on behalf of Clients; (iii) providing information
periodically to Clients regarding their positions in shares; (iv) arranging for
bank wires; (v) responding to Client inquiries concerning their investments in
Fund shares; (vi) providing the information to the Fund necessary for accounting
or subaccounting; (vii) if required by law, forwarding shareholder
communications from the Fund (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (viii) assisting in processing exchange and redemption requests from
Clients; (ix) assisting Clients in changing dividend options, account
designations and addresses; and (x) providing such other similar services.
The Plan provides that the Distributor is entitled to receive payments
for expenses on a monthly basis, at an annual
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rate not exceeding .25% of the average daily net assets of the A Shares of the
Fund during such month for shareholder servicing expenses. The calculation of
the Fund's average daily net assets for these purposes does not include assets
held in accounts opened via a transfer of assets from trust and agency accounts
of Bank of America. Further, payments made out of or charged against the assets
of the Fund must be in payment for expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies
than can be immediately paid due to the percentage limitations described above,
the unpaid amount is carried forward from month to month while the Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under the Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid amounts or credits due under the Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
Payments for shareholder service expenses under the Plan are
not subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the Plan,
the Distributor provides that a report of the amounts expended under the Plan,
and the purposes for which such expenditures were incurred, will be made to the
Board of Directors for its review at least quarterly. In addition, the Plan
provides that the selection and nomination of the directors of the Company who
are not "interested persons" thereof have been committed to the discretion of
the directors who are neither "interested persons" (as defined in the 1940 Act)
of the Company nor have any direct or indirect financial interest in the
operation of the Plan (or related servicing agreements) (the "Non-Interested
Plan Directors").
The Company understands that Bank of America and/or some
Service Organizations may charge their clients a direct fee for administrative
and shareholder services in connection with the holding of A Shares. These fees
would be in addition to any amounts which might be received under the Plan.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
The Company's Board of Directors has concluded that the Plan
will benefit the Fund and its A shareholders. The Plan is subject to annual
reapproval by a majority of the Non-Interested Plan Directors and is terminable
at any time with respect to the Fund by a vote of a majority of such Directors
or by vote of the holders of a majority of the A Shares of the Fund. Any
agreement entered into pursuant to the Plan with a Service Organization is
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terminable with respect to the Fund without penalty, at any time, by vote of a
majority of the Non-Interested Plan Directors, by vote of the holders of a
majority of the A Shares of the Fund, by the Distributor or by the Service
Organization. Each agreement will also terminate automatically in the event of
its assignment.
YIELD AND TOTAL RETURN
From time to time, the yields and the total returns of the
Fund may be quoted in and compared to other mutual funds with similar investment
objectives in advertisements, shareholder reports or other communications to
shareholders. The Fund may also include calculations in such communications that
describe hypothetical investment results. (Such performance examples will be
based on an express set of assumptions and are not indicative of the performance
of the Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund), as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, Treasury bills and shares of the Fund. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. From time to
time, the investment adviser may enter into alliances with retirement plan
sponsors, including The Legend Group, and the Fund may in its advertisements and
sales
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<PAGE> 69
literature include a discussion of certain attributes and benefits to be derived
from its relationship with such retirement plan sponsors. With proper
authorization, the Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information with
respect to the Fund is generally available by calling (800) 346-2087.
YIELD CALCULATIONS. The yield for the Fund is calculated by
dividing the net investment income per share (as described below) earned by the
Fund during a 30-day (or one month) period by the maximum offering price per
share (including the maximum front-end sales load 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 is based on the average daily number of shares
outstanding in the Fund during the period entitled to receive dividends and
includes dividends and interest earned during the period minus expenses accrued
for the period, net of reimbursements. This calculation can be expressed as
follows:
a-b
Yield = 2 [(----- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities is recognized by accruing 1/360 of the stated dividend rate of the
security each day. Except as noted below, interest earned on debt obligations is
calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued
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interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Interest earned on tax-exempt obligations that are issued
without original issue discount and have a current market discount is calculated
by using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that exceed the
then-remaining portion of the original issue discount (market discount), the
yield to maturity is the imputed rate based on the original issue discount
calculation. On the other hand, in the case of tax-exempt obligations that are
issued with original issue discount but which have the discounts based on
current market value that are less than the then-remaining portion of the
original issue discount (market premium), the yield to maturity is based on the
market value.
