<PAGE> 1
As filed with the Securities and Exchange Commission on June 24, 1997
Registration Nos. 2-81110/811-4293
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Post-Effective Amendment No. 57 [x]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 59 [x]
-----------------------------------------
PACIFIC HORIZON FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road
Columbus, OH 43219
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (800) 332-3863
W. Bruce McConnel, III
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. The Registrant has filed its Rule 24f-2 Notice relating to
such shares for Registrant's most recent fiscal year on April 29, 1997.
This Registration Statement has also been executed by Master
Investment Trust, Series I.
================================================================================
<PAGE> 2
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Corporate Bond Fund, Intermediate Bond (formerly, Flexible Bond) Fund and
U.S. Government Securities Fund
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
1. Cover Page............................... Cover Page
2. Synopsis................................. Expense Summary
3. Condensed Financial Information.......... Financial Highlights;
Measuring Performance
4. General Description of Registrant........ Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund................... The Business of the Funds
5.A. Management's Discussion of
Fund Performance....................... *
6. Capital Stock and Other
Securities............................. Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered................................. How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase................. How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings................ *
- ----------
* Item inapplicable or answer negative.
<PAGE> 3
PROSPECTUS
JUNE 24, 1997
PACIFIC HORIZON CORPORATE BOND FUND
PACIFIC HORIZON INTERMEDIATE BOND FUND
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
Investment Portfolios Offered by Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON CORPORATE BOND FUND (the "Corporate Bond Fund") is a
diversified mutual fund whose investment objective is to provide investors with
high current income consistent with reasonable investment risk. The Corporate
Bond Fund seeks its objective through investment primarily in a diversified
portfolio of investment grade corporate debt securities although it may invest a
portion of its assets in other types of securities and money market instruments.
The PACIFIC HORIZON INTERMEDIATE BOND FUND, formerly Flexible Bond Fund (the
"Intermediate Bond Fund"), is a diversified mutual fund whose investment
objective is to obtain interest income and capital appreciation. The
Intermediate Bond Fund seeks its objective by investing in investment grade
intermediate and longer term bonds, including corporate and governmental fixed
income obligations , mortgage-backed securities, municipal securities and cash
equivalents.
The PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND (the "U.S. Government
Securities Fund" and, collectively with the Corporate Bond and Intermediate Bond
Funds, the "Funds") is a mutual fund whose investment objective is to provide
investors with a high level of current income, consistent with preservation of
capital. In seeking its investment objective, the U.S. Government Securities
Fund invests principally in instruments issued by the Government National
Mortgage Association, although it may invest a portion of its assets in other
types of U.S. Government securities.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE INTERMEDIATE BOND FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE
BY INVESTING ALL ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY (THE "MASTER PORTFOLIO" WITH THE CORPORATE BOND FUND AND U.S.
GOVERNMENT SECURITIES FUND (THE "PORTFOLIOS")) HAVING THE SAME INVESTMENT
OBJECTIVE AS THAT OF THE INTERMEDIATE BOND FUND. THE INTERMEDIATE BOND FUND WILL
PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE
OF THE INTERMEDIATE BOND FUND WILL RESPOND TO INCREASES AND DECREASES IN THE
VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON PAGE 27 FOR ADDITIONAL INFORMATION
REGARDING THIS STRUCTURE.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference. More information about the Funds is contained in
a Statement of Additional Information that has been filed with the Securities
and Exchange Commission. To obtain a free copy, call 800-332-3863. The Statement
of Additional Information, as it may be revised from time to time, is dated June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
(Continued next page)
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
<PAGE> 4
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Funds or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investment in the Funds involves investment
risk, including the possible loss of principal.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America National Trust
and Savings Association ("Bank of America" or the "investment adviser") serves
as the Portfolios' investment adviser. Based in San Francisco, California, Bank
of America and its affiliates have over $50 billion under management, including
over $14 billion in mutual funds.
<PAGE> 5
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 13 INVESTMENT OBJECTIVES
14 TYPES OF INVESTMENTS
15 FUNDAMENTAL LIMITATIONS
17 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 29 HOW TO BUY SHARES
29 What Is My Minimum Investment In The Funds?
29 What Alternative Sales Arrangements Are Available?
29 How Are Shares Priced?
32 How Do I Decide Whether To Buy A or K Shares?
33 How Can I Buy Shares?
34 What Price Will I Receive When I Buy Shares?
35 What Else Should I Know To Make A Purchase?
35 HOW TO SELL SHARES
35 How Do I Redeem My Shares?
37 What NAV Will I Receive For Shares I Want To Sell?
38 What Kind Of Paperwork Is Involved In Selling
Shares?
38 How Quickly Can I Receive My Redemption
Proceeds?
38 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION
POLICIES 38
SHAREHOLDER SERVICES 39 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
40 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
40 WHAT IS TELETRADE?
41 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
41 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
41 CAN I ARRANGE PERIODIC WITHDRAWALS?
41 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER
FUNDS?
42 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 42 FUND MANAGEMENT
42 Service Providers
TAX INFORMATION 45
MEASURING PERFORMANCE 46
DESCRIPTION OF SHARES 47
PLAN PAYMENTS 49
APPENDIX A 52
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
</TABLE>
<PAGE> 6
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 30 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Master Portfolio which are allocable to the Intermediate Bond Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, distribution (in the case of K Shares only),
shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A and K Shares reflecting the operating expenses (including the operating
expenses of the Master Portfolio which are allocable to the Intermediate Bond
Fund) 1) expected to be incurred during the current fiscal year with respect to
A and K Shares of the Intermediate Bond Fund and Corporate Bond Fund and 2)
incurred during the last fiscal year with respect to A and K Shares of the U.S.
Government Securities Fund. Actual expenses may vary. A hypothetical example
based on the summary is also shown. Expenses of the Corporate Bond Fund are
based upon historical costs for the Corporate Bond Fund which will differ from
the historical costs of the Corporate Bond Fund's predecessor fund as a result
of the change in organization of the Corporate Bond Fund from a closed-end fund
to an open-end fund and the change from a master-feeder to a directly managed
portfolio.
CORPORATE BOND FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of original
purchase price or redemption
proceeds, whichever is lower None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (After Fee
Waivers)+ 0% 0%
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses 0.85% 0.85%
----- ----
Total Operating Expenses
(After Fee Waivers)+ 1.10% 1.60%
===== ====
</TABLE>
-----------------------------------------------
+ Absent fee waivers, Management Fees for each class of shares of the Fund would
be 0.65% of the average net assets (annualized) and Total Operating Expenses
for the Fund's A and K Shares would be 1.75% and 2.50% of average net assets
(annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Corporate Bond Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. For a further
description of shareholder transaction expenses and the Corporate Bond Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
2
<PAGE> 7
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 56 $78 $ 103 $173
K Shares $ 16 $50 $ 87 $190
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (After Fee
Waivers)+ 0.16% 0.16%
12b-1 Fees (or in the case of
certain K Shares, Administrative
Service Fees) (After Fee
Waivers)* 0% 0.50%
Shareholder Services Fee (After
Fee Waivers)* 0.16% 0.16%
Other Expenses 0.63% 0.63%
---- ----
Total Operating Expenses (After
Fee Waivers)+ 0.95% 1.45%
==== ====
</TABLE>
+ Absent fee waivers, Management Fees for each class of shares of the Fund would
be 0.50% of the average net assets (annualized) and Total Operating Expenses
for the Intermediate Bond Fund's A and K Shares would be 1.38% and 2.13% of
average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Intermediate Bond Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. Absent fee waivers,
Shareholder Services Fees for the Fund's A and K Shares would be 0.25%
(annualized). For a further description of shareholder transaction expenses
and the Intermediate Bond Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments" below.
3
<PAGE> 8
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 54 $74 $95 $156
K Shares $ 15 $46 $79 $174
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) None None
Redemption Fees None None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (After Fee
Waivers)+ 0.15% 0.15%
12b-1 Fees (or in the case of
certain K Shares, Administrative
Service Fees) (After Fee Waiver)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses 0.45% 0.45%
---- ----
Total Operating Expenses (After
Fee Waivers)+ 0.85% 1.35%
==== ====
</TABLE>
-----------------------------------------------
+ Absent fee waivers, Management Fees for each class of shares of the Fund would
be .55% of the average net assets (annualized) and Total Operating Expenses
for the U.S. Government Securities Fund's A and K Shares would be 1.25% and
2.00% of average net assets, respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the K Shares. Because of
the Rule 12b-1, administrative and/or shareholder services fees paid by the
U.S. Government Securities Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. For a further
description of shareholder transaction expenses and the U.S. Government
Securities Fund's operating expenses, see the sections entitled "Shareholder
Guide," "The Business of the Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 53 $71 $90 $145
K Shares $ 14 $43 $74 $162
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
4
<PAGE> 9
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.45%, 0.30% and
0.35% of the Corporate Bond's, Master Portfolio's and U.S. Government
Securities Fund's respective average daily net assets; and
- - an administration fee payable at the annual rate of 0.20%, 0.15% and 0.20% of
the Corporate Bond, Intermediate Bond and U.S. Government Securities Funds'
respective average daily net assets and 0.05% of the Master Portfolio's
average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Intermediate Bond Fund and the Master Portfolio in which the
Fund's assets are invested will be less than or approximately equal to the
expenses which the Intermediate Bond Fund would incur if the Company retained
the services of an investment adviser for that Fund and the assets of that Fund
were invested directly in the type of securities held by its Master Portfolio.
Further, the Directors believe that the shareholders of the Intermediate Bond
Fund may participate in the ownership of a larger portfolio of securities than
could be achieved directly by the Intermediate Bond Fund. There can be no
assurance, however, that such will be the case or that any economies of scale
that might occur if other investors acquire shares of the Master Portfolio will
be realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a front-
end sales charge nor a contingent deferred sales charge, but incur fees under a
Distribution Plan and/or an Administrative and Shareholder Services Plan with
respect to K Shares. See the Section entitled "How Do I Decide Whether to Buy A
or K Shares?" below.
================================================================================
FINANCIAL HIGHLIGHTS
The Corporate Bond Fund commenced operations in 1973 as a diversified,
closed-end management investment company (that is, as an investment company with
non-redeemable shares) known as Bunker Hill Income Securities, Inc. (the
"Corporate Predecessor Fund"). Following its initial public sale of common
shares in 1973, the Corporate Predecessor Fund did not regularly issue
additional common shares except in connection with dividend reinvestments. On
April 25, 1994, the Corporate Predecessor Fund was reorganized as a new open-end
portfolio of the Company and, in connection with the reorganization, all of the
assets and liabilities of the Corporate Predecessor Fund were transferred to the
Corporate Bond Master Portfolio (as defined below). The Corporate Predecessor
Fund received investment advisory services from Bank of America. Prior to
September 1, 1996, the Corporate Bond Fund operated as part of a master-feeder
structure and invested all of its assets in a diversified investment portfolio
of an open-end, management investment company (the "Corporate Bond Master
Portfolio") which had an identical investment objective. On September 1, 1996,
the Fund withdrew its assets
5
<PAGE> 10
from the Corporate Bond Master Portfolio and invested them directly in portfolio
securities.
The U.S. Government Securities Fund commenced operations on January 7, 1988 as
The Horizon Capital GNMA Extra Fund (the "Government Predecessor Fund"), a
separate portfolio of a Massachusetts business trust called The Horizon Capital
Funds. On January 1, 1989 the Government Predecessor Fund changed its name to
The Pacific Horizon GNMA Extra Fund, and on January 9, 1990 was reorganized as a
portfolio of the Company. On June 28, 1991 the U.S. Government Securities Fund
changed its name to the Pacific Horizon U.S. Government Securities Fund.
The tables below show certain information concerning the investment results of
the Corporate Predecessor Fund for the periods ended on or prior to September
30, 1993; the combined investment results of the Corporate Bond Fund and the
Corporate Predecessor Fund for the period October 1, 1993 through September 30,
1994; and the Corporate Bond Fund's investment results for the period October 1,
1994 through February 28, 1995, and the years ended February 29, 1996 and
February 28, 1997. The tables below also show certain information concerning the
Intermediate Bond Fund (formerly, the Flexible Bond Fund) for the years and
period indicated. The tables below also show certain information concerning the
investment results of the Government Predecessor Fund for the periods ended on
or prior to August 31, 1989, the combined results of the U.S. Government
Securities Fund and the Government Predecessor Fund for the period September 1,
1989 through February 28, 1990 and the U.S. Government Securities Fund's
investment results for the seven fiscal years in the seven year period ended
February 28, 1997. On July 22, 1996, each of the Funds initially funded K
Shares. The information for the years and periods indicated was audited by Price
Waterhouse LLP, the independent accountants for the Funds and the Predecessor
Funds, whose unqualified reports on the financial statements containing such
information for the five fiscal years or periods in the five year period ended
February 28, 1997 are incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
free of charge by calling 800-332-3863.
6
<PAGE> 11
PACIFIC HORIZON CORPORATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 10/1/94 YEAR ENDED SEPTEMBER 30
ENDED ENDED THROUGH ----------------------------------------------------------------------------
2/28/97(A) 2/29/96 2/28/95 1994* 1993++ 1992++ 1991++ 1990++ 1989++ 1988++ 1987++
--------- ------- -------- ------- ------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $ 16.09 $15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02 $ 17.56 $ 17.56 $ 17.72
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income From
Investment
Operations:
Net investment
income 0.93 0.98 0.45 1.58 1.34 1.48 1.68 1.85 1.98 1.88 2.17
Net realized and
unrealized gains
(losses) on
investment
transactions (0.30) 1.11 0.17 (2.06) 0.82 0.95 0.52 (2.15) (0.65) 0.13 (0.17)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income
(loss) from
investment
operations 0.63 2.09 0.62 (0.48) 2.16 2.43 2.20 (0.30) 1.33 2.01 2.00
Less Dividends and
Distributions:
Dividends to
shareholders from
net investment
income (0.93) (0.98) (0.45) (1.58) (1.34) (1.53) (1.77) (1.93) (1.87) (2.01) (2.16)
Dividends to
shareholders from
net realized gains
on investment
transactions -- (0.05) -- (0.02) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Dividends and
Distributions: (0.93) (1.03) (0.45) (1.60) (1.34) (1.53) (1.77) (1.93) (1.87) (2.01) (2.16)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net
asset value per
share (0.30) 1.06 0.17 (2.08) 0.82 0.90 0.43 (2.23) (0.54) 0.00 (0.16)
Net asset value per
share, end of
period $ 15.79 $16.09 $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02 $ 17.56 $ 17.56
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return+ 4.13% 14.12% 4.26% (2.29)% 7.05% 13.36% 36.64% (15.11)% 13.95% 0.10% (6.03)
Ratios/Supplemental
Data:
Net assets, end of
year (000) $32,842 $32,387 $31,372 $33,046 $46,999 $44,642 $41,807 $40,528 $46,426 $47,881 $47,561
Ratio of expenses
to average net
assets 1.27%** 1.33%** 1.04%[]** 0.91%** 1.02% 1.09% 1.09% 1.06% 1.05% 1.02% 1.12%
Ratio of net
investment income
to average net
assets 6.01%** 6.12%** 7.32%[]** 7.85%** 8.14% 9.42% 11.16% 11.65% 11.35% 10.63% 12.04%
Portfolio
Turnover+++ 59% N/A N/A N/A 154.34% 251.97% 54.79% 83.92% 88.48% 133.29% 79.41%
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The total return figures do not include the effect of the maximum 4.50% sales charge on A Shares and are not
annualized for the period October 1, 1994 through February 28, 1995.
++ The financial highlights for the years ended September 30, 1987, 1988, 1989, 1990, 1991, 1992 and 1993 are for
Bunker Hill Income Securities, Inc., a closed-end fund.
+++ Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of
shares issued.
* Includes the combined results of operations of Bunker Hill Income Securities, Inc. and the Corporate Bond Fund.
** Reflects the Corporate Bond Fund's proportionate share of the Corporate Bond Master Portfolio's expenses and fee
waivers and expense reimbursements by the Corporate Bond Master Portfolio's investment advisor and administrator
and the Corporate Bond Fund's administrator and Distributor. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and increasing the ratio of net investment income to
average net assets by 0.61% for the period ended February 28, 1997 and 0.90% (annualized) for the periods ended
February 29, 1996 and February 28, 1995, and 0.16% for the period ended February 28, 1994, respectively.
[] Annualized.
N/A Not applicable.
(a) As of July 22, 1996, the Fund designated the existing series of shares as "A" Shares.
</TABLE>
7
<PAGE> 12
PACIFIC HORIZON CORPORATE BOND FUND
Selected data for a K Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
------------
<S> <C>
Net asset value per share, beginning of period $15.56
------
Income from Investment Operations:
Net investment income 0.53
Net realized and unrealized gains on investment transactions 0.24
------
Total income from investment operations 0.77
------
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.53)
Distributions to shareholders from net realized gains on investment transactions --
------
Total dividends and distributions (0.53)
------
Net change in net asset value per share 0.24
------
Net asset value per share, end of period $15.80
======
Total Return 5.01%(b)
Ratios/Supplemental Data:
Net assets at end of year (000) $ 237
Ratio of expenses to average net assets 1.64%(c)
Ratio of net investment income to average net assets 5.60%(c)
Ratio of expenses to average net assets* 2.25%(c)
Ratio of net investment income to average net assets* 4.99%(c)
Portfolio turnover rate** 59%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of
shares issued.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.
</TABLE>
8
<PAGE> 13
INTERMEDIATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED JANUARY 13, 1994
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, (INCEPTION DATE)
1997(A) 1996 1995 THROUGH FEBRUARY 28, 1994
------------ ------------ ------------ -------------------------
<S> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 9.75 $ 9.44 $ 9.81 $ 10.00
------- ------- ------ ------
Income from Investment
Operations:
Net investment income 0.52 0.59 0.59 0.08
Net realized and unrealized
gains (losses) on securities (0.15) 0.33 (0.37) (0.19)
------- ------- ------ ------
Total income (loss) from
investment operations 0.37 0.92 0.22 (0.11)
------- ------- ------ ------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income (0.52) (0.59) (0.59) (0.08)
Distributions to shareholders
from net realized gains on
investment transactions (0.06) (0.02) -- --
------- ------- ------ ------
Total dividends and distributions (0.58) (0.61) (0.59) (0.08)
------- ------- ------ ------
Net change in net asset value (0.21) 0.31 (0.37) (0.19)
------- ------- ------ ------
Net asset value per share, end of
period $ 9.54 $ 9.75 $ 9.44 $ 9.81
======= ======= ====== ======
Total Return++ 3.92% 10.45% 2.27% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period
(000) $ 22,937 $ 13,179 $1,964 $ 356
Ratio of expenses to average
net assets* 0.75% 0.27% 0.00% 0.00%+
Ratio of net investment
income to average net
assets* 5.45% 6.13% 6.43% 5.70%+
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Reflects the Intermediate Bond Fund's proportionate share of the Master Portfolio's expenses and fee waivers and
expense reimbursements by the Master Portfolio's investment adviser and administrator and the Intermediate Bond
Fund's administrator and distributor. Such fee waivers and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net investment income to average net assets by
1.51%, 4.73%, 17.95% and 160.20% (annualized) for the periods ended February 28, 1997, February 29, 1996, February
28, 1995 and February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended February 28, 1994, and do not include the effect of
the maximum 4.50% sales charge on A Shares.
(a) As of July 22, 1996, the Fund designated the existing series of shares as "A" Shares.
</TABLE>
9
<PAGE> 14
PACIFIC HORIZON INTERMEDIATE BOND FUND
Selected data for a K Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
------------
<S> <C>
Net asset value per share, beginning of period $ 9.53
------
Income from Investment Operations:
Net investment income 0.31
Net realized and unrealized gains on investments 0.07
------
Total income from investment operations 0.38
------
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.31)
Distributions to shareholders from net realized gains on investments (0.06)
------
Total dividends and distributions (0.37)
------
Net change in net asset value per share 0.01
------
Net asset value per share, end of period $ 9.54
======
Total Return 3.73%++
Ratios/Supplemental Data:
Net assets, end of period (000) $ 332
Ratio of expenses to average net assets 1.43%+
Ratio of net investment income to average net assets 5.41%+
Ratio of expenses to average net assets* 2.71%+
Ratio of net investment income to average net assets* 4.13%+
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
<TABLE>
<S> <C>
+ Annualized.
++ Not Annualized.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
</TABLE>
10
<PAGE> 15
U.S. GOVERNMENT SECURITIES FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997(b) 1996 1995 1994 1993[] 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59
------ ------ ------ ------------ ------------ ------------ ------
Income from Investment
Operations:
Net investment income 0.59 0.61 0.55 0.45 0.70 0.81 0.87
Net realized and
unrealized gains (losses)
on securities (0.12) 0.16 (0.54) (0.11) 0.37 0.37 0.29
------ ------ ------ ------------ ------------ ------------ ------
Total income from
investment operations 0.47 0.77 0.01 0.34 1.07 1.18 1.16
------ ------ ------ ------------ ------------ ------------ ------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment
income (0.59) (0.61) (0.52) (0.45) (0.70) (0.81) (0.87)
Distributions to
shareholders from net
realized gains on
investment transactions -- (0.01) -- (0.16) (0.38) (0.03) --
Tax return of capital (0.01) (0.03) (0.03) (0.09) -- -- --
------ ------ ------ ------------ ------------ ------------ ------
Total dividends and
distributions (0.60) (0.65) (0.55) (0.70) (1.08) (0.84) (0.87)
------ ------ ------ ------------ ------------ ------------ ------
Net change in net asset
value per share (0.13) 0.12 (0.54) (0.36) (0.01) 0.34 0.29
------ ------ ------ ------------ ------------ ------------ ------
Net asset value per
share, end of period $ 9.30 $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88
============ ============ ============ ============ ============ ============ ============
Total return++ 5.23% 8.47% 0.30% 3.40% 10.92% 12.45% 12.73%
Ratios/Supplemental Data:
Net assets, end of period
(000) $ 74,485 $ 89,491 $ 87,354 $157,984 $119,127 $100,444 $7,466
Ratio of expenses to
average net assets*** 0.85% 1.15% 1.15% 0.96% 0.51% 0.37% 0.39%
Ratio of net investment
income to average net
assets*** 6.11% 6.36% 5.57% 4.45% 6.80% 7.60% 8.88%
Portfolio turnover rate 94% 137% 189% 255% 252% 165% 80%
<CAPTION>
PERIOD YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 28, AUGUST 31, AUGUST 31,
1990** 1989 1988*
------------ ---------- ----------
<S> <<C> <C> <C>
Net asset value per share,
beginning of period $ 9.62 $ 9.50 $ 9.55
------ ---------- ----------
Income from Investment
Operations:
Net investment income 0.44 0.86 0.56
Net realized and
unrealized gains (losses)
on securities (0.03) 0.12 (0.05)
------ ---------- ----------
Total income from
investment operations 0.41 0.98 0.51
------ ---------- ----------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment
income (0.44) (0.86) (0.56)
Distributions to
shareholders from net
realized gains on
investment transactions -- -- --
Tax return of capital -- -- --
------ ---------- ----------
Total dividends and
distributions (0.44) (0.86) (0.56)
------ ---------- ----------
Net change in net asset
value per share (0.03) 0.12 (0.05)
------ ---------- ----------
Net asset value per
share, end of period $ 9.59 $ 9.62 $ 9.50
============ ========== ==========
Total return++ 4.28%[][](a) 10.81%(a) 5.34%[][](a)
Ratios/Supplemental Data:
Net assets, end of period
(000) $3,562 $2,986 $1,784
Ratio of expenses to
average net assets*** 0.51%+ 0.70% --
Ratio of net investment
income to average net
assets*** 9.06%+ 9.02% 9.46%+
Portfolio turnover rate 4% 5% 1%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period January 7, 1988 (commencement of operations) through August 31, 1988.
** For the period September 1, 1989 through February 28, 1990.
*** Includes fee waivers and expense reimbursements. Such fee waivers and expense reimbursements had the effect of
reducing the ratio of expenses to average net assets and increasing the ratio of net investment income to average
net assets by 0.40%, 0.00%, 0.04%, 0.59%, 0.75%, 3.91%, 6.87% (annualized), 4.49% and 28.66% (annualized), for the
fiscal years or periods ended February 28, 1997, February 28, 1995, February 28, 1994, February 28, 1993, February
29, 1992, February 28, 1991, February 28, 1990, August 31, 1989 and August 31, 1988, respectively. For the fiscal
year ended February 29, 1996, such fee waivers and expense reimbursements had the effect of reducing the ratio of
expenses to average net assets by 0.11% and increasing the ratio of net investment income to average net assets by
0.08%. During the fiscal years ended February 29, 1996 and February 28, 1997, the Fund received credits from its
custodian for interest earned on uninvested cash balances which were used to offset custodian fees and expenses. If
such credits had not occurred, the ratio of expenses to average net assets (without fee waivers and/or expense
reimbursements) would have been 1.26% and 1.25%, respectively. The ratio of net investment income to average net
assets was not affected by such credits.
+ Annualized.
++ The total return figures listed do not include the effect of the maximum 4.50% sales charge on A Shares.
[] Security Pacific National Bank served as investment adviser through April 21, 1992. Bank of America National Trust
and Savings Association served as investment adviser commencing April 22, 1992.
[][] Not Annualized.
(a) Unaudited.
(b) As of July 22, 1996, the Fund designated the existing series of Shares as "A" Shares.
</TABLE>
11
<PAGE> 16
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
Selected data for a K Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
------------
<S> <C>
Net asset value per share, beginning of period
Income from Investment Operations: $ 9.22
------
Net investment income 0.35
Net realized and unrealized gains on investment transactions 0.08
------
Total income from investment operations 0.43
------
Less Dividends to shareholders from net investment income (0.35)
------
Net change in net asset value per share 0.08
------
Net asset value per share, end of period $ 9.30
======
Total return 4.75%(b)
Ratios/Supplemental Data:
Net assets at end of year (000) $ 418
Ratio of expenses to average net assets 1.35%(c)
Ratio of net investment income to average net assets 6.11%(c)
Ratio of expenses to average net assets* 2.06%(c)**
Ratio of net investment income to average net assets* 5.73%(c)
Portfolio turnover rate 94%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been as indicated.
** During the period ended February 28, 1997, the Portfolio received credits from its custodian for interest earned on
uninvested balances which were used to offset custodian fees and expenses. If such credits had not occurred, the
expense ratios would have been as indicated. The ratio of net investment income was affected.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.
</TABLE>
12
<PAGE> 17
================================================================================
FUND INVESTMENTS
---------------------------------------------------------
INVESTMENT OBJECTIVES
The Corporate Bond Fund seeks to provide investors with high current income
consistent with reasonable investment risk. The Intermediate Bond Fund also
seeks interest income and capital appreciation. The U.S. Government Securities
Fund strives to provide investors with high a level of current income,
consistent with preservation of principal.
The CORPORATE BOND FUND seeks to achieve its objective through investment
primarily in a diversified portfolio of investment grade corporate debt
securities although it may invest a portion of its assets in other types of
securities and money market instruments. The Corporate Bond Fund may be suited
for investors looking for high current income who are willing to accept some
price and yield fluctuations.
The INTERMEDIATE BOND FUND seeks to achieve its objective by investing in
investment grade intermediate and long term bonds, including corporate and
governmental fixed income obligations through investment in mortgage-backed
securities, municipal securities and cash equivalents. The Intermediate Bond
Fund may be appropriate for investors who want interest income from a
diversified portfolio of debt securities and capital appreciation.
The U.S. GOVERNMENT SECURITIES FUND invests mainly in certificates issued by the
Government National Mortgage Association ("GNMA"), a U.S. Government corporation
within the Department of Housing and Urban Development. The U.S. Government
Securities Fund may be appropriate for investors who want: (1) income from U.S.
Government securities to help meet today's expenses and (2) relative stability
of investment but are willing to accept some price and yield variations. The
U.S. Government Securities Fund may be suited for investors who want to
participate in a diversified portfolio of U.S. Government securities and who are
willing to accept some price and yield variations.
THE INTERMEDIATE BOND FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE MASTER PORTFOLIO. THE MASTER
PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE INTERMEDIATE BOND FUND. THE
FUND MAY WITHDRAW ITS INVESTMENT IN THE MASTER PORTFOLIO AT ANY TIME, IF THE
BOARD OF DIRECTORS OF THE COMPANY DETERMINES THAT SUCH ACTION IS IN THE BEST
INTERESTS OF THE FUND. UPON ANY SUCH WITHDRAWAL, THE BOARD OF DIRECTORS WOULD
CONSIDER WHAT ACTION MIGHT BE TAKEN, INCLUDING THE INVESTMENT OF ALL OF THE
ASSETS OF THE INTERMEDIATE BOND FUND IN ANOTHER POOLED INVESTMENT ENTITY HAVING
THE SAME INVESTMENT OBJECTIVE AS THE FUND OR THE HIRING OF AN INVESTMENT ADVISER
TO MANAGE THE FUND'S ASSETS IN ACCORDANCE WITH THE INVESTMENT POLICIES DESCRIBED
BELOW WITH RESPECT TO THE MASTER PORTFOLIO.
BECAUSE THE INVESTMENT CHARACTERISTICS OF THE INTERMEDIATE BOND FUND WILL
CORRESPOND TO THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF
THE VARIOUS INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO. THE
VARIOUS INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE CORPORATE BOND FUND AND
THE U.S. GOVERNMENT SECURITIES FUND ARE ALSO DESCRIBED BELOW.
WHILE THE MASTER PORTFOLIO, THE CORPORATE BOND FUND AND THE U.S. GOVERNMENT
SECURITIES FUND STRIVE TO ATTAIN THEIR RESPECTIVE INVESTMENT OBJECTIVE, THERE
CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
13
<PAGE> 18
---------------------------------------------------------
TYPES OF INVESTMENTS
CORPORATE BOND FUND --
GENERAL INVESTMENTS
The Corporate Bond Fund is a diversified portfolio which will invest
substantially all of its assets in investment grade corporate debt obligations
(at least 65% of total assets under normal circumstances) such as bonds,
debentures, notes and securities convertible into, or exchangeable for, or with
rights to purchase, common or preferred stocks. Investment grade debt securities
ordinarily carry lower rates of interest income than lower quality debt
securities with similar maturities. The securities obtained upon conversion of a
convertible security may be retained for a period of time pending their orderly
disposition.
The Corporate Bond Fund may invest up to 20% of its total assets (determined at
the time of purchase) in debt obligations of foreign issuers, including Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). The Corporate Bond Fund may also hold a portion of its
assets in cash equivalents of the type described under "Other Investment
Practices -- Cash Equivalents."
The Corporate Bond Fund will normally invest at least 75% of its total assets in
investment grade corporate securities and securities issued by the U.S.
Government, its agencies or instrumentalities. Investment grade securities are
securities rated at the time of purchase in the four highest ratings categories
by S&P or by Moody's, or if not rated, determined by Bank of America to be of
comparable quality to securities with such ratings. The four highest ratings
categories are AAA, AA, A and BBB by S&P and Fitch and Aaa, Aa, A and Baa by
Moody's. Bonds in the fourth category are more subject than those in the top
three categories to changes in economic or other conditions that could lead to a
weakened capacity to make payments of interest and principal and may have
speculative characteristics as well. The Corporate Bond Fund may invest up to
25% of its total assets in lower quality, higher yielding securities, often
referred to as "junk bonds." Such securities are rated below investment grade,
carry a higher degree of risk and are considered to be speculative by S&P,
Moody's or Fitch. Debt securities will be rated at the time of purchase at least
"B" by S&P, Moody's or Fitch, or if unrated, will be determined by Bank of
America to be of comparable quality to securities with such ratings. Ratings are
described more fully in the Appendix to this Prospectus.
In the event that the rating of any security held by the Corporate Bond Fund
falls below the required rating, the Fund will not be obligated to dispose of
such security and may continue to hold the obligation if, in the opinion of Bank
of America, such investment is considered appropriate under the circumstances.
MASTER PORTFOLIO --
GENERAL INVESTMENTS
The Master Portfolio is a diversified portfolio which will invest substantially
all of its assets in investment grade intermediate and longer term bonds, which
consist of corporate and governmental fixed income obligations, mortgage-backed
securities, municipal securities and cash equivalents. Under normal
circumstances, at least 65% of the Master Portfolio's net assets will be
invested in investment grade bonds. For a description of investment grade
securities, see "Corporate Bond Fund -- General Investments."
Under normal market and interest rate conditions, the investment adviser expects
that the Fund's average portfolio duration generally will be approximately the
same as the Lehman Brothers Intermediate Government/Corporate Bond Index. This
means that the Fund's net asset value fluctuation is expected to be similar to
the price fluctuation of the Lehman Brothers Intermediate Government/Corporate
Bond Index. Unlike maturity which indicates when the security repays principal,
"duration" incorporates the cash
14
<PAGE> 19
flows of all interest and principal payments and the proceeds from calls and
redemptions over the life of the security. These payments are multiplied by the
number of years over which they are received to produce a value that is
expressed in years (i.e., duration). In addition, under normal market and
interest rate conditions, the investment adviser expects that the Fund's average
portfolio maturity will be between three and six years.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government or one of its
agencies or instrumentalities. The Master Portfolio will not invest more than
35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if the bond interest rate is
higher than currently prevailing interest rates. Similarly, a risk associated
with mortgage-backed securities is early paydown of principal resulting from the
refinancing of the underlying mortgages. The rate of such prepayments of
principal, and hence the life of the security, will primarily be a function of
current market rates. In periods of falling interest rates, the rate of
prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds will generally be at lower rates than the rates on the
prepaid obligations.
The Master Portfolio may also invest, from time to time, in obligations issued
by state and local governmental issuers ("Municipal Securities"). It is
currently expected that investment in Municipal Securities will not exceed 5% of
the Fund's net assets.
Interest income is expected to be the primary basis for investment return from
an investment in the Master Portfolio, and capital appreciation the secondary
basis. The Master Portfolio will attempt to achieve capital appreciation by
moderate market timing in response to anticipated interest rate changes. The
Master Portfolio will also attempt to take advantage of undervalued sectors
while selling bonds in overvalued sectors. However, since investments will
normally consist of bonds and mortgage-backed securities, the ability to achieve
capital appreciation is limited.
U.S. GOVERNMENT SECURITIES FUND --
GENERAL INVESTMENTS
As a fundamental policy, the U.S. Government Securities Fund will at all times
invest at least 65% of its assets in certificates issued by the GNMA ("GNMA
Certificates"). The rest of its assets will be invested in other securities of
the U.S. Government (and its agencies and instrumentalities) that are backed by
the full faith and credit of the Government, in GNMA Real Estate Mortgage
Investment Conduit Securities ("GNMA REMICs"), in options and futures contracts
and as described in "Other Investment Practices and Considerations" below.
Examples of other types of U.S. Government obligations that the U.S. Government
Securities Fund may hold include U.S. Treasury bills, notes and bonds, and
obligations of the Small Business Administration and the Maritime
Administration. Securities like those included in the U.S. Government Securities
Fund's portfolio have historically had a very low risk of loss of principal if
held to maturity.
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds and the Master Portfolio may not be
changed without a vote by the holders of a majority of the outstanding shares of
the particular Fund or of the outstanding interests of the Master Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below.
The Corporate Bond 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
15
<PAGE> 20
25% of its total assets may be invested without regard to this 5% limitation;
provided that all of the assets of the Fund may be invested in the Corporate
Bond Master Portfolio or another investment company;
2. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities as discussed herein; or
3. Purchase or sell commodities or commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that: (a) it may, to the
extent appropriate to its investment objective, invest in securities issued
by companies which purchase or sell commodities or commodity contracts or
which invest in such programs; and (b) it may purchase and sell futures
contracts and options on futures.
The Intermediate Bond Fund and the Master Portfolio may not:
1. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to 25%
of its total assets may be invested without regard to these limitations; and
provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the
same investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value in
excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its total assets, and may
enter into repurchase agreements as long as repurchase agreements maturing in
more than seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock indexes
and options on any such futures if such options are written by other persons
and if (i) the futures or options are listed on a national securities or
commodities exchange, (ii) the aggregate premiums paid on all such options
that are held at any time do not exceed 20% of its total net assets, and
(iii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
The U.S. Government Securities Fund may not:
1. Under normal circumstances invest less than 65% of its total assets in GNMA
Certificates.
2. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities.
3. Purchase or sell commodities or commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that: (a) the Fund may,
to the extent appropriate to its investment objective, invest in securities
issued by companies which purchase or sell commodities or commodity contracts
or which invest in such programs; and (b) the Fund may purchase and sell
futures contracts and options on futures contracts.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in full in the
Statement of Additional Information.
16
<PAGE> 21
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
CASH EQUIVALENTS. For temporary defensive purposes (for example, when Bank of
America believes such a position is warranted by uncertain or unusual market
conditions, or when liquidity is required to meet unusually high redemption
requests), the Corporate Bond Fund and U.S. Government Securities Fund may
invest without limitation and the Master Portfolio may invest up to 75% of its
net assets in cash equivalents such as money market instruments (including
short-term bank time deposits, certificates of deposit, bankers' acceptances,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, asset backed securities, foreign government securities and
commercial paper issued by U.S. and foreign issuers and, subject to the
investment limitations described below, shares of money market mutual funds.
Commercial paper must be rated at the time of purchase at least Prime-2 by
Moody's, A-2 by S&P or F-1 by Fitch Investors Services, Inc. for the Corporate
Bond Fund and Master Portfolio and Prime-1, A-1 or F-1, respectively, for the
U.S. Government Securities Fund. Certificates of deposit, bankers' acceptances
and time deposits will be issued by domestic and foreign banks and foreign
branches of U.S. banks that have total assets of more than $2.5 billion and
interest-bearing savings deposits in commercial banks in amounts not exceeding
5% of its total assets. Obligations of some of the U.S. Government agencies and
instrumentalities, such as the Small Business Administration and the Maritime
Administration, are backed by the full faith and credit of the U.S.; others,
like the Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, including the Student Loan Marketing Association, are backed solely by
the issuer's credit. There is no assurance that the U.S. Government would
support a U.S. Government-sponsored entity if it was not required to do so by
law. To the extent a Portfolio invests in cash equivalents, it will not be
invested in accordance with the investment policies designed for it to realize
its investment objective.
GNMA CERTIFICATES. Certificates issued by GNMA (Certificates) are backed by the
full faith and credit of the U.S. Government. The Master Portfolio and the U.S.
Government Securities Fund may invest in GNMA Certificates. These are mortgage-
backed debt securities representing fractional ownership of a pool of mortgage
loans. They are issued by lenders (such as savings and loan associations,
commercial banks and mortgage bankers) approved by the Federal Housing
Administration which meet criteria imposed by GNMA. The lender assembles a
specified pool of mortgage loans, all of which are insured by the Federal
Housing Administration or the Farmers' Home Administration, and applies to GNMA
for approval of the pool. Upon approval, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA certificates
secured by the mortgage loans in the pool.
GNMA Certificates usually bear a nominal rate of interest equal to the effective
rate on the mortgage loans in the pool less .5%, which is the fee charged by the
issuer and GNMA. The U.S. Government Securities Fund receives monthly payments
of principal and interest (less the fee mentioned above) from its investments in
GNMA Certificates. The actual yield on the Master Portfolio's and the U.S.
Government Securities Fund's investments, calculated by dividing the interest
payments by the purchase price for the GNMA Certificate, may differ
significantly from the nominal interest rate. This difference is due to
variations of the lives of the mortgages in the pool and to the impossibility of
anticipating the effective interest rate at which future principal payments
might be reinvested.
GNMA Certificates have in the past provided higher yields than direct
investments in U.S. Treasury obligations, although there is no assurance they
will continue to do so in the future.
If mortgage loans in the pool are prepaid (because of either voluntary
prepayments, which
17
<PAGE> 22
are more likely during periods of falling interest rates, or because of
foreclosure), the principal payments are passed through to the Certificate
holders. Because of these prepayments, the life of a GNMA Certificate may be
substantially shorter than the time remaining until maturity of the mortgages in
the pool.
The U.S. Government Securities Fund will normally reinvest amounts reserved from
prepayments in other GNMA Certificates. Depending on prevailing interest rates,
the reinvestment may be at higher or lower rates than the yield the U.S.
Government Securities Fund was receiving on the Certificate that was prepaid. As
a result, GNMA Certificates are not as effective at "locking-in" high interest
rates during periods of declining rates as are typical non-callable fixed rate
securities.
As opposed to bonds, where principal is normally returned in a lump sum at
maturity, the principal underlying a GNMA Certificate is paid back over the life
of the loan. The Master Portfolio and the U.S. Government Securities Fund will
purchase GNMA Certificates known as "modified pass-through" certificates, on
which timely payment of principal and interest is guaranteed. The Master
Portfolio and the U.S. Government Securities Fund may also purchase "variable
rate" GNMA Certificates, which are backed by pools of variable rate mortgages,
as well as other types of Certificates that are backed by GNMA's guarantee.
GNMA REMICS. The U.S. Government Securities Fund may invest in GNMA REMICs
which are collateralized mortgage obligations ("CMOs"). GNMA REMICs provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. GNMA REMICs are issued in
multiple classes, each with a specified fixed or floating interest rate and a
final distribution date. Although the relative payment rights of these classes
can be structured in a number of different ways, most often payments of
principal are applied to the GNMA REMIC classes in the order of their respective
stated maturities. GNMA REMICs can expose a Fund to more volatility and interest
rate risk than other types of asset-backed obligations.
ASSET-BACKED SECURITIES. The Corporate Bond Fund and Master Portfolio may
purchase asset-backed securities. Asset-backed securities consist of undivided
fractional interests in pools of mortgages, consumer loans or receivables held
in a trust. Examples include mortgage-backed securities, certificates for
automobile receivables (CARS) and credit card receivables (CARDS). Payments of
principal and interest on the mortgages, loans or receivables are passed through
to certificate holders. Asset-backed securities may be issued by either
governmental or non-governmental entities. Payment on asset-backed securities of
private issuers is typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guaranty, or subordination. The
extent of credit enhancement varies, but usually amounts to only a fraction of
the asset-backed security's par value until exhausted. Ultimately, asset-backed
securities are dependent upon payment of the mortgages, consumer loans or
receivables by individuals, and the certificate holder frequently has no
recourse to the entity that originated the loans or receivables. All
asset-backed securities purchased by the Corporate Bond Fund and Master
Portfolio will either be issued or guaranteed by a U.S. Government entity or
rated AAA by S&P, Aaa by Moody's or have an equivalent rating from any other
rating agency.
FOREIGN SECURITIES. Subject to their investment objectives and the policies
stated above, the Corporate Bond Fund and Master Portfolio may invest in
securities of foreign issuers that may or may not be publicly traded in the
United States, such as Yankee bonds (dollar-denominated bonds sold in the United
States by non-U.S. issuers) and Eurobonds (bonds issued in a country and
sometimes a currency other than the country of the issuer). It is currently the
intention of the Corporate Bond Fund and Master Portfolio to invest no more than
20% and 25% of their
18
<PAGE> 23
respective net assets (at the time of purchase) in foreign securities.
RISKS RELATED TO INTEREST RATE CHANGES. Mutual funds that invest solely in
fixed income securities are subject to interest rate risk. In general, bond
prices vary inversely with changes in interest rates. As a result, bond prices
tend to rise when interest rates fall and conversely, decrease during period of
falling interest rates. Thus, a Portfolio's net asset value per share is
expected to vary with changes in interest rates. A Portfolio's investments will
normally fall when prevailing interest rates rise and rise when interest rates
fall. Interest rate fluctuations can be expected to affect earnings. In an
effort to preserve the capital of a Portfolio when interest rates are generally
rising, Bank of America may shorten the average weighted maturity of the
securities in a Portfolio's investments. Because the principal values of the
securities with shorter maturities are less affected by rising interest rates, a
portfolio with a shorter average weighted maturity will generally diminish less
in value during such periods than a portfolio with a longer average weighted
maturity. Because securities with shorter maturities, however, generally have a
lower yield to maturity, a Portfolio's current return based on its net asset
value will generally be lower as a result of such action than it would have been
had such action not been taken.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries some
risk, some of the risks associated with lower-rated securities are different
from the risks associated with investment grade securities. The risk of loss
through default is greater because lower-rated securities are usually unsecured
and are often subordinate to an issuer's other obligations. Additionally, the
issuers of these securities frequently have high debt levels and are thus more
sensitive to difficult economic conditions, individual corporate developments
and rising interest rates. Consequently, the market price of these securities,
and the net asset value of the Corporate Bond Fund's shares, may be quite
volatile.
Because the market for lower-rated securities, at least in its present size and
form, is relatively new, there remains some uncertainty about its performance
level under adverse market and economic environments. An economic downturn or
increase in interest rates could have a negative impact on both the market for
lower-rated securities (resulting in a greater number of bond defaults) and the
value of lower-rated securities held in the Corporate Bond Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES.
The economy and interest rates can affect lower-rated securities differently
than other securities. For example, the prices of lower-rated securities are
more sensitive to adverse economic changes or individual corporate developments
than are the prices of higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, the Corporate Bond Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices of
lower-rated securities as well as the Corporate Bond Fund's net asset value. In
general, both the prices and yields of lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, the
Corporate Bond Fund's valuation of a security and the price it is actually able
to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by the Corporate Bond
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<PAGE> 24
Fund, especially in a thinly traded market. Illiquid or restricted securities
held by the Corporate Bond Fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for lower-rated securities.
CREDIT RATINGS. S&P, Moody's and other nationally recognized statistical rating
organizations evaluate the safety of a lower-rated security's principal and
interest payments, but do not address market value risk. Because the ratings of
the rating agencies may not always reflect current conditions and events, in
addition to using recognized rating agencies and other sources, Bank of America
performs its own analysis of the issuers whose lower-rated securities the
Corporate Bond Fund purchases. Because of this, the Corporate Bond Fund's
performance may depend more on the investment adviser's own credit analysis than
is the case for mutual funds investing in higher-rated securities.
In selecting lower-rated securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the lower-rated securities, the protections afforded the lower-rated
securities and the diversity of the Corporate Bond Fund's portfolio. Bank of
America continuously monitors the issuers of lower-rated securities held in the
Corporate Bond Fund's portfolio for their ability to make required principal and
interest payments, as well as in an effort to control the liquidity of the
Corporate Bond Fund's portfolio so that it can meet redemption requests.
If a portfolio security undergoes a rating revision, the Corporate Bond Fund may
continue to hold the security if Bank of America determines such retention is
warranted.