With respect to mortgage or other receivables-backed
obligations which are expected to be subject to monthly payments of principal
and interest ("pay downs"), (a) gain or loss attributable to actual monthly pay
downs are accounted for as an increase or decrease to interest income during the
period; and (b) the Fund may elect either (i) to amortize the discount and
premium on the remaining security, based on the cost of the security, to the
weighted average maturity date, if such information is available, or to the
remaining term of the security, if any, if the weighted average maturity date is
not available, or (ii) not to amortize discount or premium on the remaining
security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned income
is the net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. The Fund's maximum offering price per
share for purposes of the formula includes the maximum sales load imposed by the
Fund on A Shares -- currently 4.50% of the per share offering price.
TOTAL RETURN CALCULATIONS. The Fund computes its average
annual total returns by determining the average annual
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compounded rates of return during specified periods that equate the initial
amount invested to the ending redeemable value of such investment. This is done
by dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the number
of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical
$1,000 payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all nonrecurring
charges at the end of the period covered by the computations. In addition, the
Fund's average annual total return and aggregate total return quotations reflect
the deduction of the maximum front-end sales load charged in connection with the
purchase of A Shares.
The Fund may also advertise total return data without
reflecting sales loads in accordance with the rules of the SEC. Quotations which
do not reflect the sales load will, of course, be higher than quotations which
do.
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GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. The Company's Charter
authorizes the Board of Directors to issue up to two hundred billion full and
fractional common shares. Pursuant to the authority granted in the Charter, the
Board of Directors has authorized the issuance of twenty-two classes of stock,
Classes A through W Common Stock, $.001 par value per share, representing
interests in twenty-two separate investment portfolios. Class U represents
interests in the A Shares of the Fund. The Company's charter also authorizes the
Board of Directors to classify or reclassify any particular class of the
Company's shares into one or more series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectus, the Company's shares will be fully paid
and non- assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share
held, and fractional votes for fractional shares held, and will vote in the
aggregate and not by class or series except as otherwise required by the 1940
Act or other applicable law or when permitted by the Board of Directors. Shares
have cumulative voting rights to the extent they may be required by applicable
law.
Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each fund affected by the matter. The Fund is affected by a matter unless it
is clear that the interests of each of the Company's funds in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under Rule 18f-2 the approval of an investment advisory agreement or 12b-1
distribution plan or any change in a fundamental investment policy would be
effectively acted upon with respect to the Fund only if approved by a majority
of the outstanding shares of the Fund. However, the rule also provides that the
ratification of independent public accountants, the approval of principal
underwriting contracts and the election of directors may be effectively acted
upon by
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shareholders of the Company voting without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of the Fund voting
separately as a class) in connection with any corporate action, unless otherwise
provided by law (for example, by Rule 18f-2 discussed above) or by the Company's
Charter, the Company may take or authorize such action upon the favorable vote
of the holders of more than 50% of the outstanding common stock of the Company
voting without regard to class.
CUSTODIAN AND TRANSFER AGENT
The Company has appointed PNC Bank, National Association,
Broad and Chestnut Streets, Philadelphia, PA 19101 ("PNC") as custodian for the
Fund.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Fund.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of the Company, is a partner), 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, serves as counsel to the Company and will pass
upon the legality of the shares offered hereby.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, with offices at 1177 Avenue of the
Americas, New York, New York 10036, has been selected as independent accountants
of the Fund for the fiscal year ended February 28, 1997.
REPORTS
Shareholders will receive unaudited semi-annual reports
describing the Fund's investment operations, and annual financial statements
together with the reports of the Fund, audited by the independent accountants.
MISCELLANEOUS
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of the Fund or a
particular series means the affirmative vote of the lesser of (a) more than 50%
of the outstanding shares or interests of the Fund or series, or (b) 67% of the
shares or interests of the Fund or series present at a meeting at which
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more than 50% of the outstanding shares or interests of the Fund or series are
represented in person or by proxy.
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Only Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 118,867,593.50 shares (41.19%); VAR &
Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101,
28,089,317.00 shares (9.73%); BA Securities, Inc., 185 Berry Street, 3rd Floor,
San Francisco, CA 94107, 62,823,719.05 shares (21.77%); and Hare & Co., Bank of
New York and Short-Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 18,426,410.24 shares (6.39%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: Omnibus Account for
the Shareholder Accounts Maintained By Concord Financial Services, Inc., Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh,
PA 15222, 54,855,588.74 shares (19.45%); Comcare, Inc., 4001 North Third Street,
Suite 120, Phoenix, AZ 85012, 20,185,123.38 shares (7.16%); Comcare, Inc., 4001
North Third Street, Suite 120, Phoenix, AZ 85012, 19,329,714.54 shares (6.85%);
and Omnibus Account for the Shareholder Accounts Maintained by Concord Financial
Services, Inc., Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 131,444,744.70 shares (46.61%).