For your information, set forth below is the average distribution of ratings at
value for the Corporate Bond Fund's portfolio securities (including commercial
paper and nonconvertible bonds) for its last fiscal year:
<TABLE>
<CAPTION>
MOODY'S INVESTORS PERCENTAGE
SERVICE, INC. OF VALUE
- -------------------------------- ----------
<S> <C> <C>
Aaa 4.0%
Aa 16.2%
A 63.2%
Baa 11.8%
Ba or lower 4.8%
Not Rated 0%
Comparable to A 0%
Comparable to Baa 0%
Comparable to Ba or lower 0%
-----
100.0%
=====
</TABLE>
<TABLE>
<CAPTION>
STANDARD & POOR'S PERCENTAGE
CORPORATION OF VALUE
- -------------------------------- ----------
<S> <C> <C>
AAA 8.4%
AA 14.8%
A 63.3%
BBB 13.5%
BB or lower 0%
Not Rated 0%
Comparable to A 0%
Comparable to BBB 0%
Comparable to BB or lower 0%
-----
100.0%
=====
</TABLE>
These ratings are described in the Appendix to this Prospectus.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND ASSET-BACKED SECURITIES. The
Corporate Bond Fund's and the Master Portfolio's investments in foreign
securities, whether made directly or indirectly, involve certain inherent risks,
including political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns and changes in
foreign currency exchange rates and the possibility of adverse changes in
investment or exchange control regulations. There is typically less information
publicly available about a foreign company than about a U.S. company. Moreover,
these companies may be subject to less stringent reserve, auditing and reporting
requirements than their U.S. counterparts. Additionally, foreign markets are
generally not as developed or efficient as those in the U.S., and in most
foreign markets
20
<PAGE> 25
volume and liquidity are less than in the U.S. There is generally less
government supervision and regulation of foreign exchanges, brokers and
companies than in the U.S. There is also the possibility that foreign
governments could expropriate assets or levy confiscatory taxes, set limitations
on the removal of assets or suffer adverse diplomatic developments. Because of
these and other factors, foreign securities acquired by Corporate Bond Fund and
Master Portfolio may be subject to greater price fluctuation than securities of
U.S. companies.
An asset-backed security's underlying assets may be prepaid with the result of
shortening the certificate's weighted average life. Prepayment rates vary widely
and may be affected by changes in market interest rates. It is not possible to
accurately predict the average life of a particular pool of mortgages, loans or
receivables. The proceeds of prepayments received by Corporate Bond Fund and
Master Portfolio must be reinvested in securities whose yields reflect interest
rates prevailing at the time. Thus, the Corporate Bond Fund's and Master
Portfolio's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent reinvestments
are in lower yielding securities. The actual maturity and realized yield will
therefore vary based upon the prepayment experience of the underlying asset pool
and prevailing interest rates at the time of prepayment. Asset-backed securities
may be subject to greater risk of default during periods of economic downturn
than other instruments. Also, while the secondary market for asset-backed
securities is ordinarily quite liquid, in times of financial stress the
secondary market may not be as liquid as the market for other types of
securities, which could result in the Corporate Bond Fund's and Master
Portfolio's experiencing difficulty in valuing or liquidating such securities.
OPTIONS. The Corporate Bond Fund may write covered put and call options and
purchase put and call options on U.S. or foreign securities that are traded on
United States and foreign securities exchanges and in over-the-counter markets.
The Master Portfolio may purchase put and call options on listed securities and
may write fully covered call options. The U.S. Government Securities Fund may
write covered call options and purchase put options. Put options may be
purchased in order to protect a Portfolio's securities in expectation of a
declining market, and call options may be purchased to benefit from anticipated
price increases in the underlying securities or index. A Portfolio may write
fully covered call options in order to realize current income from the premiums
received as long as a Portfolio remains fully covered throughout the life of the
option, either by owning the optioned securities or possessing a call issued by
another writer that is identical in all respects to the call written by the
Portfolio.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Although the Portfolios' risk when purchasing options
is limited to the amount of the original premiums paid plus transaction costs,
options may be more volatile than the underlying instruments, and therefore, on
a percentage basis, and investment in options may be subject to greater
fluctuations than an investment in the underlying security. When writing covered
call options, the Portfolios give up the opportunity to profit from a price
increase in the underlying security above the option's exercise price in return
for the premium, but retains the risk of loss should the price of the underlying
security fall. In addition, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives, and there is no guarantee that a liquid secondary market for
particular options will exist. For additional information relating to options
transactions, please refer to the Statement of Additional Information.
Options transactions will be limited as follows: (a) not more than 5% of the
total assets of the Corporate Bond Fund may be invested in options; and (b) not
more than 25% of the value of the Master Portfolio's net assets may be
21
<PAGE> 26
subject to options. In addition, (a) obligations of the Corporate Bond Fund
under put options it writes may not exceed 50% of its net assets; (b) aggregate
premiums on all options purchased by the Corporate Bond Fund and Master
Portfolio may not exceed 25% and 2%, respectively, of their net assets; (c)
options written by the U.S. Government Securities Fund may not exceed 25% of its
total assets (taken at market value on the date written) and (d) options
purchased by the U.S. Government Securities Fund may not exceed 5% of its total
assets.
Call options written by a Portfolio gives the holder the right to buy the
underlying security from the Portfolio at a stated exercise price upon
exercising the option at any time prior to its expiration. A call option written
by a Portfolio is "covered" if the particular Portfolio owns or has an absolute
right (such as by conversion) to the underlying security covered by the call. A
call option is also covered if a Portfolio holds a call on the same security and
in the same principal amount as the call written and the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, government securities or other high grade
debt obligations in a segregated account with its custodian.
Put options written by the Corporate Bond Fund give the holder the right to sell
the underlying security to the Fund at a stated exercise price. A put option
written by the Corporate Bond Fund is "covered" if that Fund maintains cash or
high grade debt obligations with a value equal to the exercise price in a
segregated account with its custodian, or holds a put on the same security and
in the same principal amount as the put written and the exercise price of the
put held is equal to or greater than the exercise price of the put written.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities. In addition, a foreign exchange may
impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
The restrictions discussed in "Options" do not apply to options on futures
contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Corporate Bond Fund may
enter into contracts for the purchase or sale for future delivery of
fixed-income securities, or contracts based on financial indices and may
purchase and write put and call options to buy or sell futures contracts.
The Master Portfolio may purchase and sell interest rate futures contracts (and
purchase related options) as a hedge against changes resulting from market
conditions in the values of the securities held by the Portfolio or which it
intends to purchase and where the transactions are economically appropriate for
the reduction of risks inherent in the ongoing management of the Portfolio.
The U.S. Government Securities Fund may enter into financial futures contracts
or purchase or sell options on such futures as a hedge against anticipated
interest rate fluctuations.
A "sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the incurring of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date.
The Portfolios may be subject to additional risks associated with futures
contract, such as the possibility that the Bank of America's forecasts of market
values and other factors are not correct, imperfect correlation between a Fund's
hedging instrument and the asset or liability being hedged, default by the other
party to the transaction, and inability to close out a position because of the
lack of a liquid market. In addition to the possibility that there may be an
imperfect correlation, or no correlation at all, between movements in a futures
contract and the securities being hedged, the price of futures contracts may
22
<PAGE> 27
not correlate perfectly with movement in the cash market due to certain market
distortions. As a result of these factors, a correct forecast of general market
trends or interest rate movements by the Bank of America may still not result in
a successful hedging transaction over a short time frame. More information
regarding futures contracts and related options, including the costs and risks
related to such instruments, is included in the Statement of Additional
Information.
These investment techniques would be used to hedge against anticipated future
changes in interest or exchange rates which otherwise might either adversely
affect the value of the Portfolio's portfolio securities. A Portfolio may not
purchase or sell a futures contract or purchase a related option unless
immediately after any such transaction the sum of the aggregate amount of margin
deposits on its existing futures positions and the amount of premiums paid for
related options does not exceed 5% of that Portfolio's total assets (after
taking into account certain technical adjustments). In order to prevent leverage
in connection with the purchase of futures contracts or call options thereon by
a Portfolio, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the custodian. Furthermore, a Portfolio's ability to engage in
options and futures transactions may be limited by tax considerations. More
information about futures contracts and related options may be found in Appendix
B to the Statement of Additional Information.
INTEREST RATE AND CURRENCY SWAPS. The Corporate Bond Fund may enter into
interest rate and currency swaps for hedging purposes. The Corporate Bond Fund
will typically use interest rate swaps to shorten the effective duration of its
portfolio. An interest rate swap involves the exchange of a Fund with another
party of their respective rights to receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Corporate Bond
Fund holds an interest-paying security whose interest rate is reset once a year,
it may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset daily. Such a swap position would
offset changes in the value of the underlying security because of subsequent
changes in interest rates. It is designed to protect the Corporate Bond Fund
from a decline in the value of the underlying security due to rising rates, but
would also limit its ability to benefit from falling interest rates. Currency
swaps involve the exchange of their respective rights to make or receive
payments in specified currencies.
The Corporate Bond Fund will only enter into interest rate swaps on a net basis,
which means that the two payment streams are netted out, with the Corporate Bond
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Corporate Bond Fund is contractually obligated to make. If the other party to an
interest rate swap defaults, the Corporate Bond Fund's risk of loss consists of
the net amount of interest payments that the Corporate Bond Fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
POTENTIAL RISKS OF OPTIONS, FUTURES AND SWAPS. The use of options, futures and
swaps are highly specialized activities which involve investment techniques and
risks different from those associated with customary investments. If Bank of
America should be incorrect in its forecasts of market values, interest rates or
currency exchange rates, a Portfolio may not achieve the anticipated benefits of
the techniques or may
23
<PAGE> 28
realize losses, and its investment performance may be less favorable than if
these strategies had not been used. 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 a
Portfolio may be exposed to risk of loss. The loss incurred by a Portfolio in
entering into futures contracts and in writing call options on futures contracts
is potentially unlimited and may exceed the amount of the premium received.
Futures markets are highly volatile and the use of futures may increase the
volatility of a Portfolio'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 a Portfolio.
A Portfolio's ability to dispose of its positions in futures contracts and
options will depend on the availability of liquid markets in such instruments.
Markets in options and futures with respect to a number of securities are
relatively new and still developing. If a secondary market does not exist with
respect to an option purchased or written by a Portfolio over-the-counter, it
might not be possible to effect a closing transaction in the option (i.e.,
dispose of the option) with the result that (i) an option purchased by a
Portfolio would have to be exercised in order for that Portfolio to realize any
profit and (ii) a Portfolio may not be able to sell portfolio securities
covering an option written by it until the option expires or it delivers the
underlying futures contract upon exercise. Therefore, no assurance can be given
that a Portfolio will be able to utilize these instruments effectively for the
purposes set forth above.
PARTICIPATIONS. The Corporate Bond Fund may purchase from domestic financial
institutions participation interests in high quality debt securities. A
participation interest gives a Fund an undivided interest in the security in the
proportion that the Fund's participation interest bears to the total principal
amount of the security. Participation interests may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the Securities and Exchange Commission). The
Corporate Bond Fund intends only to purchase participations from an entity or
syndicate, and does not intend to serve as a co-lender in any participation. For
certain participation interests, the Corporate Bond Fund will have the right to
demand payment, on not more than 30 days' notice, for all or any part of that
Fund's participation interest in the security, plus accrued interest. As to
these instruments, the Corporate Bond Fund intends to exercise its right to
demand payment only upon a default under the terms of the security, as needed to
provide liquidity, or to maintain or improve the quality of its investment
portfolio. It is possible that a participation interest might be deemed to be an
extension of credit by the Corporate Bond Fund to the issuing financial
institution that is not a direct interest in the credit of the obligor of the
underlying security and is not directly entitled to the protection of any
collateral security provided by such obligor. In such event, the ability of the
Corporate Bond Fund to obtain repayment might depend on the issuing financial
institution.
VARIABLE RATE INSTRUMENTS. The Master Portfolio may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Master Portfolio, master demand notes may not be
marketable. Consequently, the ability to redeem such notes may depend on the
borrower's ability to pay which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or the
equivalent by another nationally recognized statistical rating organization
("NRSRO"), (c) are backed by a bank letter of credit or (d) are determined by
Bank of America to be of a quality comparable to securities described in either
clause (a) or (b).
INVESTMENT COMPANY SECURITIES. Each of the Portfolios may invest in securities
issued by other
24
<PAGE> 29
investment companies (including money market funds advised by Bank of America).
The Master Portfolio may invest in money market funds (including money market
funds advised by Bank of America) which invest in short-term debt securities,
and the U.S. Government Securities Fund may invest in money market funds
eligible for investment by national banks that invest in U.S. Government agency
securities. No more than 10% of the value of each Portfolio's total assets will
be invested in securities of other investment companies, with no more than 5%
invested in the securities of any one investment company; with respect to the
investment in a money market mutual fund advised by Bank of America, each of the
Portfolios is permitted to invest the greater of 5% of its respective net assets
or $2.5 million. In addition, the Portfolios may hold no more than 3% of the
outstanding voting stock of any other investment company. As a shareholder of
another investment company, the Portfolios would bear, along with other
shareholders, their pro rata portion of the other investment company's expenses,
including advisory fees.
REPURCHASE AGREEMENTS. The Portfolios may buy securities subject to the
seller's agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Portfolios will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Portfolio's Board of Directors or Trustees. It is intended that
such agreements for the Portfolios will not have maturities longer than 60 days.
During the term of any repurchase agreement the seller must maintain the value
of the securities subject to the agreement in an amount that is greater than the
repurchase price. Bank of America then continually monitors that value.
Nonetheless, should the seller default on its obligations under the agreement,
the Portfolios would be exposed to possible loss due to adverse market activity
or delays connected with the disposition of the underlying obligations.
The Master Portfolio will only enter into repurchase agreements with a bank if
it has a commercial paper rating of A-2 or better by S&P or Prime-2 or better by
Moody's, or the equivalent from another NRSRO or a registered broker-dealer. The
Master Portfolio will only enter into repurchase agreements for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper.
Repurchase agreements are considered to be loans under the Investment Company
Act of 1940 (the "1940 Act"). Repurchase agreements maturing in more than seven
days are considered illiquid investments and investment in such repurchase
agreements along with any other illiquid securities will not exceed 15% of the
value of the Corporate Bond Fund's net assets and 10% of the value of the Master
Portfolio's and U.S. Government Securities Fund's net assets under normal market
conditions.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these agreements a Portfolio sells portfolio securities to financial
institutions (such as banks and broker-dealers) and agrees to buy them back
later at an agreed upon time and price. When a Portfolio enters into a reverse
repurchase agreement, it places in a separate custodial account either liquid
assets or other high grade debt securities that have a value equal to or greater
than the repurchase price. The account is then continuously monitored by Bank of
America to make sure that an appropriate value is maintained. Reverse repurchase
agreements involve the risk that the value of portfolio securities a Portfolio
relinquishes may decline below the price the Portfolio must pay when the
transaction closes. Reverse repurchase agreements are considered to be
borrowings by the Portfolios under the 1940 Act. Borrowings may magnify the
potential for gain or loss on
25
<PAGE> 30
amounts invested resulting in an increase in the speculative character of a
Portfolio's outstanding shares. A Portfolio will only enter into reverse
repurchase agreements to avoid the need to sell portfolio securities to meet
redemption requests during unfavorable market conditions.
The Master Portfolio will only enter into reverse repurchase agreements with a
bank if it has a commercial paper rating of A-2 or better by S&P or Prime-2 or
better by Moody's, or the equivalent from another NRSRO.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Portfolios may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Corporate Bond
Fund and U.S. Government Securities Fund may purchase or sell securities on a
"delayed settlement" basis. When-issued and forward commitment transactions,
which involve a commitment by a Portfolio to purchase or sell particular
securities with payment and delivery taking place at a future date (perhaps one
or two months later), permit a Portfolio to lock in a price or yield on a
security it owns or intends to purchase, regardless of future changes in
interest rates. Delayed settlement refers to a transaction in the secondary
market that will settle some time in the future. These transactions involve the
risk that the price or yield obtained may be less favorable than the price or
yield available when the delivery takes place. The Portfolios will set aside in
a segregated account cash or liquid securities equal to the amount of any when-
issued forward commitment or delayed settlement transaction. When-issued
purchases, forward commitments and delayed settlements are not expected to
exceed 25% of the value of a Portfolio's total assets under normal
circumstances. These transactions will not be entered into for speculative
purposes, but primarily in order to hedge against anticipated changes in
interest rates.
SECURITIES LENDING. In order to earn additional income, a Portfolio may lend
its portfolio securities to financial institutions (such as banks and brokers)
that Bank of America considers to be of good standing. If the financial
institution should become bankrupt, however, the particular Portfolio could
experience delays in recovering its securities. A securities loan will only be
made when, in the judgment of Bank of America, the possible reward from the loan
justifies the possible risks. In addition, such loans will not be made by the
particular Portfolio if, as a result, the value of securities loaned by the
Corporate Bond Fund, the U.S. Government Securities Fund or the Master Portfolio
exceeds 33 1/3%, 33 1/3% and 10% of their respective total assets. Securities
loans will be fully collateralized.
ILLIQUID SECURITIES. The Corporate Bond Fund, Master Portfolio and U.S.
Government Securities Fund will not invest more than 15% , 10% and 10%,
respectively, of the value of their net assets (determined at the time of
acquisition) in securities that are illiquid. If, after the time of acquisition,
events cause this limit to be exceeded, the Corporate Bond Fund and Master
Portfolio will take steps to reduce the aggregate amount of illiquid securities
as soon as is reasonably practicable. The Corporate Bond Fund intends that
investments in securities that are not registered under the Securities Act of
1933 but may be purchased by institutional buyers under Rule 144A and for which
a liquid trading market exists as determined by the Board of Trustees of that
Portfolio or Bank of America (pursuant to guidelines adopted by the Board), will
not be subject to the Corporate Bond Fund's 15% limitation on illiquid
securities. This investment practice could have the effect of increasing the
level of illiquidity in the Corporate Bond Fund during any period that
institutional buyers under Rule 144A became uninterested in purchasing these
restricted securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolios. When a
purchase or sale of the
26
<PAGE> 31
same security is made at substantially the same time on behalf of the Portfolios
and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Portfolio or the size of the position
obtained or sold by a Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Portfolios'
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to a Portfolio are not less favorable than what
they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Portfolios' investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Although
no commissions are paid on bond transactions, purchases and sales are at net
prices which reflect dealers' mark-ups and mark-downs, and a higher portfolio
turnover rate for bond investments will result in the payment of more dealer
mark-ups and mark-downs than would otherwise be the case. Turnover may require
payment of brokerage commissions, impose other transaction costs and could
increase substantially the amount of income received by the Portfolio that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). The Master Portfolio's annual portfolio turnover is not
expected to exceed 300%, although the Portfolios' annual portfolio turnover
rates will not be a limiting factor in making investment decisions. See
"Financial Highlights" for the Corporate Bond Fund's and U.S. Government
Securities Fund's portfolio turnover rate for the period ended February 28,
1997.
MASTER-FEEDER STRUCTURE. The Intermediate Bond Fund is an open-end investment
portfolio that seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio which has the same investment
objective. The Intermediate Bond Fund may withdraw its investment in the Master
Portfolio at any time if the Board of Directors of the Company determines that
it is in the best interest of the Fund to do so. Upon such withdrawal, the Board
of Directors would consider what action might be taken, including the investment
of all of the assets of the Fund in another pooled investment entity having the
same investment objective as the Fund or the hiring of an investment adviser to
manage the Fund's assets in accordance with the investment policies described
above with respect to the Master Portfolio. See "Expense Summary," "Fund
Investments" and "Fund Management" for a description of this investment
objective and the investment policies, restrictions, management and expenses of
the Intermediate Bond Fund and the Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Intermediate Bond Fund and other entities that may invest in the
Master Portfolio from time to time (e.g., other investment companies and
commingled trust funds) will each be liable for all obligations of the Master
Portfolio. However, the risk of the Fund's incurring financial loss on account
of such liability is limited to circumstances in which both inadequate insurance
exists and a Portfolio itself is unable to meet its obligations. Accordingly,
the Company's Board of Directors believes that neither the Fund nor its
shareholders will be adversely affected by reason of the Fund's investing in the
Master Portfolio. As stated above, the investment objective of the Intermediate
Bond Fund and the Master Portfolio is a fundamental policy and may not be
changed, in the case of the Fund, without the vote of its shareholders or, in
the case of the Master Portfolio, without the vote of its interestholders. As
with any mutual
27
<PAGE> 32
fund, other investors in the Master Portfolio could control the results of
voting at the Master Portfolio level in certain instances (e.g. a change in
fundamental policies by the Master Portfolio which was not approved by the
Fund's shareholders). This could result in the Intermediate Bond Fund's
withdrawal of its investment in the Master Portfolio, and in increased costs and
expenses for the Fund. Further, the withdrawal of other entities that may from
time to time invest in the Master Portfolio could have an adverse effect on the
performance of the Master Portfolio and the Fund, such as decreased economies of
scale and increased per share operating expenses. In addition, the total
withdrawal by another investment company as an investor in the Master Portfolio
will cause the Master Portfolio to terminate automatically in 120 days unless a
Fund and any other investors in the Master Portfolio unanimously agree to
continue the business of the Master Portfolio. If unanimous agreement is not
reached to continue the Master Portfolio, the Board of Directors of the Company
would need to consider alternative arrangements for the Fund, such as those
described above. When the Fund is required to vote as a shareholder of the
Master Portfolio, current regulations provide that in those circumstances the
Fund may either seek instructions from its security holders with the regard to
voting such proxies and vote such proxies in accordance with such instructions
or the Fund may vote its shares in the Master Portfolio in the same proportion
of all other security holders in the Master Portfolio. The policy of the Fund,
and other similar investment companies to invest their investable assets in
trusts such as the Master Portfolio is a relatively recent development in the
mutual fund industry and, consequently, there is a lack of substantial
experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Master Portfolio which may have higher or lower fees and expenses than those of
its corresponding Fund and which may therefore have different performance
results than that Fund. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling 800-332-3863.
28
<PAGE> 33
================================================================================
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS
REGARDING BUYING AND SELLING THE FUND'S SHARES AND REGARDING THE FUND'S
DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
---------------------------------------------------------
- ---------------------------------------------------------
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.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS
ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books (d) accounts under Section 403(b)(7) of the
Code; (e) deferred compensation plans under Section 457 of the Code; and (f)
certain other retirement plans. The two classes of shares in each Fund represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares bear the expenses of a Shareholder Services Plan. K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such Plans. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Service Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A
29
<PAGE> 34
Shares. Each class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
NAV = -------------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Master Portfolio's, the Corporate Bond Fund's and the U.S. Government
Securities Fund's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Master Portfolio, the Corporate Bond Fund or U.S. Government Securities
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolio's
Board of Trustees, the Corporate Bond Fund's or the U.S. Government Securities
Fund's Board of Directors. Short-term debt securities are valued at amortized
cost, which approximates market value. For further information about valuing
securities, see the Statement of Additional Information. For price and yield
information, call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------ --------- --------- -----------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
To the extent that no other A Share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon or Time Horizon Fund
equals or exceeds $1,000,000.
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 by an investor who was a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - 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;
- - any purchase through FundStrategies(TM), including FundSelections(TM) from BA
Investment Services, Inc. and Fund Advisor(TM) or FundManager(TM) from Bank of
America;
30
<PAGE> 35
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Divison
or by or on behalf of agency accounts administered by any bank or trust
company affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open
on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain open on the
Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors and their spouses;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Fund may be purchased without a
front-end sales load pursuant to the Program.)
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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
Aggressive Growth Fund, the
31
<PAGE> 36
Pacific Horizon Capital Income Fund and shares of the Company's money market
funds that can be traced back to the purchase of shares carrying a sales load
(or any combination thereof) with an aggregate current value of $90,000. If you
subsequently purchase additional A Shares of a Fund carrying a sales load with a
current value of $10,000, the sales load applicable to the subsequent purchase
would be reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon 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.
HOW DO I DECIDE WHETHER TO BUY A OR K SHARES?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or K shares, you should consider all relevant
factors, including the dollar amount of your purchase, the length of time you
expect to hold the shares, the amount of any applicable front-end sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of A shares, whether you are eligible to purchase K
shares, and the relative level of services that are provided to different
classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the absence of a front-end sales charge. A Shares are
also subject to a shareholder services fee. Alternatively, when you purchase K
shares, you will not pay a front-end sales charge and all of your monies will be
fully invested at the time of purchase. However, K shares are subject to annual
distribution and/or administrative and shareholder service fees.
32
<PAGE> 37
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
===============================================================================
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Mail all subsequent
Application and mail it with investments to:
a check (payable to the
appropriate Fund) to the Pacific Horizon Funds, Inc.
address on the Account P.O. Box 182090
Application. The Company will Columbus, Ohio
not accept third party checks 43218-2090
for investment.