At July 23, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: BA Investment
Services, Inc., Attn: Bob Santilli, 185 Berry Street, 3rd Floor, Unit #7852, San
Francisco, CA 94107, 90,788,573.36 shares (15.39%); BA Securities, Inc., Attn:
Dan Spillane, 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
32,501,008.20 shares (5.51%); and VAR & Co., Attn: Linda Frintz, 180 East 5th
Street, 4th Floor, St. Paul, MN 55101, 37,904,427.00 shares (6.42%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Fund were as follows: Hare & Co., Bank of New
York and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 127,462,941.72 shares (13.38%); BA Investment Services, Inc.,
For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 203,966,124.78 shares (21.41%); and VAR & Co., Attn: Linda
Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 526,670,866.00 shares
(55.28%).
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At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 153,046,702.98 shares (10.70%); and BISYS Fund Services,
Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 501,880,154.03 shares (35.07%).
At July 23, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: Bank of America Financial
Management and Trust Services, Attn: Common Trust Funds Unit 8329, P.O. Box
3577, Terminal Annex, Los Angeles, CA 90051, 280,620,157.95 shares (9.44%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Treasury Fund were as follows: Bank of America TTEE/Cust. Invest.
Hor. Treas., Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex,
Los Angeles, CA 90051, 242,766,196.19 shares (8.17%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Government Fund were as follows: BA Investment Services,
Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box
7042, San Francisco, CA 94120, 86,162,393.08 shares (35.44%); VAR & Co., Attn:
Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 33,265,192.00
shares (13.68%); BA Securities, Inc., 185 Berry Street, 3rd Floor, San
Francisco, CA 94107, 47,110,672.81 shares (19.38%); Hare & Co., Bank of New York
and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New York, NY
10286, 19,386,247.54 shares (7.97%); 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, 29,014,846.77 shares (11.93%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Toasty, Ltd., David
Jackson, Controller, Two Greenway Plaza, Suite 400, Houston, TX 77046,
20,310,525.87 shares (9.42%); Cohu, Inc., 5755 Kearny Villa Road, San Diego, CA
92123, 12,006,225.07 shares (5.57%); Rocket Ball, Ltd., David Jackson,
Controller, Two Greenway Plaza, Suite 400, Houston, TX 77046, 19,044,074.15
shares (8.83%); and Omnibus Account for the Shareholder Accounts Maintained By
Concord Financial Services, Inc., Attn: Linda Zerbe, First and Market Building,
100 First
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Avenue, Suite 300, Pittsburgh, PA 15222, 25,498,022.77 shares (11.82%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Government Fund were as follows: Sunquest Information Systems,
Inc., Attn: Trena Couch, 1407 Eisenhower Boulevard, Johnstown, PA 15904,
39,633,759.45 shares (7.51%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Prime Fund were as follows: BA Securities, Inc., 185 Berry
Street, 3rd Floor, San Francisco, CA 94107, 193,809,218.50 shares (8.34%); Hare
& Co., Bank of New York and Short Term Investment Funds, Attn: Bimal Saha, One
Wall Street, New York, NY 10286, 143,084,864.58 shares (6.16%); and BA
Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob
Santilli, P.O. Box 7042, San Francisco, CA 94120, 1,591,611,258.22 shares
(68.53%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 1,016,290,616.72 shares (46.41%); and BISYS Fund Services,
Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 281,038,476.23 shares (12.83%).
At July 23, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: Bank of America National Trust
and Savings Association, Financial Management & Trust Services, Attn: Common
Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
476,825,784.33 shares (8.03%); and Security Pacific Cash Management, c/o Bank of
America GPO M/C 5533, Attn: Regina Olsen, 1850 Gateway Boulevard, Concord, CA
94520, 481,814,600.00 shares (8.12%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Prime Fund were as follows: Bank of America National Trust and
Savings Association, Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal
Annex, Los Angeles, CA 90051, 314,190,911.72 shares (5.29%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Tax-Exempt Money Fund
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were as follows: BA Investment Services, Inc., For the Benefit of Clients, Attn:
Unit #7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA 94120, 42,160,269.19
shares (83.22%); BA Securities, Inc., 185 Berry Street, San Francisco, CA 94107,
2,735,746.32 shares (5.40%); and VAR & Co., Attn: Linda Frintz, 180 E. 5th
Street, 4th Floor, St. Paul, MN 55101, 3,573,445.00 shares (7.05%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 22,564,704.81 shares (22.83%); and
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 62,807,556.18 shares
(63.55%).
At July 23, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: Bank of America
Financial Management and Trust Services, Attn: Common Trust Funds Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 62,807,556.18 shares
(15.37%); and BA Investment Services, Inc., Attn: Unit #7852 - Bob Santilli, 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 20,998,919.38 shares (5.14%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Tax-Exempt Money Fund were as follows: Bank of America Cust. for
Invest. Hor T-E, Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal
Annex, Los Angeles, CA 90051, 80,165,527.18 shares (19.62%); and Continental
Bank National Association Cust, FBO Cust & Co., Attn: Mary Chester, 231 South
LaSalle Street 6Q, Chicago, IL 60697, 175,113,979.82 shares (42.85%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the California Tax-Exempt Money Market Fund were as follows:
BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
224,568,594.05 shares (40.23%); BA Investment Services, Inc., For the Benefit of
Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA
94120, 274,082,186.92 shares (49.10%); 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, 34,365,397.24 shares (6.16%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the
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outstanding Horizon Service Shares of the California Tax-Exempt Money Market
Fund were as follows: BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers,
Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
99,619,996.90 shares (36.02%); and BISYS Fund Services, Inc. Pittsburgh, FBO
Sweep Customers, Attn: Linda Zerbe, First and Market Building, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 116,180,958.62 shares (42.01%).
At July 23, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the California Tax- Exempt Money Market Fund were as follows:
BA Investment Services, Inc., Attn: Unit #7852 - Bob Santilli, 185 Berry Street,
3rd Floor, San Francisco, CA 94107, 76,337,599.97 shares (9.11%); and Bank of
America National Trust and Savings Association TTEE/CUS, Attn: Common Trust
Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
99,448,779.90 shares (11.91%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding A Shares of
the Corporate Bond Fund were as follows: Smith Barney, Inc., Custodian, 333 W.
34th Street, 3rd Floor, New York, NY 10001, 116,252.06 shares (6.08%); and Dean
Witter Reynolds, Inc., Stock Record Department, 5th Floor, 5 World Trade Center,
New York, NY 10048, 106,821.51 shares (5.59%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the National Municipal Bond Fund were as follows: BA Investment
Services, Inc., FBO 406171021, 185 Berry Street, 3rd Floor, San Francisco, CA
94104, 113,504.06 shares (8.41%); and BA Investment Services, Inc., FBO
405084421, 555 California Street, 4th Floor, San Francisco, CA 94104, 86,618.85
shares (6.42%).
At July 23, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the International Equity Fund were as follows: Bank of America
National Trust and Savings Association, FBO PACO, Attn: Mutual Funds Unit, P.O.
Box 3577, Terminal Annex, Los Angeles, CA 90051, 241,073.42 shares (46.65%); and
Bank of America National Trust and Savings Association, Agent for the Giannini
Foundation for Medical Research, P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 89,422.65 shares (17.30%).
The Prospectus relating to the Fund and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration statement,
including items omitted herein,
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may be obtained from the SEC by paying the charges prescribed under its rules
and regulations.
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APPENDIX A
As stated in the Prospectus, the Fund may enter into
futures contracts and options for hedging purposes. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Fund, through using
futures contracts.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most
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cases the contracts are closed out before the settlement date without the making
or taking of delivery of securities. Closing out a futures contract sale is
effected by the Fund's entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by the Fund's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Fund realizes a gain, and
if the purchase price exceeds the offsetting sale price, the Fund realizes a
loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board of
Trade and the Chicago Mercantile Exchange. The Fund would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury bonds
and notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. The Fund may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. The Fund would engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in the
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The investment adviser wishes to fix
the current market value of this portfolio security until some point in the
future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. The Fund might enter into futures contract
sales of Treasury bonds for an equivalent of 98. If the market value of the
portfolio security does indeed decline from 100 to 95, the equivalent futures
market price for the Treasury bonds might also decline from 98 to 93.
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In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of
interest rates and the equivalent futures market price could rise above 98. In
this case, the market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this increase would be
reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above
example might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. The Fund would engage
in an interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond
that the Fund may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The investment adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Fund might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities 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 Fund pays for
the long-term bond
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would be offset by the 5-point gain realized by closing out the futures contract
purchase.