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Deliver your payment directly
3435 Stelzer Road Application and your payment to the address on the left.
Columbus, OH 43219-3035 directly to 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>
- --------------------------------------------------------------------------------
33
<PAGE> 38
- --------------------------------------------------------------------------------
TO BUY SHARES
-------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
- ----
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- ----
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Funds are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances
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<PAGE> 39
orders received by the entity by 4:00 p.m. Eastern time on a business day will
be effected as of 4:00 p.m. Eastern time that day if the order is actually
received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by a Fund. If you purchase or redeem
shares directly from a Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
a Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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- --------------------------------------------------------------------------------
TO SELL SHARES
===============================================================================
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Corporate Bond Fund, joint owner, must sign) to the Transfer Agent.
Intermediate Bond Fund, or
U.S. Government Securities If you hold stock certificates for the shares being
Fund redeemed, make sure to endorse them for transfer, have your
P.O. Box 182090 signature on them guaranteed by your bank or another
Columbus, Ohio 43218-2090 guarantor institution (as described in the section entitled
"What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
36
<PAGE> 41
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
payee from your Fund account in the amount of $500 or more.
The Transfer Agent (as your agent) will redeem the necessary
number of shares to cover the Check when it is presented for
payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s) and a set of
Checks will then be sent to the registered owner(s) at the
address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by
Check.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved in Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A Shares are redeemed, if you
purchase shares through Bank of America or a Service Organization they may
charge a fee for providing certain services in connection with investments in
Fund shares.
The Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
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<PAGE> 42
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. 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 Intermediate Bond Fund are entitled to dividends and
distributions arising from the net investment income and net realized gains, if
any, earned on investments in the Master
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<PAGE> 43
Portfolio which are allocable to the Fund. The Corporate Bond Fund's,
Intermediate Bond Fund's and U.S. Government Securities Fund's net realized
gains (after reduction for capital loss carryforwards, if any) are distributed
at least annually. Dividends from the Corporate Bond Fund's and U.S. Government
Securities Fund's net investment income are declared daily and paid within five
business days after the end of each month. Dividends from the Intermediate Bond
Fund's net investment income are declared monthly and paid within five days
after the end of each month. Fund shares begin earning dividends the day after
payment in federal funds is received for such shares through the business day
such shares are redeemed.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be cancelled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at P.O. Box 182090,
Columbus, Ohio 43218-2090. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
================================================================================
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
================================================================================
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Funds' distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and should
consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
39
<PAGE> 44
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares, and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
An investment in a Fund automatically entitles you to use this Privilege, unless
you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How To Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use
40
<PAGE> 45
such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder. If
you should experience difficulty in contacting the Transfer Agent to place
telephone redemptions (including telephone wire redemptions), for example
because of unusual market activity, you are urged to consider redeeming your
shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund
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<PAGE> 46
account automatically invested in shares of any other investment portfolio of
the Company, or in like shares of any Time Horizon Fund, provided such shares
are held in a non-retirement account. To participate in this program, known as
the Directed Distribution Plan, check the appropriate box and supply the
necessary information on the Account Application or subsequently send a written
request to the Transfer Agent. Participants in the Directed Distribution Plan
are subject to the minimum initial investment requirements of the particular
fund involved. Investments will be made at a price equal to the net asset value
of the purchased shares next determined after receipt of the distribution
proceeds by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
================================================================================
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolios. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
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 eleven U.S. states as well as corporate offices in major
U.S. cities and branches, corporate offices and representative offices in 37
foreign countries and territories.
In separate advisory agreements with Master Trust and the Company (collectively,
the "Advisory Agreements"), Bank of America has agreed to manage the Portfolios'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolios' securities. The
investment advisory agreement with respect to the Master Portfolio also provides
that Bank of America may: 1) in its discretion, provide advisory services
through its own employees or employees of one or more of its affiliates that are
under the common control of Bank of America's parent, BankAmerica Corporation,
provided such employees are under the management of Bank of America and 2)
employ a sub-adviser provided that Bank of America remains fully responsible to
42
<PAGE> 47
the Master Portfolio for the acts and omissions of the sub-adviser.
Since March 1996, portfolio management services for the Portfolios have been
conducted by an investment committee of the Fixed Income Division of the
Investment Management Services Group of Bank of America, and no one person is
primarily responsible for making recommendations to that committee.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.45% , 0.30%
and 0.35% of the Corporate Bond Fund's, Master Portfolio's and U.S. Government
Securities Fund's respective average daily net assets. These amounts may be
reduced pursuant to undertakings by Bank of America. (See the information below
under "Fee Waivers.") Prior to June 23, 1997, Bank of America was entitled to
receive an investment advisory fee at the annual rate of 0.45% of the Master
Portfolio's average daily net assets. On September 1, 1996, the Corporate Bond
Fund withdrew its investment in the Corporate Bond Master Portfolio, an
investment portfolio of the Master Trust having the same investment objective as
the Corporate Bond Fund, and began investing directly in portfolio securities
pursuant to a new investment advisory agreement between the Company and Bank of
America which superseded the existing advisory agreement between the Master
Trust and Bank of America with respect to the Corporate Bond Master Portfolio.
For the period March 1, 1996 through August 31, 1996, Bank of America waived its
entire investment advisory fee payable by the Corporate Bond Master Portfolio.
For the period September 1, 1996 through February 28, 1997, Bank of America
waived its entire investment advisory fee payable by the Corporate Bond Fund.
During the fiscal year ended February 28, 1997, the Master Portfolio paid Bank
of America advisory fees at an effective annual rate of 0.17% of the Master
Portfolio's average daily net assets, and Bank of America waived a portion of
its fee with respect to the Master Portfolio at an effective annual rate of
0.28% of its average daily net assets. For the same period, Bank of America also
reimbursed a portion of the operating expenses with respect to the Corporate
Bond Fund and the Intermediate Bond Fund. For the fiscal year ended February 28,
1997, the U.S. Government Securities Fund paid Bank of America advisory fees at
the effective annual rate of 0.18% the Fund's average daily net assets and Bank
of America waived a portion of its fee at an effective annual rate of 0.17% of
the Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
The BISYS Group Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Funds and the Master Portfolio.
Their offices are located at 150 Clove Road, Little Falls, New Jersey 07424 and
3435 Stelzer Road, Columbus, Ohio 43219-3035, respectively. Prior to November 1,
1996, Concord Holding Corporation ("Concord"), an indirect, wholly-owned
subsidiary of BISYS served as administrator.
Under its administration agreements with the Company and Master Portfolio, BISYS
has agreed to: pay the costs of maintaining the offices of the Company and the
Master Portfolio; provide a facility to receive purchase and redemption orders;
provide statistical and research data, data processing services and clerical
services; coordinate the preparation of reports to shareholders of the Funds,
interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolio; calculate the net asset value of
the Funds and the Master
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<PAGE> 48
Portfolio; calculate the dividends and capital gains distributions paid to
shareholders; and generally assist in all aspects of the operations of the Funds
and the Master Portfolio.
For its services as administrator, BISYS is entitled to receive an
administration fee from the U.S. Government Securities Fund and Corporate Bond
Fund at the annual rate of 0.20% of each Fund's respective average daily net
assets, and an administration fee at the annual rate of 0.15% of the
Intermediate Bond Fund's average daily net assets. BISYS also is entitled to
receive an administration fee from the Master Portfolio's net assets, at an
annual rate of 0.05% of the Master Portfolio's average daily net assets. These
amounts may be reduced pursuant to undertakings by BISYS. (See the information
below under "Fee Waivers.") Prior to September 1, 1996, Concord was entitled to
receive an administration fee payable at the annual rate of 0.15% of the
Corporate Bond Fund's average daily net assets and 0.05% of the Corporate Bond
Master Portfolio's average daily net assets. For the period March 1, 1996
through August 31, 1996, Concord waived its entire administration fee payable by
the Corporate Bond Master Portfolio. For the fiscal year ended February 28,
1997, Concord and BISYS waived their entire administration fee payable by the
Corporate Bond Fund. For the same period, the Master Portfolio paid Concord or
BISYS administration fees at an effective annual rate of 0.02% of the Master
Portfolio's average daily net assets, and Concord or BISYS waived a portion of
its fee at an effective annual rate of 0.03% of such Portfolio's average daily
net assets. For the fiscal year ended February 28, 1997, Concord or BISYS waived
its entire administration fee payable by the Intermediate Bond Fund. For the
same period, Concord and/or BISYS also reimbursed a portion of the operating
expenses with respect to the Corporate Bond Fund, Intermediate Bond Fund and
U.S. Government Securities Fund. For the fiscal year ended February 28, 1997,
the U.S. Government Securities Fund paid Concord and BISYS an administration fee
at an effective annual rate of 0.10% of such Fund's average daily net assets,
and Concord and BISYS waived a portion of its fee at an effective annual rate of
0.10% of such Fund's average daily net assets.
Pursuant to the authority granted in its administration agreements, BISYS or a
subcontractor has entered into agreements with PFPC, Inc. ("PFPC") (with respect
to the Corporate Bond Fund, Intermediate Bond Fund and the Master Portfolio) and
The Bank of New York ("BONY") (with respect to the U.S. Government Securities
Fund) under which PFPC (and an offshore affiliate of PFPC) and BONY provide
certain accounting, bookkeeping, pricing and dividend and distribution
calculation services to the Funds and the Master Portfolio. The Corporate Bond
Fund, Intermediate Bond Fund and the Master Portfolio bear all fees and expenses
charged by PFPC, and the U.S. Government Securities Fund bears all fees and
expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Corporate Bond Fund,
Intermediate Bond Fund and the Master Portfolio. The Bank of New York, 90
Washington Street, New York, New York 10286, serves as Custodian of the U.S.
Government Securities Fund. BISYS Fund Services, Inc., a wholly-owned subsidiary
of BISYS, is the transfer and dividend disbursing agent for each of the Funds
and is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with
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the performance of their services and the Funds and Master Portfolio bear the
expenses incurred in their operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of each Fund's fiscal year, Bank of
America and/or BISYS may prospectively choose not to receive fee payments and/or
may assume certain expenses of the Funds or Master Portfolio as a result of
competitive pressures and in order to preserve and protect the business and
reputation of BISYS and Bank of America. However, the service providers retain
the ability to discontinue such fee waivers and/or expense reimbursements at any
time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND
DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT STATEMENTS BECAUSE THEY
CONTAIN
INFORMATION YOU WILL NEED TO CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR
ULTIMATE SALE OR
EXCHANGE OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code. It is expected that the Master Portfolio will not
be subject to federal income taxes. The Master Portfolio intends to qualify as a
partnership (or other pass-through entity) for federal income tax purposes. As
such, the Master Portfolio is not subject to tax, and the Intermediate Bond Fund
will be treated for federal income tax purposes as recognizing a pro rata share
of the Master Portfolio's income and deductions and owning a pro rata share of
the Master Portfolio's assets. The Intermediate Bond Fund's status as a
regulated investment company is dependent on, among other things, its Master
Portfolio's continued qualification as a partnership (or other pass-through
entity) for federal income tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The Company
expects that none of the dividends paid by the Funds will qualify for the
dividends received deduction for domestic corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a dividend, you should be aware that the amount of a forthcoming
dividend, although in effect a return of capital, will be taxable to you.
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<PAGE> 50
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Corporate Bond Fund, to the extent attributable to fluctuations in
currency or exchange rules, as well as other gains or losses attributable to
exchange rate fluctuations, are typically treated as ordinary income or loss.
Such income or loss may increase or decrease (or possibly eliminate) income
available for distribution. If, under the rules governing the tax treatment of
foreign currency gains and losses, income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the
Corporate Bond Fund may be treated for federal income tax purposes as a return
of capital, or in some circumstances, as capital gain. Generally, your tax basis
in your Corporate Bond Fund shares will be reduced to the extent that an amount
distributed to you is treated as a return of capital.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from such federal tax consequences described above.
A substantial portion of the dividends that you receive from the U.S. Government
Securities Fund are derived from such Fund's investments in U.S. Government
obligations. These dividends may not be entitled to the same exemptions from
state and local taxes that would have been available if you had purchased U.S.
Government obligations directly.
================================================================================
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND
IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30-day
period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each Fund may also advertise total
return data without reflecting the sales load
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<PAGE> 51
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
================================================================================
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 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class E Common Stock, 100 million shares of Class E -- Special Series 3 Common
Stock and 100 million shares of Class E -- Special Series 5 Common Stock,
representing interests in the U.S. Government Securities Fund; 100 million
shares of Class M Common Stock, 100 million shares of Class M -- Special Series
3 Common Stock, 100 million shares of Class M -- Special Series 5 Common Stock,
and 100 million shares of Class M -- Special Series 7 Common Stock, representing
interests in the Intermediate Bond Fund and 100 million shares of Class W Common
Stock, 100 million shares of Class W -- Special Series 3 Common Stock and 100
million shares of Class W -- Special Series 5 Common Stock, representing
interests in the Corporate Bond Fund; and additional classes of shares
representing interests in other investment portfolios of the
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Company. Class E, M and W Common Stock are the "A" Shares, Class E, M and
W -- Special Series 3 Common Stock are the "M" Shares, Class E , M and
W -- Special Series 5 Common Stock are the "K" Shares and Class M -- Special
Series 7 Common Stock are the "SRF" Shares. As of the date of this Prospectus, M
Shares have not been offered to the public. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class E Common
Stock, Class E -- Special Series 3 Common Stock, Class E -- Special Series 5
Common Stock, Class M Common Stock, Class M -- Special Series 3 Common Stock,
Class M -- Special Series 5 Common Stock, Class M -- Special Series 7 Common
Stock, Class W Common Stock, Class W -- Special Series 3 Common Stock or Class
W -- Special Series 5 Common Stock) into one or more series. This Prospectus
relates primarily to the Funds' A and K Shares. For more information about the
Intermediate Bond Fund's SRF Shares or about the Company's other portfolios,
contact the Company at the telephone number listed on the cover page of this
Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into the
Company. A Shares are sold to investors choosing the front-end sales charge
alternative unless an exemption to the sales charge is otherwise available,
which is the case for eligible retirement accounts. A Shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. K Shares are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. K Shares, however, are sold only to: (a) businesses and other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; (c) accounts opened for IRA rollovers from a
401(k) plan in which the assets were held in any Fund of the Company or a Time
Horizon Fund and subsequent purchases into an IRA rollover account, so long as
the original IRA rollover account remains open on the Company's books; (d)
accounts under Section 403 (b) (7) of the Code; (e) deferred compensation plans
under Section 457 of the Code; and (f) certain other retirement plans.
A Shares, K Shares and SRF Shares each have certain purchase, redemption and
exchange privileges. Additionally, A and K Shares have certain shareholder
services, such as TeleTrade, an automatic investment program, an automatic
withdrawal plan, a directed distribution plan and a direct deposit program.
The three classes of shares in the Intermediate Bond Fund and the two classes of
shares in the Corporate Bond and U.S. Government Securities Funds which are
publicly offered represent interests in the same portfolio of investments of the
particular Fund, have the same rights and are identical in all respects except
(a) SRF Shares and A Shares bear the expenses of their respective Shareholder
Services Plans; and (b) K Shares bear the expenses of a Distribution Plan and/or
Administrative and Shareholder Services Plan. Each class of shares have
different exchange privileges.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of
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the particular Fund upon liquidation. The net income attributable to SRF, A and
K Shares and the dividends payable on such Shares will be reduced by the amount
of the: (a) Shareholder Services Plan fees attributable to SRF Shares and A
Shares, respectively, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans. SRF, A and K Shares may
have different performance results due to sales charges and other expenses
attributable to distribution, administrative service and/or shareholder
servicing plans applicable with respect to a particular share class. 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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares, only holders of K Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution Plan and Administrative and Shareholder Services Plan
attributable to K Shares, and only holders of SRF Shares will be entitled to
vote on matters submitted to a vote of shareholders relating to the Shareholder
Services Plan attributable to SRF Shares. The Funds do not presently intend to
hold annual meetings of shareholders to elect directors or for other business
unless and until such time as less than a majority of the directors holding
office have been elected by the shareholders. At that time, the directors then
in office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
================================================================================
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the
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beneficial owners of Fund shares, such as: establishing and maintaining accounts
and records relating to the Service Organization's clients who invest in Fund
shares; assisting those clients in processing exchange and redemption requests
and in changing dividend options and account designations; and responding to
inquiries from clients concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1997 the Corporate Bond Fund, Intermediate Bond
Fund and U.S. Government Securities Fund made payments under the Plan at
effective annual rates of 0.25% , 0.16% and 0.25% of the average daily net
assets with respect to A Shares of the Corporate Bond, Intermediate Bond and
U.S. Government Securities Funds, respectively.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Funds (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K shareholders of the Funds) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Funds
necessary for accounting or
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<PAGE> 55
sub-accounting, and providing statements periodically to clients showing their
position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plans, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
For the fiscal year ended February 28, 1997, the Corporate Bond, Intermediate
Bond and U.S. Government Securities Funds made payments under the Distribution,
Administrative and Shareholder Services Plans at the effective annual rate of
0.75%, 0.75% and 0.75%, of the average daily net assets with respect to such
Funds' K Shares, and the Distributor waived Fees under the Distribution,
Administrative and Shareholder Services Plans at the effective annual rate of
0.25%, 0.25% and 0.25% of the average daily net assets with respect to such
Funds' K shares.
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================================================================================
APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa -- judged to be of high quality by all
standards; A -- deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa -- considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default. Moody's
applies numerical modifiers 1, 2 and 3 in each generic rating classification
from Aa to B. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks at the lower end of its
generic rating category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and to repay principal for
debt in this category than for higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of speculation and
"C" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "CI" is
reserved for income bonds on which no interest is being paid. Debt rated "D" is
in default. This rating is used when interest payments or principal payments are
not made on the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized. The ratings from "AA" to
"CCC" may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Excerpts from Fitch's description of its corporate bond ratings:
"AAA" -- considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA" -- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A" -- deemed investment grade and of high credit quality,
although the capacity to pay interest and repay principal may be more
susceptible to the adverse changes
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in economic conditions and circumstances than bonds with higher ratings; "BBB"
is considered to be investment grade and is regarded as having satisfactory
credit quality with an adequate capacity to pay interest and repay principal
although adverse changes in economic conditions and circumstances are more
likely to impair timely payment than for higher rated categories; "BB," "B,"
"CCC," "CC," "C," " DDD," "DD," and "D" -- regarded as speculative investments.
The ratings "BB" to "C" represent the likelihood of timely payment of principal
and interest in accordance with the terms of obligation for bond issues not in
default. For defaulted bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation. The ratings from
"AA" to "BBB" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch short-term ratings apply to debt obligations that are payable on demand or
have original maturities of generally up to three years. The designation "F-1"
indicates that the securities possess very strong credit quality. Those
securities determined to possess exceptionally strong credit quality are denoted
with a plus (+) sign designation. Securities rated "F-2" are considered to
possess good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
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<PAGE> 58
TFI-0010
PACIFIC HORIZON MUTUAL FUNDS
CORPORATE BOND FUND
INTERMEDIATE BOND FUND
U.S. GOVERNMENT
SECURITIES FUND
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 59
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
International Equity Fund
----------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
Part A
<S> <C> <C>
1. Cover Page................................................. Cover Page
2. Synopsis................................................... Expense Summary
3. Condensed Financial Information............................ Measuring Performance
4. General Description of Registrant.......................... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund..................................... The Business of the Fund
5.A. Management's Discussion of
Fund Performance......................................... *
6. Capital Stock and Other
Securities............................................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered................................................... How to Buy Shares; Shareholder
Services; The Business of the
Fund; Plan Payments; Measuring
Performance
8. Redemption or Repurchase................................... How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings.................................. *
</TABLE>
- ----------
* Item inapplicable or answer negative.
<PAGE> 60
PROSPECTUS
JUNE 24, 1997
PACIFIC HORIZON INTERNATIONAL EQUITY FUND
Investment Portfolio Offered by Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON INTERNATIONAL EQUITY FUND (the "Fund") is a diversified
mutual fund whose investment objective is to seek long-term capital growth
primarily through investments in foreign equity securities.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"), an open-end,
series management investment company. Bank of America National Trust and Savings
Association ("Bank of America" or the "investment adviser") serves as the Fund's
investment adviser. Based in San Francisco, California, Bank of America and its
affiliates have over $50 billion under management, including over $14 billion in
mutual funds. Wellington Management Company, LLP ("Wellington Management")
serves as sub-adviser to the Fund.
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 June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, in
connection with the offering of the Fund's shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Fund or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Fund or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 61
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
FUND INVESTMENTS 7 INVESTMENT OBJECTIVE
7 TYPES OF INVESTMENTS
9 FUNDAMENTAL LIMITATIONS
9 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 14 HOW TO BUY SHARES
14 What Is My Minimum Investment In The Fund?
14 What Alternative Sales Arrangements Are Available?
14 How Are Shares Priced?
17 How Do I Decide Whether To Buy A or K Shares?
19 How Can I Buy Shares?
20 What Price Will I Receive When I Buy Shares?
21 What Else Should I Know To Make A Purchase?
21 HOW TO SELL SHARES
21 How Do I Redeem My Shares?
23 What NAV Will I Receive For Shares I Want To Sell?
23 What Kind Of Paperwork Is Involved In Selling
Shares?
23 How Quickly Can I Receive My Redemption Proceeds?
24 Do I Have Any Reinstatement Privileges After
I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION 24
POLICIES
SHAREHOLDER SERVICES 25 CAN I USE THE FUND IN MY RETIREMENT PLAN?
25 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
26 WHAT IS TELETRADE?
26 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
26 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
27 CAN I ARRANGE PERIODIC WITHDRAWALS?
27 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
27 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 28 FUND MANAGEMENT
28 Expenses
28 Service Providers
30 Fee Waivers
TAX INFORMATION 31
MEASURING PERFORMANCE 32
DESCRIPTION OF SHARES 33
PLAN PAYMENTS 35
DISTRIBUTOR: INVESTMENT ADVISER: SUB-ADVISER:
Concord Financial Group, Inc. Bank of America National Trust Wellington Management
3435 Stelzer Road and Savings Association Company, LLP
Columbus, OH 43219-3035 555 California Street 75 State Street
San Francisco, CA 94104 Boston, MA 02109
</TABLE>
<PAGE> 62
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 15 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A and K Shares and the operating expenses expected to be incurred during the
current fiscal year with respect to A and K Shares. Actual expenses may vary. A
hypothetical example based on the summary is also shown.
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None
Maximum Sales Load Imposed
on Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0.30% 0.30%
12b-1 Fees (or in the case
of certain Class K Shares,
Administrative Service Fees
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses (After Fee
Waivers and Expense
Reimbursements)+ 0.95% 0.95%
----- -----
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 1.50% 2.00%
===== =====
</TABLE>
+ Absent fee waivers and/or expense reimbursements, Management Fees for each
class of shares of the Fund would be 0.95% of the average net assets
(annualized); Other Expenses for the Fund's A and K shares would be 1.04% of
average net assets (annualized) and Total Operating Expenses for the Fund's A
and K Shares would be 2.24% and 2.99% of average net assets (annualized),
respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Fund as shown in the above table, long-term K shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the NASD Regulations, Inc. For a further description of
shareholder transaction expenses and the Fund's operating expenses, see the
sections entitled "Shareholder Guide", "The Business of the Fund" and "Plan
Payments" below.
2
<PAGE> 63
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 60 $90 $ 123 $216
K Shares $ 20 $63 $ 108 $233
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.75% of the Fund's
daily net assets; and
- - an administration fee payable at the annual rate of 0.20% of the Fund's
average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a front-
end sales charge nor a contingent deferred sales charge, but incur fees under a
Distribution Plan and/or an Administrative and Shareholder Services Plan, with
respect to K Shares. See the section entitled "How Do I Decide Whether to Buy A
or K Shares?" on page 17.