The investment adviser could be wrong in its forecast of
interest rates; long-term interest rates might rise to above 10%; and the
equivalent futures market price could fall below 98. If short-term rates at the
same time fall to 10% or below, it is possible that the Fund would continue with
its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Fund would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The benefit
of this continued incremental income will be reduced by the loss realized on
closing out the futures contract purchase. In each transaction, expenses would
also be incurred.
II. MARGIN PAYMENTS
Unlike when the Fund purchases or sells a security, no price
is paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when the Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund
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would be required to make a variation margin payment to the broker. At any time
prior to expiration of the futures contract, the investment advisor may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures
in the Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, the Fund involved
will experience either a loss or gain on the future which will not be completely
offset by movements in the price of the securities which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the investment adviser. Conversely, the Fund may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by the adviser. It is also possible that, where the Fund has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Fund may decline. If this
occurred, the Fund would lose money on the future and also experience a decline
in value in its portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest its cash
(or cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if the Fund then concludes not to
invest in securities
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or options at that time because of concern as to possible further market decline
or for other reasons, the Fund will realize a loss on the futures contract that
is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by
the Fund, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the Fund's
custodian and/or in a margin account with a broker to collateralize the position
and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if
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any, may partially or completely offset losses on the futures contract. However,
as described above, there is no guarantee that the price of the securities will
in fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by the Fund is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part of all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
IV. OPTIONS ON FUTURES CONTRACTS
The Fund may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the
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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 Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). Although permitted by
its fundamental investment policies, the Fund does not currently intend to write
futures options, and will not do so in the future absent any necessary
regulatory approvals.
V. OTHER HEDGING TRANSACTIONS
The Fund presently intends to use interest rate futures
contracts in connection with its hedging activities. Nevertheless, the Fund 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 Fund's
hedging strategies if, in the judgment of the investment adviser, transactions
therein are necessary or advisable.
VI. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be
in accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts
held by the Fund at the close of the Fund's taxable year will be treated for
federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "marking-to-market." Forty percent
of any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60% of such gain or loss will be treated as
long-term capital gain or loss without regard to the length of time the Fund
holds the futures contract or option ("the 40%-60% rule"). The amount of any
capital gain or loss actually realized by the Fund in a subsequent sale or other
disposition of those futures contracts or options will be adjusted to reflect
any capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale of the contracts or options. With respect to
futures contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by the Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of
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the straddle to the amount thereof which exceeds the unrecognized gain (if any)
with respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which also will be applicable, the holding
period of the securities forming part of the straddle (if they have not been
held for the long-term holding period) will be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts and
related options, deductions for interest and carrying charges will not be
allowed. Notwithstanding the rules described above, with respect to futures
contracts to sell which are properly identified as such, the Fund may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the last
business day of the Fund's taxable year, but gains and losses will be subject to
such short sales, wash sales and loss deferral rules and the requirement to
capitalize interest and carrying charges. Under Temporary Regulations, the Fund
would be allowed (in lieu of the foregoing) to elect either (1) to offset gains
or losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40%-60% rule will apply to the net gain or loss attributable to
the futures contracts, but in the case of a mixed straddle account election, not
more than 50 percent of any net gain may be treated as long-term and no more
than 40 percent of any net loss may be treated as short-term.
Qualification as a regulated investment company under the Code
requires that each Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of each
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is treated
for this purpose as derived with respect to the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust.
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An additional requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross income
must be derived from gains realized on the sale or other disposition of the
following investments held for less than three months: (1) stock and securities
(as defined in section 2(a)(36) of the 1940 Act); (2) options, futures and
forward contracts other than those on foreign currencies; and (3) foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are not directly related to a Fund's principal business of investing in
stock and securities (and options and futures with respect to stocks and
securities).
With respect to futures contracts and other financial
instruments subject to the mark-to-market rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a futures
contract or financial instrument will be treated as being derived from a
security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the marking-to-market rules, and will be treated as
being derived from a security held for less than three months only if the
contract or instrument is terminated (or transferred) during the taxable year
(other than by reason of marking-to-market) and less than three months have
elapsed between the date the contract or instrument is acquired and the
termination date. In determining whether the Short-Short test is met for a
taxable year, increases and decreases in the value of each Fund's futures
contracts and other investments that qualify as part of a "designated hedge," as
defined in the Code, may be netted.
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