3
<PAGE> 64
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the period indicated. The Fund commenced operations on May 13, 1996
by offering a single series of shares known as A Shares, and initially funded K
Shares on July 22, 1996. Prior to September 1, 1996, the Fund operated as part
of a master-feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company (the "Master
Portfolio") which had an identical investment objective. On September 1, 1996,
the Fund withdrew its assets from the Master Portfolio and invested them
directly in portfolio securities. The information has been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference in
the Statement of Additional Information.
The Financial Highlights should be read in conjunction with such financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund is
available in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
4
<PAGE> 65
Selected data for an A Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997(A)
--------------------
<S> <C>
Net asset value per share, beginning of period $ 10.00
-------
Income from Investment Operations:
Net investment income (0.01)
Net realized and unrealized gains on investment transactions (0.07)
-------
Total income from investment operations (0.08)
Less Dividends and Distributions:
Distributions to shareholders from net realized gains on investment
transactions (0.01)
-------
Net change in asset value per share (0.09)
-------
Net asset value per share, end of period $ 9.91
=======
Total Return (0.79)%**
Ratios/supplemental data:
Net assets, end of period (000) $ 16,217
Ratio of expenses to average net assets* 0.92%(b)
Ratio of net investment income to average net assets* 0.40%(b)
Portfolio Turnover Rate 114%(c)
Average Commission Rate Paid $ 0.0353(d)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee waivers and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 3.00% and 3.01% respectively, for
the period ended February 28, 1997.
** The total return listed is not annualized for the period ended February 28,
1997, and does not include the effect of the maximum 4.50% sales charge on A
Shares.
(a) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
(b) Annualized.
(c) Not Annualized.
(d) Represents the dollar amount of commissions paid on Fund transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
5
<PAGE> 66
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997(A)
--------------------
<S> <C>
Net asset value per share, beginning of period $ 9.82
-------
Income from Investment Operations:
Net investment (loss) (0.01)
Net realized and unrealized gains on investment transactions 0.08
-------
Total income from investment operations 0.07
Distributions to shareholders from net realized gains on investment
transactions (0.01)
-------
Net change in asset value per share 0.06
-------
Net asset value per share, end of period $ 9.88
=======
Total return 0.72%**
Ratios/supplemental data:
Net assets, end of period (000) $ 116
Ratio of expenses to average net assets* 1.49%(b)
Ratio of net investment income to average net assets* (0.31)%(b)
Portfolio Turnover rate 114%**
Average Commission rate paid $ 0.0353(c)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and or reimbursed.
Such fee waivers and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 2.04% and 2.03%, respectively,
for the period ended February 28, 1997.
** Not annualized.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Annualized.
(c) Represents the dollar amount of commissions paid on fund transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
6
<PAGE> 67
================================================================================
FUND INVESTMENTS
---------------------------------------------------------
INVESTMENT OBJECTIVE
The Pacific Horizon International Equity Fund seeks long-term capital growth by
investing primarily in foreign equity securities. The Fund may be appropriate
for investors who want to diversify their investments into foreign equity
markets and who are prepared to accept the risks entailed in such investments.
WHILE THE FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. During normal market conditions, the Fund will invest at least 80%
of its total assets in equity securities of companies that are domiciled or have
their principal activities in countries outside the United States. Normally, the
Fund will invest in equity securities of companies in at least three different
foreign countries. The domicile or the location of the principal activities of a
company will be the country under whose laws the company is organized, in which
the principal trading market for the equity securities issued by the company is
located, or in which the company has over half of its assets or derives over
half of its revenues or profits. Equity securities in which the Fund may invest
consist of common stocks, preferred stocks, securities convertible into common
stocks or preferred stocks, and warrants to purchase such securities. The Fund
may also invest in futures and options for purposes of adjusting country
exposure, hedging, or income enhancement. The Fund will be primarily invested in
securities denominated in currencies other than the U.S. dollar; currency will
be hedged at the discretion of Wellington Management.
The Fund may invest up to 20% of its total assets (at the time of purchase) in
convertible bonds and debt securities. These debt obligations include U.S.
Government and foreign government securities and corporate debt securities,
including Samurai and Yankee bonds and Euro-bonds. The Fund will limit its
purchases of debt securities to investment grade obligations. "Investment grade"
debt refers to those securities rated within one of the four highest ratings
categories by Moody's Investors Service, Inc. ("Moody's") or by Standard &
Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit Co.
("D&P"), or Fitch Investors Service, Inc. ("Fitch"), or, if unrated, deemed by
Bank of America or Wellington Management to be of equivalent quality. Securities
rated in the lowest category of investment grade, Baa by Moody's or BBB by S&P,
D&P or Fitch may have speculative characteristics.
In the event that the rating of any security held by the Fund falls below the
required rating, the Fund will not be obligated to dispose of such security and
may continue to hold the security if, in the opinion of Bank of America or
Wellington Management, such investment is considered appropriate under the
circumstances.
The Fund may also invest, without limitation, in securities of foreign issuers
in the form of American Depositary Receipts ("ADRs") or other similar securities
evidencing ownership of underlying securities issued by foreign issuers. ADRs
purchased for the Fund will be included as part of the 80% of assets in foreign
equity securities. These securities may not necessarily be denominated in the
same currency as the securities underlying the ADRs. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying foreign securities. Generally, ADRs, in registered form, are designed
for use in U.S. securities markets.
During temporary defensive periods when Bank of America or Wellington Management
believe
7
<PAGE> 68
such a position is warranted by uncertain or unusual market conditions, the Fund
may invest without limit in securities issued or guaranteed by the U.S.
Government (and its agencies and instrumentalities), foreign or domestic money
market instruments and investment grade debt securities, or may hold its assets
in cash (U.S. dollars, foreign currencies or multinational currency units).
RISK FACTORS. Although investing in any mutual fund has certain inherent risks,
an investment in the Fund may have even greater risks than investments in most
other types of mutual funds. The Fund is not a complete investment program, and
it may not be appropriate for an investor if he or she cannot bear financially
the loss of at least a significant portion of his or her investment. The Fund's
net asset value per share is subject to rapid and substantial changes because
greater risk is assumed in seeking the Fund's objective.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers carry certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Fund will invest heavily in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will, to the extent the Fund does not hedge against such fluctuations,
affect the value of securities in the Fund so far as U.S. investors are
concerned. Foreign currency exchange rates are determined by forces of supply
and demand on the foreign exchange markets and the regulatory control of the
exchanges on which the currencies trade. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Costs are
incurred in connection with conversions between various currencies.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or as
uniform as, those of U.S.-based companies. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than U.S.
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable U.S.-based companies. There
is generally less government supervision and regulation of foreign exchanges,
brokers and issuers than there is in the United States. The Fund may have
greater difficulty taking appropriate legal action in a foreign court than in a
United States court.
The expense ratio of the Fund can be expected to be higher than that of funds
investing in domestic securities. The costs attributable to investing abroad are
usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
Interest and dividends payable on the Fund's foreign portfolio securities may be
subject to foreign withholding taxes. To the extent such taxes are not offset by
credits or deductions allowed to investors under U.S. federal income tax
provisions, they may reduce the net return to the Funds' shareholders. See "Tax
Information."
ADDITIONAL INVESTMENTS. When not invested in the securities described above,
the Fund may invest in other types of securities subject to the limitations
described previously.
The Fund may purchase bank obligations including certificates of deposit and
bankers' accept-
8
<PAGE> 69
ances issued by domestic or foreign banks or financial institutions that have
total assets of more than $2.5 billion. The Fund may also make interest-bearing
savings deposits in commercial banks in amounts not exceeding 5% of its total
assets.
Commercial paper rated in the top rating category by S&P, Moody's, D&P or Fitch
and unrated commercial paper determined to be of comparable quality by Bank of
America or Wellington Management may also be purchased.
As noted above, the Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Obligations of some of
these agencies and instrumentalities, such as the Small Business Administration
or the Maritime Administration, are backed by the full faith and credit of the
U.S. Government; others, like the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, including the Student Loan Marketing
Association, are backed solely by the issuer's credit. There is no assurance
that the U.S. Government would support a U.S. Government-sponsored entity if it
was not required to do so by law.
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund 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." Included in the
Fund's fundamental investment limitations is the restriction that the Fund may
not borrow money for the purpose of obtaining investment leverage or issue
senior securities (as defined in the Investment Company Act of 1940 (the "1940
Act")), provided that the Fund may borrow from banks for temporary purposes and
in an amount not exceeding 10% of the value of the total assets of the Fund; or
mortgage, pledge or hypothecate any assets, except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of its total assets at the time of such borrowing.
This restriction shall not apply to (a) the sale of portfolio securities
accompanied by a simultaneous agreement as to their repurchase, or (b)
transactions in currency, options, futures contracts and options on futures
contracts, or forward commitment transactions.
A complete list of the fundamental investment limitations is set out in full in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Fund may write covered put and call options and purchase put and
call options on U.S. or foreign securities that are traded on United States and
foreign securities exchanges and in over-the-counter markets.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian.
Put options written by the Fund give the holder the right to sell the underlying
security to the Fund at a stated exercise price. A put option written by the
Fund is "covered" if the Fund maintains cash or other liquid portfolio
securities with a value equal to the exercise price in a segregated account with
its custodian, or holds a put on the same security and in the same principal
amount as the put written and the
9
<PAGE> 70
exercise price of the put held is equal to or greater than the exercise price of
the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign securities exchanges are similar
to the risks of investing in foreign securities. In addition, a foreign exchange
may impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option plus transaction costs. The Fund may purchase
call options to hedge against an increase in the price of securities that the
Fund anticipates purchasing in the future. The premium paid for the call option
plus any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option. Unless the price of the underlying security rises
sufficiently, the call option may expire worthless to the Fund.
The Fund's options transactions will be limited as follows: a) not more than 5%
of the total assets of the Fund may be invested in options; b) the obligations
of the Fund under put options written by the Fund may not exceed 50% of the
Fund's net assets; and c) the aggregate premiums on all options purchased by the
Fund may not exceed 25% of the Fund's net assets.
The Fund may buy put and call options on various stock indices. In contrast to
an option on a particular security, an option on a stock index provides the
holder with the right to make or receive a cash settlement upon exercise of the
option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write put and call
options on foreign currencies to increase the Fund's gross income and for the
purpose of protecting against declines in the United States dollar value of
foreign currency-denominated portfolio securities and against increases in the
United States dollar cost of such securities to be acquired. As with other kinds
of options, however, writing an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. Purchasing an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium paid plus related transaction costs.
Options on foreign currencies written or purchased by the Fund may be traded on
United States and foreign exchanges or over-the-counter. There is no specific
percentage limitation on the Fund's investments in options on foreign
currencies.
STOCK INDEX, INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS AND
OPTIONS. The Fund may purchase and sell stock index, interest rate and foreign
currency futures contracts (as well as purchase and sell related options) for
purposes of adjusting country exposure, in an effort to hedge against changes in
the value of securities that the Fund holds in its portfolio or which it intends
to purchase, or as a substitute for purchasing or selling the underlying
security. Such changes could occur as a result of market conditions or
fluctuating currency exchange rates. These transactions will only be entered
into when deemed appropriate by Bank of America or Wellington Management to
reduce the risks inherent in the management of the Fund.
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 aggregate
amount of initial margin deposits on its existing futures positions and the
amount of premiums paid for related options does not
10
<PAGE> 71
exceed 5% of the Fund's total assets (after taking into account certain
technical adjustments). Equity-related options and futures will be included in
the Fund's equity assets for purposes of the 80% test.
More information regarding futures contracts and related options can be found in
Appendix A to the Statement of Additional Information.
POTENTIAL RISKS OF OPTIONS AND FUTURES. The successful use of the foregoing
investment techniques depends on the ability of Bank of America or Wellington
Management to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of futures contracts or options or
may realize losses and thus be in a worse position than if such strategies had
not been used. Unlike many exchange-traded futures contracts and options on
futures contracts, there are no daily price fluctuation limits with respect to
options on currencies, and adverse market movements could therefore continue to
an unlimited extent over a period of time. In addition, the correlation between
movements in the prices of such instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses. The Fund's ability to dispose of its positions in
futures contracts, options and forward contracts will depend on the availability
of liquid markets in such instruments. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. In order to prevent leverage in connection with the purchase of
futures contracts or call options thereon by the Fund, an amount of cash, cash
equivalents or liquid portfolio 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.
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 or Wellington Management,
under guidelines approved by the Fund'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 or Wellington Management 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 action or
delays connected with the disposition of the underlying obligations. Repurchase
agreements are considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary purposes
by entering into reverse repurchase agreements. Under these agreements the Fund
sells portfolio securities to financial institutions (such as banks and
broker-dealers) and agrees to buy them back at an agreed upon time and price.
When the Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by Bank of America or Wellington
Management to make sure that an appropriate value is maintained. Reverse
repurchase agreements involve the risk that the value of portfolio securities
the Fund relinquishes may decline below the price the Fund must pay when the
transaction closes. Reverse repurchase agreements are considered to be
borrowings by the Fund under the 1940 Act. Borrowings may magnify the potential
for gain or loss on amounts
11
<PAGE> 72
invested resulting in an increase in the speculative character of the Fund's
outstanding shares. The Fund will only enter into reverse repurchase agreements
to avoid the need to sell portfolio securities to meet redemption requests
during unfavorable market conditions.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The 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 Fund's total assets under normal circumstances. These
transactions will not be entered into for speculative purposes, but primarily to
hedge against anticipated changes in interest rates.
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to financial institutions (such as banks and brokers) that
Bank of America or Wellington Management consider to be of good standing.
Borrowers of portfolio securities may not be affiliated directly or indirectly
with the Company or the Fund. If the financial institution should become
bankrupt, however, the Fund could experience delays in recovering its
securities. A securities loan will only be made when, in the judgment of Bank of
America or Wellington Management, the possible reward from the loan justifies
the possible risks. In addition, such loans will not be made if, as a result,
the value of securities loaned by the Fund exceeds 30% of its total assets.
Securities loans will be fully collateralized.
INVESTMENT COMPANY SECURITIES. The Fund may acquire shares of open and
closed-end investment companies, including companies that invest in foreign
issuers and money market mutual funds advised by Bank of America, subject to the
requirements of applicable securities laws. No more than 10% of the value of the
Fund's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one investment
company; except with respect to the investment in a money market mutual fund
advised by Bank of America, the Fund is permitted to invest the greater of 5% of
its net assets or $2.5 million. In addition, the Fund may hold no more than 3%
of the outstanding voting stock of any other investment company. Although these
investment companies may have policies that differ from the Fund's policies,
their management and other types of expenses will be similar to those borne by
the Fund. When the Fund invests in another investment company, it pays a pro
rata portion of that company's expenses. Such expenses are in addition to the
expenses the Fund pays in connection with its own operations.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
net assets (determined at the time of acquisition) in securities that are
illiquid. If, after the time of acquisition, events cause this limit to be
exceeded, the Fund will take steps to reduce the aggregate amount of illiquid
securities as soon as is reasonably practicable. The Fund intends that
investments in securities that are not registered under the Securities Act of
1933 but may be purchased by institutional buyers under Rule 144A and for which
a liquid trading market exists as determined by the Board of Directors, Bank of
12
<PAGE> 73
America, or Wellington Management (pursuant to guidelines adopted by the Board),
will not be subject to the Fund's 15% limitation on illiquid securities. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund during any period that institutional buyers under Rule 144A become
uninterested in purchasing these securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made
independently from those for other investment companies and accounts managed by
Bank of America or Wellington Management and their 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 or Wellington Management. 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.
From time to time, the Fund may pay brokerage commissions to an affiliate of the
Fund's distributor on securities acquired by the Fund. In allocating purchase
and sale orders for investment securities, Bank of America or Wellington
Management may consider the sale of Fund shares by broker-dealers and other
financial institutions (including affiliates of Bank of America, Wellington
Management or 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. The Fund's investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Turnover may require
payment of brokerage commissions, impose other transaction costs and could
increase substantially the amount of income received by the 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"). Portfolio turnover will not be a limiting factor in
making investment decisions for the Fund. See "Financial Highlights" for the
Fund's portfolio turnover for the period ended February 28, 1997.
13
<PAGE> 74
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS
REGARDING BUYING AND SELLING THE FUND'S SHARES AND REGARDING THE FUND'S
DIVIDENDS.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
- ---------------------------------------------------------
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 .
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books; (d) accounts under Section 403(b)(7) of the
Code; (e) deferred compensation plans under Section 457 of the Code and (f)
certain other retirement plans. The two classes of shares in the Fund represent
interests in the same portfolio of investments of the Fund, have the same rights
and are identical in all respects except as discussed below. A Shares bear the
expenses of a Shareholder Services Plan. K Shares bear the expenses of a
Distribution Plan and/or Administrative and Shareholder Services Plan and have
exclusive voting rights with respect to such Plans. The two classes also have
different exchange privileges, as described below. The net income attributable
to A and K Shares and the dividends payable on A and K Shares will be reduced by
the amount of the: (a) Shareholder Services Plan fees attributable to A Shares,
(b) Distribution Plan fees and/or Administrative and Shareholder Services Plan
fees attributable to K Shares, respectively, and (c) the incremental expenses
associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A
14
<PAGE> 75
Shares. Each class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
-------------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
Net asset value is determined as of 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 Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market value.
Trading in foreign securities is generally completed prior to the end of regular
trading on the Exchange. Trading may occur in foreign securities, however, on
Saturdays and U.S. holidays and at other times when the Exchange is closed. As a
result, there may be delays in reflecting changes in the market values of
foreign securities in the calculation of the net asset value per share of the
Fund on days when net asset value is not calculated and on which shareholders of
the Fund cannot redeem due to changes in values of securities traded in foreign
markets. For further information about valuing securities, see the Statement of
Additional Information. For price information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the Fund
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
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.
- --------------------------------------------------------------------------------
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.
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 by an investor who was a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - any purchase through FundStrategies(TM), including FundSelections(TM) from BA
Investment Ser-
15
<PAGE> 76
vices, Inc. and FundAdvisor(TM) or FundManager(TM) from Bank of America;
- - any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
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 and their spouses;
- - 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;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Fund may be purchased without a
front-end sales load pursuant to the Program.)
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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
16
<PAGE> 77
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon 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.
HOW DO I DECIDE WHETHER TO BUY A OR K SHARES?
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or K shares, you should consider all relevant
factors, including the dollar amount of your purchase, the length of time you
expect to hold the shares, the amount of any applicable front-end sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of A shares, whether you are eligible to purchase K
shares, and the relative level of services that are provided to different
classes.
17
<PAGE> 78
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the absence of a front-end sales charge. A Shares also
bear the expense of a shareholder service plan. Alternatively, when you purchase
K shares, you will not pay a front-end sales charge and all of your monies will
be fully invested at the time of purchase. However, K shares are subject to
annual distribution and/or administrative and shareholder service fees.
18
<PAGE> 79
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
===============================================================================
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly Contact them directly
for instructions. for instructions.
- ----
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Mail all subsequent
Application and mail it with investments to:
a check payable to Pacific
Horizon International Equity Pacific Horizon Funds, Inc.
Fund to the address on the P.O. Box 182090
Account Application. The Columbus, Ohio 43218-2090
Company will not accept third
party checks for investment.
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Deliver your payment directly
3435 Stelzer Road Application and your payment to the address on the left.
Columbus, OH 43219-3035 directly to 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>
- --------------------------------------------------------------------------------
19
<PAGE> 80
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the 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
20
<PAGE> 81
orders received by the entity by 4:00 p.m. Eastern time on a business day will
be effected as of 4:00 p.m. Eastern time that day if the order is actually
received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will not be issued. Federal regulations require
you to provide a certified taxpayer identification number upon opening or
reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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<PAGE> 82
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TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
</TABLE>
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<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
International Equity Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds,
Inc.
P.O. Box 182090
Columbus, Ohio 43218-2090
</TABLE>
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<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) to the address on the left.
</TABLE>
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<TABLE>
<S> <C>
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
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22
<PAGE> 83
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
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WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Fund itself imposes no charge when A Shares are redeemed,
if you purchase shares through Bank of America or a Service Organization they
may charge a fee for providing certain services in connection with investments
in Fund shares.
The Fund imposes no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for (i) an
amount in excess of $50,000 per day, (ii) any amount if the redemption proceeds
are to be sent somewhere other than the address of record on the Company's
books, or (iii) an amount of $50,000 or less if the address of record has not
been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
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 Commis-
23
<PAGE> 84
sion. If the shares to be redeemed have been purchased by check or by TeleTrade,
the Company will, upon the clearance of the purchase check or TeleTrade payment,
mail the redemption proceeds within seven business days. This does not apply to
situations where the Fund receives payment in cash or immediately available
funds for the purchase of shares. The Company may suspend the right of
redemption or postpone the date of payment upon redemption (as well as suspend
the recordation of the transfer of shares) for such periods as are permitted
under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. 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
- --------------------------------------------------------------------------------
The Fund's net income and net realized capital gains (if any) are distributed at
least annually. Dividends are paid within five business days after year end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be cancelled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at P.O. Box 182090,
Columbus, Ohio 43218-2090. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
24
<PAGE> 85
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS
TO MAKE MANAGING YOUR INVESTMENTS MORE CONVENIENT.
- --------------------------------------------------------------------------------
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and should
consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America ,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares, and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
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.
25
<PAGE> 86
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
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.
26
<PAGE> 87
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.
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 nonretirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
27
<PAGE> 88
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THE BUSINESS OF THE FUND
- --------------------------------------------------------------------------------
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company 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, investment advisory, 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 their operation.
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 eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
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 subadviser provided that Bank
of America remains fully responsible to the Fund for the acts and omissions of
the subadviser. In addition, notwithstanding any such employment or association,
Bank of America shall itself (a) establish and monitor general investment
criteria and policies for the Fund, (b) review and analyze on a periodic basis
the Fund's portfolio holdings and transactions in order to determine their
appropriateness in light of the Fund's shareholder base, and (c) review and
analyze on a periodic basis the policies established by any sub-adviser for the
Fund with respect to the placement of orders for the purchase and sale of
portfolio securities.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.75% of the
Fund's average daily net assets. This fee is higher than that paid by other
investment companies but is comparable to fees paid by other investment
companies with similar invest-
28
<PAGE> 89
ment objectives and policies. This amount may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers"). On September 1, 1996, the International Equity Fund withdrew its
investment in the International Equity Master Portfolio, an investment portfolio
of Master Investment Trust, Series I ("Master Trust") having the same investment
objective as the International Equity Fund, and began investing directly in
portfolio securities pursuant to a new investment advisory agreement between the
Company and Bank of America which superseded the existing advisory agreement
between the Master Trust and Bank of America with respect to the International
Equity Master Portfolio. For the period May 13, 1996 (commencement of
operations) through August 31, 1996, Bank of America waived its entire
investment advisory fee payable by the International Equity Master Portfolio.
For the period September 1, 1996 through February 28, 1997, Bank of America
waived its entire investment advisory fee payable by the International Equity
Fund. For the period May 13, 1996 through February 28, 1997, Bank of America
reimbursed a portion of the International Equity Master Portfolio's and/or
International Equity Fund's operating expenses.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments" below, and may
receive fees charged directly to their accounts in connection with investments
in Fund shares.
SUB-ADVISER
Wellington Management Company, LLP, ("Wellington Management") a Massachusetts
limited liability partnership with principal offices at 75 State Street, Boston,
Massachusetts 02109 , provides sub-advisory services to the Fund. Subject to the
oversight and supervision of the Adviser and the Company's Board of Directors,
the Sub-Adviser provides a continuous investment program for the Fund, including
investment research and management with respect to all securities, investments,
cash and cash equivalents in the Fund. Wellington Management will from time to
time determine what securities and other investments will be purchased, retained
or sold by the Fund.
Wellington Management is entitled to a fee, payable by the Adviser, for its
services and expenses incurred with respect to the Fund. The fee is payable
quarterly at the following annual rates based on the average month-end net
assets of the Fund: 0.40% on the Fund's first $50 million of average month-end
net assets, 0.30% on the next $100 million, 0.25% on the next $350 million and
0.20% of the Fund's average month-end net assets in excess of $500 million. For
the period January 1, 1997 through February 28, 1997, Wellington Management
waived a portion of its sub-advisory fee payable by Bank of America, and Bank of
America paid Wellington Management sub-advisory fees at an effective rate of
0.12% of the Fund's average month-end net assets.
Since January 1, 1997, the International Equity Fund has been managed by
Wellington Management's Global Equity Strategy Group, a group of global
portfolio managers and senior investment professionals headed by Trond
Skramstad. Mr. Skramstad joined Wellington Management in 1993 as the firm's
Director of International Equity Investments. Prior to joining Wellington
Management, Mr. Skramstad was a Principal at Scudder, Stevens & Clark, Inc.
ADMINISTRATOR
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Fund. Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly-owned subsidiary of BISYS
served as administrator.
29
<PAGE> 90
Under its administration agreements with the Company, BISYS 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, BISYS 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. This amount may be reduced pursuant to undertakings by
BISYS. (See the information below under "Fee Waivers").
Prior to September 1, 1996, Concord was entitled to receive an administration
fee payable at the annual rate of 0.15% of the International Equity Fund's
average daily net assets and 0.05% of the International Equity Master
Portfolio's average daily net assets. For the period May 13, 1996 (commencement
of operations) through August 31, 1996, Concord waived its entire administration
fee payable by the International Equity Master Portfolio. For the period May 13,
1996 through February 28, 1997, Concord or BISYS waived its entire
administration fee payable by the International Equity Fund. For the same
period, Concord and/or BISYS also reimbursed a portion of the Fund's operating
expenses.
Pursuant to the authority granted in its administration agreements, BISYS or a
subcontractor has entered into an agreement with PFPC, Inc. ("PFPC") under which
PFPC and an off-shore affiliate of PFPC provides certain accounting,
bookkeeping, pricing and dividend distribution calculation services to the Fund.
The Fund bears all fees and expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th floor, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Fund. BISYS Fund Services,
Inc., a wholly-owned subsidiary of BISYS, is the transfer and dividend
disbursing agent of the Fund and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of the Fund's fiscal year, Bank of
America and other service providers 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
these entities. However, the service providers retain the ability to discontinue
such fee waivers and/or expense reimbursements at any time.
30
<PAGE> 91
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES
IN THE FUNDS.
- --------------------------------------------------------------------------------
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code, as amended (the "Code"), for the current taxable year,
and the Fund intends that it will so qualify in future years as long as such
qualification is in the best interests of its shareholders. As a result of this
qualification, the Fund generally is not required to pay federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. It is not
anticipated that any such distribution from the Fund will qualify for the
dividends received deduction allowed to corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Certain interest income and dividends earned by the Fund from foreign securities
is expected to be subject to foreign withholding taxes or other
31
<PAGE> 92
taxes. So long as more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. The Fund may make this
election. As a consequence, the amount of these foreign taxes paid by the Fund
will be included in the income of the Fund's shareholders pro rata (in addition
to taxable distributions actually received by them), and a shareholder will be
entitled either (a) to credit their proportionate amount of such taxes against
his U.S. federal income tax liabilities, or (b) if they itemize their
deductions, to deduct such proportionate amounts from their U.S. income.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Fund, to the extent attributable to fluctuations in currency or exchange
rates, as well as other gains or losses attributable to exchange rate
fluctuations, are typically treated as ordinary income or loss. Such income or
loss may increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by the Fund may be
treated for federal income tax purposes as a return of capital, or, in some
circumstances, as capital gains. Generally, your tax basis in your Fund shares
will be reduced to the extent that an amount distributed to you is treated as a
return of capital.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends paid to any investor (i) who has provided either
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure properly to include on this return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
- --------------------------------------------------------------------------------
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN AND
AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
- --------------------------------------------------------------------------------
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be quoted
in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by the Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A Shares. The Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
The Fund may compare its total return to that of other mutual funds with similar
investment
32
<PAGE> 93
objectives and to stock and other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
mutual fund performance. For example, the Fund's total return may be compared to
data prepared by: Lipper Analytical Services, Inc.; Mutual Fund Forecaster;
Morningstar; Micropal; Wiesenberger Investment Companies Services; or CDA
Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Europe, Asia
and Far East Index ("EAFE"); the Dow Jones Industrial Average; the Financial
Times World Stock Index; the Lipper International Fund Index; the Standard &
Poor's 500 Stock Index; the Wilshire 5000 Equity Indexes; or the Consumer Price
Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in the Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
- --------------------------------------------------------------------------------
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class T Common Stock, 100 million shares of Class T -- Special Series 3 Common
Stock and 100 million shares of Class T -- Special Series 5 Common Stock,
representing interests in the Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class T
Common Stock are the "A" Shares; Class T -- Special Series 3 Common Stock are
the "M" Shares and Class T -- Special Series 5 Common Stock are the "K" Shares.
As of the date of this prospectus, M Shares have not been offered to the public.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class T Common Stock, Class T -- Special Series 3 Common
Stock or Class T -- Special Series 5 Common Stock) into one or more series. This
Prospectus relates primarily to the Fund's A and K Shares. For more information
about the Company's other portfolios, contact the Company at the telephone
number listed on the cover page of this Prospectus.
The two classes of shares in the Fund which are publicly offered represent
interests in the same portfolio of investments of the Fund, have the same rights
and are identical in all respects except (a) A Shares bear the expenses of a
Shareholder Services Plan and (b) K Shares bear the expenses of a Distribution
Plan and/or Administrative and Shareholder Services Plan.
33
<PAGE> 94
The two classes also have different exchange privileges.
Except as noted below, 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. The
net income attributable to A and K Shares and the dividends payable on such
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans. A and K Shares may have
different performance results due to sales charges and other expenses
attributable to distribution, administrative service and/or shareholder
servicing plans applicable with respect to a particular share class. 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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares, and only holders of K Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution Plan and Administrative and Shareholder Services Plan
attributable to K Shares. The Fund does not presently intend to hold annual
meetings of shareholders to elect directors or for other business unless and
until such time as less than a majority of the directors holding office have
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.
34
<PAGE> 95
- --------------------------------------------------------------------------------
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
FOR K SHARES.
- --------------------------------------------------------------------------------
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of the Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of the Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of the Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
period ended February 28, 1997, the Distributor waived its entire fee under the
Plan with respect to the Fund's A shares.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, the Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of the Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing the Fund's K Shares; payments to Service Organizations for
assistance in connec-
35
<PAGE> 96
tion with the distribution of K Shares; and expenses incurred in connection with
preparing, printing and distributing prospectuses for the Fund (except those
used for regulatory purposes, for solicitation or distribution to existing or
potential A shareholders, or for distribution to existing K shareholders of the
Fund) and in implementing and operating the Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative Services Plan
include, but are not limited to, expenses incurred in connection with
administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting; and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by the Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of the Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of the Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of the Fund's K Shares. These amounts may
be reduced pursuant to undertakings by the Distributor. Payments for
distribution expenses under the Distribution Plan are subject to Rule 12b-1
under the 1940 Act. For the period ended February 28, 1997, the Distributor
waived its entire fee under the Distribution Plan and Administrative and
Shareholder Services Plan with respect to the Fund's K Shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
36
<PAGE> 97
IEQ-0020
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
INTERNATIONAL
EQUITY FUND
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 98
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Asset Allocation Fund
----------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
Part A
<S> <C> <C>
1. Cover Page................................................. Cover Page
2. Synopsis................................................... Expense Summary
3. Condensed Financial Information............................ Financial Highlights;
Measuring Performance
4. General Description of Registrant.......................... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund..................................... The Business of the Fund
5.A. Management's Discussion of
Fund Performance......................................... *
6. Capital Stock and Other
Securities............................................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered................................................... How to Buy Shares; Shareholder
Services; The Business of the
Fund; Plan Payments; Measuring
Performance
8. Redemption or Repurchase................................... How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings.................................. *
</TABLE>
- ----------
* Item inapplicable or answer negative.
<PAGE> 99
PROSPECTUS
JUNE 24, 1997
PACIFIC HORIZON ASSET ALLOCATION FUND
Investment Portfolio Offered by Pacific Horizon Funds, Inc.
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Fund") is a diversified mutual
fund whose investment objective is to obtain long-term growth from capital
appreciation and dividend and interest income. The Fund seeks to achieve its
objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"), an open-end,
series management investment company. Bank of America National Trust and Savings
Association ("Bank of America" or the "investment adviser") serves as the Fund's
investment adviser. Based in San Francisco, California, Bank of America and its
affiliates have over $50 billion under management, including over $14 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 June 24, 1997 and is
incorporated by reference into this Prospectus. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference, and other
information regarding registrants that file electronically with the Securities
and Exchange Commission.
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.
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.
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.
1
<PAGE> 100
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, in
connection with the offering of the Fund's shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Fund or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Fund or the distributor to make such offer in such
jurisdiction.
2
<PAGE> 101
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 5
FINANCIAL HIGHLIGHTS 8
FUND INVESTMENTS 10 INVESTMENT OBJECTIVE
10 TYPES OF INVESTMENTS
11 FUNDAMENTAL LIMITATIONS
12 OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
SHAREHOLDER GUIDE 17 HOW TO BUY SHARES
17 What Is My Minimum Investment In The Fund?
17 What Alternative Sales Arrangements Are
Available?
18 How Are Shares Priced?
22 How Do I Decide Whether To Buy A or K
Shares?
22 How Can I Buy Shares?
22 What Price Will I Receive When I Buy
Shares?
23 What Else Should I Know To Make A
Purchase?
23 HOW TO SELL SHARES
23 How Do I Redeem My Shares?
25 What NAV Will I Receive For Shares I
Want To Sell?
26 What Kind Of Paperwork Is Involved In
Selling Shares?
26 How Quickly Can I Receive My Redemption
Proceeds?
26 Do I Have Any Reinstatement Privileges
After I Have Redeemed Shares?
DIVIDEND AND
DISTRIBUTION POLICIES 27
SHAREHOLDER SERVICES 28 CAN I USE THE FUND IN MY RETIREMENT PLAN?
28 CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
29 WHAT IS TELETRADE?
29 CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
30 WHAT IS DOLLAR COST AVERAGING AND HOW
CAN I IMPLEMENT IT?
30 CAN I ARRANGE PERIODIC WITHDRAWALS?
30 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
31 IS THERE A SALARY DEDUCTION PLAN
AVAILABLE?
THE BUSINESS OF THE FUND 32 FUND MANAGEMENT
32 Service Providers
TAX INFORMATION 34
MEASURING PERFORMANCE 35
DESCRIPTION OF SHARES 37
PLAN PAYMENTS 38
</TABLE>
3
<PAGE> 102
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings
3435 Stelzer Road Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
4
<PAGE> 103
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 18 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A and K Shares and the estimated operating expenses expected to be incurred
during the current fiscal year with respect to the Fund's A and K Shares. Actual
expenses may vary. A hypothetical example based on the summary is also shown.
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None
Maximum Sales Load Imposed on Reinvested
Dividends None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees 0.55% 0.55%
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses 0.15% 0.15%
Total Operating Expenses
(After Fee Waivers)+ 0.95% 1.45%
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Fund's K Shares
would be 1.70% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would
be 0.75% of the average net assets (annualized) of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed the annual rate of 1.00% of
the average net assets of the Fund's K Shares. However, it is expected
that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule
12b-1, administrative and/or shareholder services fees paid by the
Fund as shown in the above table, long-term K shareholders may pay
more than the economic equivalent
5
<PAGE> 104
of the maximum front-end sales charge permitted by NASD Regulations,
Inc. For a further description of shareholder transaction expenses and
the Fund's operating expenses, see the sections entitled "Shareholder
Guide," "The Business of the Fund" and "Plan Payments" below.
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
A Shares(1) $ 54 $ 74 $ 95 $156
K Shares $ 15 $ 46 $ 79 $174
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.40% of the
Fund's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a
front-end sales charge nor a contingent deferred sales charge, but incur fees
under a Distribution Plan and/or an Administrative and Shareholder Services
Plan, with respect to K Shares. See the section entitled "How Do I Decide
Whether To Buy A or K Shares?" on page 21.
6
<PAGE> 105
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. On July 22, 1996, the Fund initially funded
K Shares. Prior to June 23, 1997, the Fund operated as part of a master-feeder
structure and invested all of its assets in a diversified investment portfolio
at an open-end, management investment company (the "Master Portfolio") which had
an identical investment objective. On June 23, 1997, the Fund withdrew its
assets from the Master Portfolio and invested them directly in portfolio
securities. This information has been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report on the financial statements
containing such information is incorporated by reference in the Statement of
Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund is
available in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 18,
1994
(INCEPTION
FOR THE FOR THE FOR THE DATE)
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997(a) 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 17.52 $ 15.15 $ 14.84 $ 15.00
---------- ---------- ---------- ----------
Income from Investment Operations:
Net investment income 0.48 0.52 0.48 0.03
Net realized and unrealized gains
(losses) on investment transactions 2.50 2.86 0.24 (0.19)
---------- ---------- ---------- ----------
Total income (loss) from investment
operations 2.98 3.38 0.72 (0.16)
---------- ---------- ---------- ----------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.46) (0.53) (0.41) --
Distributions to shareholders from
net realized gains on investment
transactions (0.64) (0.48) -- --
---------- ---------- ---------- ----------
Total dividends and distributions (1.10) (1.01) (0.41) --
---------- ---------- ---------- ----------
Net change in net asset value per
share 1.88 2.37 0.31 (0.16)
---------- ---------- ---------- ----------
Net asset value per share, end of period $ 19.40 $ 17.52 $ 15.15 $ 14.84
========== ========== ========== ==========
Total Return+ 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000) $ 34,838 $ 22,355 $ 5,694 $ 666
Ratio of expenses to average net assets* 1.25% 0.62% 0.00% 0.00%++
Ratio of net investment income to
average net assets* 2.59% 3.49% 4.25% 4.20%++
</TABLE>
* Reflects the Fund's proportionate share of the Master Portfolio's
expenses, the Master Portfolio's fee waivers and expense
reimbursements and the Fund's fee waivers and expense reimbursements.
Such fee waivers and expense reimbursements had the effect of reducing
the ratio of expenses to average net assets and increasing the ratio
of net investment income to average net assets by 0.69%, 2.30%, 7.89%
and 83.95% (annualized) for the periods ended
7
<PAGE> 106
February 28, 1997, February 29, 1996, February 28, 1995 and February
28, 1994, respectively.
+ The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum 4.50%
sales charge on A Shares.
++ Annualized.
(a) As of July 22, 1996 the Fund designated the existing series of shares
as "A" shares.
8
<PAGE> 107
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEBRUARY 28, 1997
-----------------
<S> <C>
Selected data for a K Share of common stock outstanding
throughout the period indicated:
Net asset value per share, beginning of period ................. $ 17.23
-------
Income from Investment Operations:
Net investment income ...................................... 0.19
Net realized and unrealized gain on investments ............ 2.80
-------
Total income from investment operations .................... 2.99
-------
Less Dividends and Distributions:
Dividends to shareholders from net investment income ....... (0.18)
Distributions to shareholders from net realized gains on
investment transactions .............................. (0.64)
-------
Total Dividends and Distributions .............................. (0.82)
-------
Net change in net asset value per share ........................ 2.17
-------
Net asset value per share, end of period ....................... $ 19.40
=======
Total Return ................................................... 17.69%++
Ratios/Supplemental Data:
Net assets at end of period (000) .......................... $ 748
Ratio of expenses to average net assets .................... 1.94%+
Ratio of net investment income to average net assets ....... 2.31%+
</TABLE>
- ------------------
+ Annualized. Reflects the Fund's proportionate share of the Master
Portfolio's expenses, the Master Portfolio's fee waivers and expense
reimbursements and the Fund's fee waivers and expense reimbursements. Such
fee reductions and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 1.32% for the period ended
February 28, 1997.
++ Not annualized
9
<PAGE> 108
INVESTMENT OBJECTIVE
The Pacific Horizon Asset Allocation Fund seeks to obtain long-term growth from
capital appreciation and dividend and interest income. The Fund seeks to achieve
its objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents. The Fund may be
appropriate for investors who want long-term capital appreciation and current
dividend and interest income.
WHILE THE FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
FUND INVESTMENTS
TYPES OF INVESTMENTS
IN GENERAL. The Fund is a diversified portfolio which will invest substantially
all of its assets through a balanced approach using bonds, equity securities and
cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index.
Bonds acquired by the Fund will be investment grade at the time of purchase, and
may include corporate and government obligations, mortgage-backed securities and
municipal securities. Investment grade bonds are bonds that are rated in one of
the four highest rating categories by a nationally recognized statistical rating
organization, i.e., BBB or better by Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Duff & Phelps Credit Co. ("D&P") or Fitch Investors
Service, Inc. ("Fitch") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). While bonds with such ratings are regarded as having adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay interest and
repay principal. Bonds with the lowest investment grade rating (i.e., BBB or
Baa) do not have outstanding investment characteristics and may have speculative
characteristics as well. Unrated securities will be purchased only if Bank of
America determines that they are of comparable quality to the rated securities
in which the Fund may invest. Under normal market conditions at least 25% of the
Fund's total assets will be invested in fixed income senior securities.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government or one of its
agencies or instrumentalities. The Fund will not invest more than 35% of its net
assets in mortgage-backed securities. There is the risk that corporate bonds
might be called by the issuer if the bond interest rate is higher than currently
prevailing interest rates. Similarly, a risk associated with mortgage-backed
securities is early paydown resulting from refinancing of the underlying
mortgages. The rate of such prepayments, and hence the life of the security,
will primarily be a function of current market rates. In periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds will generally be at lower rates than
the rates on the prepaid obligations.
The Fund may also invest, from time to time, in obligations issued by state and
local governmental issuers ("Municipal Securities"). The purchase of Municipal
Securities may be advantageous when, as a result of prevailing economic,
regulatory or other circumstances, the performance of such securities, on a
pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. Dividends received by shareholders which are attributable to
interest income
10
<PAGE> 109
received from Municipal Securities generally will be subject to Federal income
tax.
The two principal classifications of Municipal Securities which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Private activity bonds held by the Fund are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
The Fund may also include "moral obligation" securities, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund, the restoration of which is a moral commitment
but not a legal obligation of the state or municipality which created the
issuer.
The value of securities held by the Fund will vary with changes in interest
rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P or similarly rated by another NRSRO, or if unrated, will
be determined by Bank of America to be of comparable quality under procedures
established by the Board.
The Fund may also make other investments as described more fully below under
"Other Investment Practices and Considerations."
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. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to
25% of its total assets may be invested without regard to these
limitations; and provided that all of its assets may be invested in a
diversified, open-end management investment company, or a series thereof,
with substantially the same investment objectives, policies and
restrictions without regard to the limitations set forth in this paragraph;
2. Make loans to other persons except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value
in excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its
11
<PAGE> 110
total assets, and may enter into repurchase agreements as long as
repurchase agreements maturing in more than seven days do not exceed 10% of
the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock
indexes and options on any such futures if such options are written by
other persons and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums paid on all
such options that are held at any time do not exceed 20% of its total net
assets, and (iii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of its total
assets.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of additional fundamental investment limitations is set out in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Fund may invest in securities of foreign issuers that may or may not
be publicly traded in the United States, such as Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Fund to invest no
more than 25% of its net assets (at the time of purchase) in foreign securities.
The Fund may be subjected to additional risks associated with the holding of
property abroad such as future political and economic developments, currency
fluctuations, possible withholding of tax payments, possible seizure or
nationalization of foreign assets, possible establishment of currency exchange
control regulations or the adoption of other foreign government restrictions
that might adversely affect the payment of principal or interest on foreign
securities in the Fund. In addition, securities of some foreign companies are
less liquid, and their prices more volatile than domestic companies, have less
publicly available information about foreign companies, and the fact that
foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies.
OPTIONS. The Fund may purchase put and call options on listed securities and
stock indexes so long as the aggregate of the premiums paid for options does not
exceed 2% of the net assets of the Fund (this restriction does not apply to
options on futures contracts). Put options may be purchased in order to protect
the Fund's securities in expectation of a declining market and call options may
be purchased to benefit from anticipated price increases in the underlying
securities or index. The Fund may not write put options but may write fully
covered call options as long as the Fund remains fully covered throughout the
life of the option, either by owning the optioned securities or possessing a
call issued by another writer that is identical in all respects to the call
written by the Fund.
Closing purchase transactions on previously written options may be entered into
by the Fund to realize a profit and/or to permit the Fund to write another
option on the underlying security. The Fund might write another option on the
underlying security in order to provide for a different exercise price or
expiration date. A profit or loss will be realized when an option is closed to
12
<PAGE> 111
the extent the cost of the closing transaction is less or more, respectively,
than the premium received for writing the option.
When an option written by the Fund is exercised, the Fund will receive the
exercise price for the security as provided for in the option, but it loses the
opportunity to receive the price which it could have obtained for the security
in the open market, which will likely be higher than the exercise price of the
option.
Put options purchased by the Fund give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. The Fund may sell a put option prior to the time
the securities underlying the option are actually sold, which will result in a
gain or loss to the Fund depending on whether the amount received from the sale
is more or less than the premium and other transaction costs associated with the
option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. The Fund will only write options where
Bank of America believes a liquid secondary market will exist on a national
securities exchange for options of the same series, which would permit the Fund
to close out its option positions. There are no assurances that a liquid
secondary market will exist on an exchange for a particular option or at any
particular time. In fact, for some options no secondary market on an exchange
may exist at all. If the Fund cannot close out an option, it will not be able to
sell the securities underlying the option until the option expires or is
exercised.
Furthermore, the Fund's ability to engage in transactions in options may be
limited by IRS requirements that the Fund receive less than 30% of its gross
income from certain securities, including options and futures contracts, held by
the Fund for less than three months. Bank of America does not believe that
transactions in options will significantly affect the Fund's ability to meet IRS
requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Fund may purchase and sell both interest rate and stock index
futures contracts (as well as purchase related options) as a hedge against
anticipated fluctuations or changes resulting from relevant market conditions in
the values of the securities held by the Fund or which it intends to purchase or
sell, and where the transactions are economically appropriate for the reduction
of risks inherent in the ongoing management of the Fund. The Fund may not
purchase or sell an interest rate or stock index futures contract or purchase a
related option unless immediately after any such transaction the sum of the
aggregate amount of margin deposits on its existing futures positions and the
amount of premiums paid for related options does not exceed 5% of the Fund's
total assets (after taking into account certain technical adjustments). For a
more detailed description of futures contracts and options and the costs and
risks related to such instruments, see the Statement of Additional Information.
VARIABLE RATE INSTRUMENTS. The Fund may invest in variable and floating rate
instruments, which may include master demand notes. Although payable on demand
by the Fund, master demand notes may not be marketable. Consequently, the
ability to redeem such notes may depend on the borrower's ability to pay which
13
<PAGE> 112
will be continuously monitored by Bank of America. Such notes will be purchased
only from domestic corporations that either (a) are rated Aa or better by
Moody's or AA or better by S&P, (b) have commercial paper rated at least Prime-2
by Moody's or A-2 by S&P or the equivalent by another nationally recognized
statistical rating organization ("NRSRO"), (c) are backed by a bank letter of
credit or (d) are determined by Bank of America to be of a quality comparable to
securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Fund may invest in securities issued by other investment
companies (including money market funds advised by Bank of America). No more
than 10% of the value of the Fund's total assets will be invested in securities
of other investment companies, with no more than 5% invested in the securities
of any one investment company; except that with respect to the investment in a
money market mutual fund advised by Bank of America, the Fund is permitted to
invest in the greater of 5% of its net assets or $2.5 million. In addition, the
Fund may hold no more than 3% of the outstanding voting stock of any other
investment company. As a shareholder of another investment company, the Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them within a specified time at a fixed price (equal to
the purchase price plus interest). These transactions are known as repurchase
agreements. Under these agreements, the Fund will acquire securities from either
a bank (which has a commercial paper rating of A-2 or better by S&P or Prime-2
or better by Moody's or the equivalent by another NRSRO) or a registered
broker-dealer. Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (the "1940 Act"). Repurchase agreements maturing
in more than seven days are considered illiquid investments and investment in
such repurchase agreements along with any other illiquid securities will not
exceed 10% of the value of the net assets of the Fund. Repurchase agreements
will be entered into only for debt obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of deposit, bankers'
acceptances or commercial paper, and either the Fund's custodian or its agent
will have physical possession of the securities or the securities will be
transferred to the Fund's custodian, by appropriate entry in the Federal Reserve
Bank's records and, in either case, will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Fund might incur a loss if the value of
the securities securing the repurchase agreement declines, and might incur
disposition costs in connection with liquidating the securities. In addition, if
bankruptcy proceedings are commenced with respect to the seller, realization of
the securities by the Fund may be delayed or denied. Repurchase agreements are
considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary purposes
by entering into transactions called reverse repurchase agreements. Under these
arrangements, the Fund will sell portfolio securities to either a bank (which
has a commercial paper rating of A-2 or better by S&P or Prime-2 or better by
Moody's) or a registered broker-dealer, with an agreement to repurchase the
security on an agreed date, price and interest payment. Reverse repurchase
agreements involve the possible risk that the value of portfolio securities the
Fund relinquishes may decline below the price the Fund must pay when the
transaction closes. Borrowings may magnify the potential for gain or loss on
amounts invested resulting in an increase in the speculative character of the
Fund's outstanding shares.
14
<PAGE> 113
When the Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by Bank of America to make sure that an
appropriate value is maintained. Reverse repurchase agreements are considered to
be borrowings under the 1940 Act.
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to broker-dealers that Bank of America considers to be of
good standing. Borrowers of portfolio securities may not be affiliated directly
or indirectly with the Company or the Fund. If the broker-dealer should become
bankrupt, however, the Fund could experience delays in recovering its
securities. A securities loan will only be made when, in Bank of America's
judgment, the possible reward from the loan justifies the possible risks. In
addition, such loans will not be made if, as a result, the value of securities
loaned by the Fund exceeds 10% of its total assets. Securities loans will be
fully collateralized.
ASSET-BACKED SECURITIES. The Fund may purchase asset-backed securities.
Asset-backed securities consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) or receivables held in a trust.
Examples include certificates for automobile receivables (CARS) and credit card
receivables (CARDS). Payments of principal and interest on the loans or
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but usually
amounts to only a fraction of the asset-backed security's par value until
exhausted. Ultimately, asset-backed securities are dependent upon payment of the
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables. All asset-backed securities purchased by the Fund will either be
issued or guaranteed by a U.S. Government entity or rated AAA by S&P, Aaa by
Moody's or have an equivalent rating from any other rating agency.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Fund must be reinvested in securities
whose yields reflect interest rates prevailing at the time. Thus, the Fund's
ability to maintain a portfolio which includes high-yielding asset-backed
securities will be adversely affected to the extent reinvestments are in lower
yielding securities. The actual maturity and realized yield will therefore vary
based upon the prepayment experience of the underlying asset pool and prevailing
interest rates at the time of prepayment. Asset-backed securities may be subject
to greater risk of default during periods of economic downturn than other
instruments. Also, while the secondary market for asset-backed securities is
ordinarily quite liquid, in times of financial stress, the secondary market may
not be as liquid as the market for other types of securities, which could result
in the Fund's experiencing difficulty in valuing or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. These transactions, which involve a commitment by the 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, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk
15
<PAGE> 114
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 or
forward commitment transactions. The Fund's when-issued purchases and forward
commitments are not to exceed 25% of the value of the Fund's total assets absent
unusual market conditions. The Fund does not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of its investment objective.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of the value of its
total assets (determined at the time of acquisition) in securities that are
illiquid. If, after the time of acquisition, events cause this limit to be
exceeded, the Fund will take steps to reduce the aggregate amount of illiquid
securities as soon as is reasonably practicable.
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. The Fund will not invest in
instruments or securities issued by Bank of America or any of its affiliates.
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 unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Fund's investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs than would otherwise be the case. Higher rates of turnover may
require payment of brokerage commissions, impose other transaction costs and
could increase substantially the amount of income received by the 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"). Fund turnover will not be a limiting factor in making
investment decisions for the Fund. For further information concerning portfolio
turnover, see the Statement of Additional Information.
16
<PAGE> 115
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
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.
** A regular IRA must be opened in conjunction with this account.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books ; (d) accounts under Section 403(b)(7) of
the Code; (e) deferred compensation plans under Section 457 of the Code; and (f)
certain other retirement plans. The two classes of shares represent interests in
the same portfolio of investments of the Fund, have the same rights and are
identical in all respects except as discussed below. A Shares bear the expenses
of a Shareholder Services Plan. K Shares bear the expenses of a Distribution
Plan and/or Administrative and Shareholder Services Plan and have exclusive
voting rights with respect to such Plans. The two classes also have different
exchange privileges, as described below. The net income attributable to A and K
Shares
17
<PAGE> 116
and the dividends payable on A and K Shares will be reduced by the amount of
the: (a) Shareholder Services Plan fees attributable to A Shares, (b)
Distribution Plan fees and/or Administrative and Shareholder Services Plan fees
attributable to K Shares, respectively, and (c) the incremental expenses
associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class)-
(Liabilities Attributable to the Class)
----------------------------------------------
NAV= Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock 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 Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market value. For
further information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the Fund
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
----------- -------- --------- --------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
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.
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
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<PAGE> 117
$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.
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 by an investor who is a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - 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;
- - any purchase through FundStrategies(TM), including FundSelections(TM) from
BA Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from
Bank of America;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of the Bank of America's Northwest
Division 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 and their spouses;
- - 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;
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<PAGE> 118
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses;
- - Lucky Store Cardholders during periodic promotions under the Periodic No
Load to Lucky Store Cardholders Program (the "Program") (initial purchase
only, a front end sales load will apply to any other purchases unless
another exemption is available). (Promotional material will delineate the
beginning and ending date during which shares of the Funds may be purchased
without a front end sales load pursuant to the Program.)
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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon 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
20
<PAGE> 119
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A OR K SHARES?
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or K shares, you should consider all relevant
factors, including the dollar amount of your purchase, the length of time you
expect to hold the shares, the amount of any applicable front-end sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of A shares, whether you are eligible to purchase K
shares, and the relative level of services that are provided to different
classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
Shares than you would in the absence of a front-end sales charge. A Shares are
also subject to fees under a shareholder services plan. Alternatively, when you
purchase K shares, you will not pay a front-end sales charge and all of your
monies will be fully invested at the time of purchase. However, K shares are
subject to annual distribution and/or administrative and shareholder service
fees.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
TO BUY SHARES
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 instructions. Contact them directly
for instructions.
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<PAGE> 120
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<TABLE>
<S> <C> <C>
BY MAIL Complete an Account Application Mail all subsequent investments to:
and mail it with a check Pacific Horizon Funds, Inc.
(payable to Pacific Horizon P.O. Box 182090
Asset Allocation Fund) to the Columbus, Ohio 43218-2090
address on the Account
Application. The Company will
not accept third party checks
for investment.
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Application Deliver your payment directly to the
3435 Stelzer Road and your payment directly to 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 complete
made by wire. wiring instructions.
Instruct your bank to transmit immediately
available funds for purchase of Fund shares
in your name.
Be sure to include your name and your Fund
account number.
Consult your bank for information on remitting funds by wire and any associated
bank charges.
By TeleTrade
(a service permitting TeleTrade Privileges may not Purchases may be made in the
transfers of money be used to make an initial minimum amount of $500
from your checking, purchase. and the maximum amount of
NOW or bank $50,000 per transaction as
money market account) soon as appropriate information
regarding your bank account has
been established on your Fund
account. This information may
be provided on the Account
Application or in a signature
guaranteed letter of instruction
to the Transfer Agent. Signature
guarantees are discussed under
"How to Sell Shares."
Call 800-346-2087 to make your
purchase.
</TABLE>
YOU SHOULD REFER TO THE "SHAREHOLDER SERVICES" SECTION
FOR ADDITIONAL IMPORTANT INFORMATION ABOUT THE TELETRADE PRIVILEGE.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
22
<PAGE> 121
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 time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
23
<PAGE> 122
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
24
<PAGE> 123
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
Asset Allocation Fund owner, including each joint owner, must
c/o Pacific Horizon Funds, Inc. sign) to the Transfer Agent.
P.O. Box 182090
Columbus, Ohio 43218-2090
If you hold stock certificates for the
shares being redeemed, make sure to
endorse them for transfer, have your
signature on them guaranteed by your
bank or another guarantor institution
(as described in the section entitled
"What Kind Of Paperwork Is Involved In
Selling Shares?") and include them with
your request.
IN PERSON
BISYS Fund Services, Inc. Deliver your signed, written request
3435 Stelzer Road (each owner, including each joint owner,
Columbus, OH 43219-3035 must sign) and any certificates
(endorsed for transfer and signature
guaranteed as described in the section
entitled "What Kind Of Paperwork Is
Involved In Selling Shares?") to the
address on the left.
BY WIRE As soon as appropriate information
regarding your bank account has been
established on your Fund account, you
may write, telephone or telegraph
redemption requests to the Transfer
Agent, and redemption proceeds will be
wired in federal funds to the commercial
bank you have specified. Information
regarding your bank account may be
provided on the Account Application or
in a signature guaranteed letter of
instruction to the Transfer Agent.
Signature guarantee requirements are
discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling
Shares?".
Redemption proceeds will normally be
wired the business day after your
request and any other necessary
documents have been received by the
Transfer Agent.
Wire Privileges apply automatically
unless you indicate on the Account
Application or in a subsequent written
notice to the Transfer Agent that you do
not wish to have them.
25
<PAGE> 124
Requests must be for at least $1,000 and
may be subject to limits on frequency
and amount.
Wire Privileges may be modified or
suspended at any time, and are not
available for shares issued in
certificate form.
Contact your bank for information on any
charges imposed by the bank in
connection with receipt of redemptions
by wire.
BY TELETRADE
(a service permitting transfers You may redeem Fund shares (minimum of
of money to your checking, $500 and maximum of $50,000 per
NOW or bank money market account) transaction) by telephone after
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 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.
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,
if you purchase shares through Bank of America or a Service Organization they
may charge a fee for providing certain services in connection with investments
in Fund shares.
The Fund imposes no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
26
<PAGE> 125
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. 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.
27
<PAGE> 126
DIVIDEND AND DISTRIBUTION POLICIES
Dividends from the Fund's net income is declared and paid as a dividend on a
quarterly basis and net realized capital gains (if any) are distributed at least
annually. Dividends are paid within five business days after the quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of distribution.
In addition, any undeliverable checks or checks that remain uncashed for six
months will be cancelled and will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at P.O. Box 182090,
Columbus, Ohio 43218-2090. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
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<PAGE> 127
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.
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and should
consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
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."
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<PAGE> 128
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
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WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual 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.
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
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IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
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THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
------------------
INVESTMENT ADVISER
Bank of America serves as the Fund's Investment Adviser. 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 eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
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.
The Asset Allocation Committee of Bank of America's Global Investment Management
Division establishes general parameters for the selection of securities for the
Fund. Robert Pyles, Senior Vice President and Director of Equity, and Steven L.
Vielhaber are primarily responsible for the selection of particular securities
for the equity and fixed-income portions, respectively, of the Fund. Mr. Pyles
has been the Fund's manager since November 1994 and has been associated with
Bank of America's Northwest Division and its predecessor, since 1976. Mr. Pyles
also manages mutual fund managers for the Pacific Horizon Capital Income Fund
and currently manages various common trust, employee benefit and individual
accounts for Bank of America. Mr. Vielhaber has been the Fund's manager since
April 1994 and has been employed by Bank of America since 1993. Prior thereto,
Mr. Vielhaber had been Director of Fixed Income Marketing at Dimensional Fund
Advisers since 1990, and Vice President and Manager of Investments at Gibraltar
Savings from 1986 to 1990.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.40% 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"). Prior to June 23, 1997, Bank of America was entitled to receive an
investment advisory fee at the annual rate of 0.55% of the average daily net
assets of the Master Portfolio. On that date, the Asset Allocation Fund withdrew
its investment in the Master Portfolio and began investing directly in portfolio
securities pursuant to a new investment advisory agreement between the Company
and Bank of America which superseded the existing advisory agreement between
Master Investment Trust, Series I and Bank of America with respect to the Master
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Portfolio. During the fiscal year ended February 28, 1997, the Master Portfolio
paid Bank of America advisory fees at an effective annual rate of 0.16% of the
Master Portfolio's average daily net assets, and Bank of America waived a
portion of its fee at an effective annual rate of 0.39% of the Master
Portfolio's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments" below, and may
receive fees charged directly to their accounts in connection with investments
in Fund shares.
ADMINISTRATOR
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Fund . Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly-owned subsidiary of BISYS
served as administrator.
Under its administration agreement with the Company, BISYS 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, BISYS is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets . This amount may be reduced pursuant to undertakings
by BISYS. (See the information below under "Fee Waivers"). Prior to June 23,
1997, Concord or BISYS was entitled to receive an administration fee payable at
the annual rate of 0.15% of the Asset Allocation Fund's average daily net assets
and 0.05% of the Master Portfolio's average daily net assets. For the fiscal
year ended February 28, 1997, the Master Portfolio paid Concord and BISYS
administration fees at an effective annual rate of 0.01% of the Master
Portfolio's average daily net assets, and Concord and BISYS waived a portion of
its fee with respect to the Master Portfolio at an effective annual rate of
0.04% of the Master Portfolio's average daily net assets. For the same period,
Concord and BISYS waived its entire administration fee payable by the Asset
Allocation Fund. During the fiscal year ended February 28, 1997, Concord and/or
BISYS also reimbursed a portion of the operating expenses with respect to the
Asset Allocation Fund.
Pursuant to the authority granted in its administration agreements, BISYS or a
subcontractor has entered into an agreement with PFPC, Inc. ("PFPC") under which
PFPC provides certain accounting, bookkeeping, pricing, and dividend and
distribution calculation services to the Fund. The Fund bears all fees and
expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
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CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Fund. BISYS Fund Services,
Inc., a wholly-owned subsidiary of BISYS, is the transfer and dividend
disbursing agent of the Fund and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of the Fund's fiscal year, Bank of
America and other service providers 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
these entities. However, the service providers retain the ability to
discontinue such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent taxable year, the Fund qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and the Fund intends that it will so qualify in future years as long as
such qualification is in the best interests of its shareholders. As a result of
this qualification, the Fund generally is not required to pay federal income
taxes to the extent its earnings are distributed in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/ or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
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<PAGE> 134
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30-day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by the Fund during the period are reinvested in Fund shares, and include
the maximum front-end sales charge for A Shares. 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
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return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
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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 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class O Common Stock, 100 million shares of Class O--Special Series 3 Common
Stock; 100 million shares of Class O--Special Series 5 Common Stock and 100
million shares of Class O -- Special Series 7 Common Stock representing
interests in the Fund, and additional classes of shares representing interests
in other investment portfolios of the Company. Class O Common Stock are the "A"
Shares; Class O--Special Series 3 Common Stock are the "M" Shares; Class O
- --Special Series 5 Common Stock are the "K" Shares; and Class O -- Special
Series 7 Common Stock are "SRF" Shares. As of the date of this prospectus, M
Shares have not been offered to the public. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class O Common
Stock, Class O--Special Series 3 Common Stock , Class O--Special Series 5 Common
Stock or Class O -- Special Series 7 Common Stock) into one or more series. This
Prospectus relates primarily to the Fund's A and K Shares. For more information
about the Fund's SRF Shares or about the Company's other portfolios, contact the
Company at the telephone number listed on the cover page of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into the
Company. A Shares are sold to investors choosing the front-end sales charge
alternative unless an exemption to the sales charge is otherwise available,
which is the case for eligible retirement accounts. A Shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. K Shares are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. See "Shareholder Guide -- What Alternative Sales Arrangements are
Available?" for a description of eligible purchasers of K Shares.
A Shares, K Shares and SRF Shares each have certain purchase, redemption and
exchange privileges. Additionally, A Shares and K Shares have certain
shareholder services such as TeleTrade, an automatic investment program, an
automatic withdrawal plan, a directed distribution plan and a direct deposit
program.
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The three classes of shares in the Fund which are publicly offered represent
interests in the same portfolio of investments of the Fund, have the same rights
and are identical in all respects except (a) SRF Shares and A Shares bear the
expenses of their respective Shareholder Services Plans; and (b) K Shares bear
the expenses of a Distribution Plan and/or Administrative and Shareholder
Services Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution Plan fees and/or Administrative and Shareholder
Services Plan fees attributable to K Shares, respectively, and (c) the
incremental expenses associated with such Plans. SRF, A and K Shares may have
different performance results due to sales charges and other expenses
attributable to distribution, administrative service and/or shareholder
servicing plans applicable with respect to a particular share class.
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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares; only holders of K Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution Plan and Administrative and Shareholder Services Plan
attributable to K Shares; and only holders of SRF Shares will be entitled to
vote on matters submitted to a vote of shareholders relating to the Shareholder
Services Plan attributable to SRF 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 have been elected by the shareholders. At that time, the directors then
in office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR
K SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of the Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
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<PAGE> 138
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of the Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of the Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1997, the Asset Allocation Fund made payments
under the Plan at an effective annual rate of 0.25% of the A Shares' average
daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, the Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of the Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing the Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Fund (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K shareholders of the Fund) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
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and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting, and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by the Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of the Fund's
K Shares. Under the Administrative and Shareholder Services Plan, payments
for shareholder servicing expenses may not exceed 0.25% (annualized) of the
average daily net assets of the Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses
may not exceed 0.75% (annualized) of the average daily net assets of the
Fund's K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average daily net assets of the Fund's K Shares. These amounts
may be reduced pursuant to undertakings by the Distributor. Payments for
distribution expenses under the Distribution Plan are subject to Rule 12b-1
under the 1940 Act. For the fiscal year ended February 28, 1997, the Asset
Allocation Fund made payments under the Distribution, Administrative and
Shareholder Services Plan, at the effective annual rate of 0.75% of the average
daily net assets of the Asset Allocation Fund's K Shares, and the Distributor
waived fees under the Distribution, Administrative and Shareholder Services
Plans, at the effective annual rate of 0.25% of average daily net assets with
respect to K Shares of the Asset Allocation Fund.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
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PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
National Municipal Bond Fund and California Tax-Exempt Bond Fund
----------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
Part A
<S> <C> <C>
1. Cover Page................................................. Cover Page
2. Synopsis................................................... Expense Summary
3. Condensed Financial Information............................ Financial Highlights;
Measuring Performance
4. General Description of Registrant.......................... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund..................................... The Business of the Funds
5.A. Management's Discussion of
Fund Performance......................................... *
6. Capital Stock and Other
Securities............................................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered................................................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase................................... How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings.................................. *
</TABLE>
- ----------
* Item inapplicable or answer negative.
<PAGE> 141
PROSPECTUS
JUNE 24, 1997
PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
Investment Portfolios Offered by Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND (the "National Municipal Bond
Fund") is a diversified mutual fund whose investment objective is to provide
investors with as high a level of current interest income free of regular
Federal income tax as is consistent with prudent investment management and
preservation of capital. The National Municipal Bond Fund seeks to achieve its
objective through investment primarily in a diversified portfolio of investment
grade municipal debt securities.
The PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND (the "California Tax-Exempt
Bond Fund" and, collectively with the National Municipal Bond Fund, the "Funds")
is a diversified mutual fund whose investment objective is to provide its
shareholders with as high a level of current interest income free of Federal
income tax and California state personal income tax as is consistent with
prudent investment management and preservation of capital. In seeking its
investment objective, the California Tax-Exempt Bond Fund invests primarily in
investment grade municipal obligations issued by the state of California and
other governmental entities.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America National Trust
and Savings Association ("Bank of America" or the "investment adviser") serves
as the Funds' investment adviser. Based in San Francisco, California, Bank of
America and its affiliates have over $50 billion under management, including
over $14 billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference. More information about the Funds is contained in
a Statement of Additional Information that has been filed with the Securities
and Exchange Commission. To obtain a free copy, call 800-332-3863. The Statement
of Additional Information, as it may be revised from time to time, is dated June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investment in the Funds involves investment
risk, including the possible loss of principal.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Funds or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 142
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
FUND INVESTMENTS 9 INVESTMENT OBJECTIVES
9 TYPES OF INVESTMENTS
11 FUNDAMENTAL LIMITATIONS
12 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 20 HOW TO BUY SHARES
20 What Is My Minimum Investment In The Funds?
20 What Alternative Sales Arrangements Are Available?
20 How Are Shares Priced?
23 How Do I Decide Whether To Buy A or K Shares?
24 How Can I Buy Shares?
25 What Price Will I Receive When I Buy Shares?
26 What Else Should I Know To Make A Purchase?
26 HOW TO SELL SHARES
26 How Do I Redeem My Shares?
28 What NAV Will I Receive For Shares I Want To Sell?
29 What Kind Of Paperwork Is Involved In Selling Shares?
29 How Quickly Can I Receive My Redemption Proceeds?
29 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION 30
POLICIES
SHAREHOLDER SERVICES 30
30 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
31 WHAT IS TELETRADE?
31 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
32 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT
IT?
32 CAN I ARRANGE PERIODIC WITHDRAWALS?
32 CAN MY DIVIDENDS FROM A FUND BE INVESTED
IN OTHER FUNDS?
33 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 33
33 FUND MANAGEMENT
33 Service Providers
TAX INFORMATION 36
MEASURING PERFORMANCE 37
DESCRIPTION OF SHARES 39
PLAN PAYMENTS 41
APPENDIX A 43
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
</TABLE>
<PAGE> 143
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 20 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed for A and K
Shares by the National Municipal Bond Fund and California Tax-Exempt Bond Fund
and the operating expenses incurred by the A and K Shares of the National
Municipal Bond Fund and California Tax-Exempt Bond Fund during their last fiscal
year. Actual expenses may vary. A hypothetical example based on the summary is
also shown.
NATIONAL MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
A SHARES K SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of
original purchase price or
redemption proceeds, whichever
is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee
Waivers)+ 0% 0%
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee (After
Fee Waivers)* 0% 0%
Other Expenses (After Fee Waivers
and Expense Reimbursements)+ 0.49% 0.49%
------ ------
Total Operating Expenses (After
Fee Waivers and Expense
Reimbursements)+ 0.49% 0.99%
====== ======
----------------------------------------------
</TABLE>
+ Absent fee waivers and/or expense reimbursement, Management Fees for each
class of shares of the Fund would be 0.55% of the average net assets
(annualized); Other Expenses for the National Municipal Bond Fund's A and K
Shares would be 1.42% of average net assets (annualized) and Total Operating
Expenses for the National Municipal Bond Fund's A and K Shares would be 2.22%
and 2.97% of average net assets (annualized), respectively.
- Absent fee waivers and/or expense reimbursements, 12b-1 fees or
administrative services fees would be 0.75% of the average net assets
(annualized) of the Fund's K Shares. The total of all 12b-1 fees,
administrative services fees and shareholder services fees may not exceed the
annual rate of 1.00% of the average net assets of the National Municipal Bond
Fund's K Shares. However, it is expected that during the current fiscal year,
such fees will not exceed 0.75% of the average net assets of the Fund's K
Shares. Because of the Rule 12b-1, administrative and/or shareholder services
fees paid by the Fund as shown in the above table, long-term K shareholders
may pay more than the economic equivalent of the maximum front-end sales
charge permitted by NASD Regulations, Inc. Absent fee waivers, Shareholder
Services fees for A and K Shares would be 0.25% (annualized) of average daily
net assets. For a further description of shareholder transaction expenses and
the National Municipal Bond Fund's operating expenses, see the sections
entitled "Shareholder Guide," "The Business of the Funds" and "Plan Payments"
below.
2
<PAGE> 144
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 50 $60 $71 $104
K Shares $ 10 $32 $55 $121
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT BOND FUND
<TABLE>
<CAPTION>
A SHARES K SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of
original purchase price or
redemption proceeds, whichever
is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee
Waivers)+ 0.51% 0.51%
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses (After Fee
Waivers)+ 0.14% 0.14%
------- -------
Total Operating Expenses (After
Fee Waivers)+ 0.90% 1.40%
======= =======
----------------------------------------------
</TABLE>
+ Absent fee waivers and/or expense reimbursements, Management Fees for each
class of shares of the Fund would be 0.70% of the average net assets
(annualized); Other Expenses for the A and K shares would be 0.15% of average
net assets (annualized) and Total Operating Expenses for the California
Tax-Exempt Bond Fund's A and K Shares would be 1.10% and 1.85% of average net
assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the California Tax-Exempt Bond Fund as shown in the above table,
long-term K shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by NASD Regulations, Inc. For a
further description of shareholder transaction expenses and the California
Tax-Exempt Bond Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 54 $72 $93 $151
K Shares $ 14 $44 $77 $168
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
3
<PAGE> 145
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.35% and 0.40% of
the National Municipal Bond Fund's and the California Tax-Exempt Bond Fund's
respective average daily net assets; and
- - an administration fee payable at the annual rate of 0.20% of the National
Municipal Bond Fund's average daily net assets and 0.30% of the California
Tax-Exempt Bond Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a front-
end sales charge nor a contingent deferred sales charge, but incur fees under a
Distribution Plan and/or an Administrative and Shareholder Services Plan, with
respect to K Shares. See the section entitled "How Do I Decide Whether To Buy A
or K Shares?" below.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The California Tax-Exempt Bond Fund commenced operations on March 30, 1984 as a
separate Maryland corporation called Pacific Horizon Tax-Exempt Fund, Inc. (the
"Predecessor Fund"). The Predecessor Fund subsequently changed its name to
Pacific Horizon California Tax-Exempt Bond Portfolio, Inc. On January 19, 1990,
the Predecessor Fund was reorganized as a separate portfolio of the Company.
Prior to July 1, 1996, the National Municipal Bond Fund operated as part of a
master feeder structure and invested all of its assets in a master portfolio
("Master Portfolio") which had an identical investment objective. On July 1,
1996, the National Municipal Fund withdrew its investment in the Master
Portfolio and began investing its assets directly in investment securities.
The table below shows certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's investment
results for the fiscal years ended on or prior to February 28, 1989, the
combined investment results of both the Predecessor Fund and the California
Tax-Exempt Bond Fund for the fiscal year ended February 28, 1990 and the
California Tax-Exempt Bond Fund's investment results for the seven years in the
seven year period ended February 28, 1997). On July 22, 1996, the National
Municipal Bond Fund and the California Tax-Exempt Bond Fund initially funded K
Shares. The information for each of the last five fiscal years ended February
28, 1997 has been audited by Price Waterhouse LLP, independent accountants,
whose unqualified reports on the financial statements containing such
information for the five year period ended February 28, 1997 is incorporated by
reference in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
4
<PAGE> 146
NATIONAL MUNICIPAL BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 28, 1994
(COMMENCEMENT OF
FOR THE YEAR FOR THE YEAR FOR THE YEAR OPERATIONS)
ENDED ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997(A) 1996 1995 1994
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of period $ 10.15 $ 9.64 $ 9.89 $10.00
------------ ------------ ------------ --------
Income from Investment Operations:
Net Investment income 0.50 0.54 0.50 0.01
Net realized and unrealized gains (losses) on
invest transactions 0.06 0.51 (0.25) (0.11)
------------ ------------ ------------ --------
Total income (loss) from investment
operations 0.56 1.05 0.25 (0.10)
------------ ------------ ------------ --------
Less Dividends and Distributions Dividends to
shareholders from net investment income (0.50) (0.54) (0.50) (0.01)
------------ ------------ ------------ --------
Distributions to shareholders from net realized
gains on investment transactions (0.03) -- -- --
------------ ------------ ------------ --------
Total Dividends and Distributions (0.53) (0.54) (0.50) (0.01)
------------ ------------ ------------ --------
Net change in net asset value per share 0.03 0.51 (0.25) (0.11)
------------ ------------ ------------ --------
Net asset value per share, end of period $ 10.18 $ 10.15 $ 9.64 $ 9.89
========== ========== ========== ===============
Total Return++ 5.66% 1.16% 2.78% (1.00)%
Ratios/Supplemental Data:
Net assets, end of period (000) $ 15,414 $ 12,242 $2,520 $ 733
Ratio of expenses to average net assets* 0.49% 0.12% 0.00% 0.00%+
Ratio of net investment income to average net
assets* 4.96% 5.24% 5.30% 1.15%+
Portfolio Turnover Rate 12% 38% 20% 15%
</TABLE>
- ---------------
* Reflects the National Municipal Bond Fund's proportionate share of the Master
Portfolio's expenses and fee waivers and expense reimbursements (for periods
prior to July 1, 1996) and the National Municipal Bond Fund's fee waivers and
expense reimbursements. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and increasing
the ratio of net investment income to average net assets by 2.59%, 17.46% and
170.99% (annualized) for the years ended February 29, 1996, February 28, 1995
and the period ended February 28, 1994, respectively. During the year ended
February 28, 1997, certain fees were voluntarily reduced and/or reimbursed.
Such fee reductions had the effect of reducing the ratio of expenses to
averages net assets by 1.73% and increasing the ratio of net investment
increase to average net assets by 1.71%. During the same period, the Fund
received credits from the custodian for interest earned on uninvested
balances which were used to offset custodian fees and expenses. If such
credits had not occurred the ratio of expenses to average net assets would
have been 2.22%. The ratio of net investment income was not affected.
+ Annualized.
++ The total return listed does not include the effect of the maximum 4.50%
sales charge on A Shares, and is not annualized for the period ended
February 28, 1994.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
5
<PAGE> 147
NATIONAL MUNICIPAL BOND FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEB. 28, 1997
-----------------
<S> <C>
Net asset value per share, beginning of period $ 9.96
------
Income from Investment Operations:
Net Investment income 0.28
Net realized and unrealized gains on investment transactions 0.25
------
Total income from investment operations 0.53
------
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.28)
Distributions to shareholders from net realized gains on investment
transactions (0.03)
------
Total Dividends and Distributions (0.31)
------
Net change in net asset value per share 0.22
------
Net asset value per share, end of period $ 10.18
======
Total Return 5.38%**
Ratios/Supplemental Data:
Net assets, end of period (000) $ 1
Ratio of expenses to average net assets* 0.76%+
Ratio of net investment income to average net assets* 4.54%+
Portfolio turnover rate 12%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee reductions and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets by 0.92% and increasing the ratio of
net investment income to average net assets by 0.92%, (annualized) for the
period ended February 28, 1997. Fees paid by third parties, however, had no
effect on the ratios.
** Not Annualized.
+ Annualized.
6
<PAGE> 148
CALIFORNIA TAX-EXEMPT BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------------------------------
FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29,
1997(A) 1996 1995 1994 1993+ 1992 1991 1990 1989 1988
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset value per
share, beginning of
period $ 7.45 $ 7.12 $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6.84 $ 6.72 $ 6.87 $ 7.38
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Income from
Investment
Operations:
Net investment
income 0.36 0.37 0.38 0.38 0.43 0.43 0.45 0.47 0.47 0.47
Net realized and
unrealized
gains (losses)
on securities (0.05) 0.33 (0.37) 0.04 0.52 0.22 0.06 0.12 (0.15) (0.51)
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total income from
investment
operations 0.31 0.70 0.01 0.42 0.95 0.65 0.51 0.59 0.32 (0.04)
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Less Dividends and
Distributions:
Dividends to
shareholders
from net
investment
income (0.36) (0.37) (0.38) (0.38) (0.43) (0.43) (0.45) (0.47) (0.47) (0.47)
Distributions to
shareholders
from net
realized gains
on investment
transactions (0.05) -- -- (0.06) (0.08) (0.05) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total dividends
and
distributions (0.41) (0.37) (0.38) (0.44) (0.51) (0.48) (0.45) (0.47) (0.47) (0.47)
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Net change in net
asset value per
share (0.10) 0.33 (0.37) (0.02) 0.44 0.17 0.06 0.12 (0.15) (0.51)
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Net asset value per
share, end of
period $ 7.35 $ 7.45 $ 7.12 $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6.84 $ 6.72 $ 6.87
======== ======== ======== ======== ======== ======== ======== ======== ======= =======
Total Return* 4.29% 10.12% 0.36% 5.65% 14.01% 9.63% 7.72% 8.94% 4.90%# (0.23%)#
Ratios/Supplemental
Data:
Net assets, end of
period (000) $ 221,110 $221,141 $194,601 $245,040 $189,419 $149,020 $107,815 $101,583 $ 88,678 $ 90,142
Ratio of expenses to
average net assets 0.90%++ 0.94%++ 0.95%++ 0.96%++ 0.62%++ 1.01%++ 0.98%++ 0.95%++ 1.03% 1.10%
Ratio of net
investment income
to average net
assets 4.88%++ 5.11%++ 5.43%++ 4.96%++ 5.95%++ 6.05%++ 6.57%++ 6.81%++ 6.93% 6.90%
Portfolio turnover 34% 57% 20% 15% 32% 24% 33% 58% 54% 30%
</TABLE>
- ---------------
+ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
++ Includes fee waivers and/or expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.20%, 0.20%,
0.20%, 0.15%, 0.52%, 0.15%, 0.22% and 0.17% for the years ended February
28, 1997, February 29, 1996, February 28, 1995, February 28, 1994, February
28, 1993, February 29, 1992, February 28, 1991 and February 28, 1990,
respectively. During the year ended February 28, 1997, the Fund received
credits from its custodian for interest earned on uninvested balances which
were used to offset custodian fees and expenses. If such credits had not
occurred the ratio of expenses would have been 1.10%. The ratio of net
investment income was not affected.
* The total return figures presented do not include the effect of the maximum
4.50% sales charge on A Shares.
# Unaudited
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
7
<PAGE> 149
CALIFORNIA TAX-EXEMPT BOND FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEB. 28, 1997
-----------------
<S> <C>
Net asset value per share, beginning of period $ 7.25
------
Income from Investment Operations:
Net Investment income 0.20
Net realized and unrealized gains on securities 0.15
------
Total income from investment operations 0.35
------
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.20)
Distributions to shareholders from net realized gains on investment
transactions (0.05)
------
Total Dividends and Distributions (0.25)
------
Net change in net asset value per share 0.10
------
Net asset value per share, end of period $ 7.35
======
Total Return 4.90%**
Ratios/Supplemental Data:
Net assets, end of period (000) $ 1
Ratio of expenses to average net assets* 1.21%+
Ratio of net investment income to average net assets* 4.51%+
Portfolio turnover rate 34%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee reductions and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 0.35%, (annualized) for the period
ended February 28, 1997. Fees paid by third parties, however, had no effect on
the ratios.
** Not Annualized.
+ Annualized.
8
<PAGE> 150
================================================================================
FUND INVESTMENTS
---------------------------------------------------------
INVESTMENT OBJECTIVES
The Funds seek as high a level of current interest income free of Federal income
tax (and California state personal income tax in the case of the California
Tax-Exempt Bond Fund) as is consistent with prudent investment management and
preservation of capital. WHILE THE FUNDS STRIVE TO ATTAIN THEIR INVESTMENT
OBJECTIVES, THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
NATIONAL MUNICIPAL BOND FUND
The National Municipal Bond Fund seeks to achieve its investment objective
through investment primarily in a diversified portfolio of investment grade
municipal debt securities. Investment grade debt securities ordinarily carry
lower rates of interest income than lower quality debt securities with similar
maturities. The National Municipal Bond Fund may be appropriate for investors
who want a high level of current interest income free from Federal income tax.
CALIFORNIA TAX-EXEMPT BOND FUND
The California Tax-Exempt Bond Fund seeks to achieve its investment objective
through investment primarily in investment grade municipal obligations issued by
the State of California and other governmental entities. Investment grade debt
securities ordinarily carry lower rates of interest income than lower quality
debt securities with similar maturities. The California Tax-Exempt Bond Fund may
be appropriate for California residents and other investors who want monthly
income sheltered from both Federal and California income taxes, greater
diversification and liquidity than could be achieved by an individual purchasing
municipal bonds directly, and relative stability of principal.
- ---------------------------------------------------------
TYPES OF INVESTMENTS
GENERAL INVESTMENTS
NATIONAL MUNICIPAL BOND FUND. The National Municipal Bond Fund's assets will be
primarily invested in debt obligations (at least 80% of the total assets under
normal market conditions) issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political sub-divisions, the
interest on which, in the opinion of bond counsel to the issuer, is exempt from
regular Federal income tax ("Municipal Securities"). Under normal market
conditions, it is expected that at least 75% of the National Municipal Bond
Fund's total assets will consist of issues rated investment grade or better by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P") or
Fitch Investors Service, Inc. ("Fitch") at the time of purchase (that is, rated
in one of the four highest rating categories) or, if unrated, will be deemed by
the National Municipal Bond Fund's investment adviser to be of comparable
quality. While securities rated in the fourth highest rating category (i.e.,
rated Baa or BBB) are regarded as having an adequate capacity to pay principal
and interest, such securities lack outstanding investment characteristics and in
fact have speculative characteristics as well. The National Municipal Bond
Fund's assets may be invested in lower quality, higher yielding Municipal
Securities which are rated below investment grade. Such securities carry a
higher degree of risk and are considered to be speculative by the major credit
rating agencies. Lower quality, higher yielding securities are commonly referred
to as "junk bonds." See "High Yield, High Risk Securities" below and
"Description of Municipal Securities Ratings" in the Appendix to this
Prospectus. The National Municipal Bond Fund has
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<PAGE> 151
no restrictions on the maturity of Municipal Securities in which it may invest.
Accordingly, the National Municipal Bond Fund seeks to invest in Municipal
Securities of such maturities which, in the judgment of the investment adviser,
will provide a high level of current income consistent with prudent investment
management, with consideration given to market conditions. The National
Municipal Bond Fund's average weighted maturity will vary in response to
variations in comparative yields of differing maturities of instruments, in
accordance with the National Municipal Bond Fund's investment objective.
The National Municipal Bond Fund may hold uninvested cash reserves pending
investment, during temporary defensive periods, or if, in the opinion of the
National Municipal Bond Fund's investment adviser, suitable tax-exempt
obligations are unavailable. In accordance with the National Municipal Bond
Fund's investment objective, investments may be made in taxable obligations if,
for example, suitable tax-exempt obligations are unavailable or if acquisition
of U.S. Government or other taxable securities is deemed appropriate for
temporary defensive purposes. Such taxable obligations may include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(some of which may be subject to repurchase agreements), certificates of deposit
and bankers' acceptances of selected banks, and commercial paper rated within
the two highest ratings assigned by a nationally recognized statistical rating
organization. These obligations are described further in the Statement of
Additional Information. To the extent that the National Municipal Bond Fund
invests in such instruments, it will not be invested in accordance with the
investment policies designed for it to realize its investment objective. Income
earned from these instruments is taxable and therefore is not included in the
dividends exempt from federal income tax which the National Municipal Bond Fund
will pay.
The National Municipal Bond Fund may also make other investments as described
more fully below under "Other Investment Practices and Considerations."
CALIFORNIA TAX-EXEMPT BOND FUND. The California Tax-Exempt Bond Fund invests
primarily in Municipal Securities (at least 65% of its total assets under normal
circumstances) issued by California and other states, territories and
possessions of the U.S. and the District of Columbia, and their agencies,
authorities, instrumentalities and political sub-divisions, as long as these
instruments are free of Federal income tax.
Under normal market conditions, it is expected that at least 75% of the
California Tax-Exempt Bond Fund's total assets will consist of issues rated
investment grade or better by Moody's, S&P, D&P or Fitch at the time of purchase
(that is, rated in one of the four highest rating categories) or, if unrated,
will be deemed by the California Tax-Exempt Bond Fund's investment adviser to be
of comparable quality. While securities rated in the fourth highest rating
category (i.e., rated Baa or BBB) are regarded as having an adequate capacity to
pay principal and interest, such securities lack outstanding investment
characteristics and in fact have speculative characteristics as well. The
California Tax-Exempt Bond Fund's assets may be invested in lower quality,
higher yielding Municipal Securities which are rated below investment grade.
Such securities carry a higher degree of risk and are considered to be
speculative by the major credit rating agencies. Lower quality, higher yielding
securities are commonly referred to as "junk bonds." See "High Yield, High Risk
Securities" below and "Description of Municipal Securities Ratings" in the
Appendix to this Prospectus. The California Tax-Exempt Bond Fund has no
restrictions on the maturity of Municipal Securities in which it may invest.
Accordingly, the California Tax-Exempt Bond Fund seeks to invest in Municipal
Securities of such maturities which, in the judgment of the investment adviser,
will provide a high level of current income consistent with prudent investment
management, with considera-
10
<PAGE> 152
tion given to market conditions. The California Tax-Exempt Bond Fund's average
weighted maturity will vary in response to variations in comparative yields of
differing maturities of instruments, in accordance with the California
Tax-Exempt Bond Fund's investment objective.
As a fundamental policy, under normal circumstances at least 80% of the
California Tax-Exempt Bond Fund's assets will be invested in Municipal
Securities free from tax under the laws or Constitution of California
("California Municipal Securities"). In any event, in an effort to keep the
California Tax-Exempt Bond Fund's dividends free from California state personal
income tax, the California Tax-Exempt Bond Fund will endeavor to invest at least
50% of its total assets in obligations the interest on which (if held by an
individual) is exempt from taxation by California ("California Exempt
Securities," which generally are limited to California Municipal Securities and
certain U.S. Government and U.S. Possession obligations) as of the end of each
fiscal quarter. If the California Tax-Exempt Bond Fund is able to do so, and
assuming the California Tax-Exempt Bond Fund otherwise qualifies, the dividends
that investors receive from the interest on those California Exempt Securities
will not be subject to that tax. However, if the California Tax-Exempt Bond Fund
is not able to achieve the 50% goal, no part of the California Tax-Exempt Bond
Fund's dividends will be exempt from California state personal income tax.
Dividends derived from Municipal Securities that are not California Municipal
Securities will be subject to California's state personal income tax.
Subject to the fundamental policy above, the California Tax-Exempt Bond Fund may
also make limited investments in taxable obligations. These taxable obligations,
which may have maturities of up to thirteen months, may include obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
(and repurchase agreements related to such obligations), certificates of deposit
and bankers' acceptances of select banks and commercial paper rated within the
two highest rating categories by any major rating service.
The California Tax-Exempt Bond Fund might purchase such taxable obligations if,
for example, suitable tax-exempt obligations cannot be found or if deemed
appropriate for temporary defensive purposes. To the extent that the California
Tax-Exempt Bond Fund invests in such instruments, it will not be invested in
accordance with the investment policies designed for it to realize its
investment objective. Income earned from these instruments is taxable and
therefore is not included in the dividends exempt from federal and California
income tax which the California Tax-Exempt Bond Fund will pay. The California
Tax-Exempt Bond Fund may also hold cash for temporary defensive purposes, prior
to making investments or if Bank of America believes suitable tax-exempt
investment opportunities are not available.
FUNDAMENTAL LIMITATIONS The investment objective of the Funds may not be
changed without a vote by the holders of a majority of the outstanding shares of
the particular Fund. Policies requiring such a vote to effect a change are known
as "fundamental." A number of the other fundamental investment limitations are
summarized below.
The National Municipal Bond Fund may not:
1. Purchase securities of any one issuer (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, immediately after and as a
result, more than 5% of its total assets will be invested in the securities
of such issuer, except that up to 25% of its total assets may be invested
without regard to this 5% limitation and that all of the assets of the Fund
may be invested in another investment company.
2. Make loans except that the Fund may purchase or hold debt instruments and
enter into repurchase agreements pursuant to its investment objective and
policies.
3. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs (however, the
11
<PAGE> 153
National Municipal Bond Fund may, to the extent appropriate to its investment
objective, purchase publicly traded securities of companies engaging in whole
or in part in such activities), but may enter into futures contracts and
options thereon in accordance with its Prospectus.
The California Tax-Exempt Bond Fund:
1. Under normal circumstances, will invest at least 80% of its assets in
California Municipal Securities.
2. May not purchase securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if
immediately thereafter more than 15% of its total assets would be invested in
certificates of deposit or bankers' acceptances of any one bank, or more than
5% of its total assets would be invested in other securities of any one bank
or the securities of any other issuer (except that up to 25% of the Fund's
total assets may be invested without regard to this limitation).
3. May not make loans except that the Fund may purchase or hold debt instruments
and enter into repurchase agreements pursuant to its investment objective and
policies.
4. May not purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs (however, the Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
5. May not invest more than 10% of its total assets in certain instruments that
are illiquid.
A list of additional fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES
AND CONSIDERATIONS
MORE ON MUNICIPAL SECURITIES. The two main types of Municipal Securities are
"general obligation" securities (which are secured by the issuer's full faith,
credit and taxing power) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or other specific
revenue source). A third type of Municipal Security, normally issued by special
purpose public authorities, is known as a "moral obligation" security because if
the issuer cannot meet its repayment obligations it then draws on a reserve
fund, the restoration of which is a moral, but not a legal requirement. Private
activity bonds which the Funds may hold are usually revenue securities that are
not payable from the unrestricted revenues of the issuer. The quality of these
bonds therefore is often directly related to the credit of the corporate user of
the facility being financed.
Municipal Securities purchased by the Funds may include both rated and unrated
variable and floating rate instruments. Although particular variable or floating
rate obligations often do not have an active secondary market, the periodic
readjustment of interest rates that these instruments undergo tends to assure
that their value to the Fund approximates their actual par value.
Opinions with respect to Municipal Securities regarding their validity and
exemption from Federal income tax (and California personal income tax where
applicable) are given by the issuer. The Funds and Bank of America will rely on
these opinions and do not intend to review the basis for them.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities acquired by the Funds
may be in the form of custodial receipts evidencing rights to receive a specific
future interest payment, principal payment or both on certain Municipal
Securities. Such obligations are held in custody by a bank on behalf of holders
of the receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The Funds may also
purchase from time to time participation interests in debt securi-
12
<PAGE> 154
ties held by trusts or financial institutions. A participation interest gives
the Funds an undivided interest in the security or securities involved.
Participation interests may have fixed, floating or variable rates of interest
(although the securities held by the issuer may have longer maturities). If a
participation interest is unrated, the investment adviser will have determined
that the interest is of comparable quality to those instruments in which the
Funds may invest pursuant to guidelines approved by the Funds' Board of
Directors. For certain participation interests, the Funds will have the right to
demand payment, for all or any part of the Funds' participation interest, plus
accrued interest. As to these instruments, each Fund intends to exercise its
right to demand payment as needed to provide liquidity, to maintain or improve
the quality of its investment portfolio or upon a default (if permitted under
the terms of the instrument).
WHEN-ISSUED, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds may
purchase Municipal Securities on a "when issued" basis and may purchase or sell
Municipal Securities on a "forward commitment" basis. The Funds may also
purchase or sell Municipal Securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Funds to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Funds to lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in interest rates. Delayed settlement describes
settlement of a securities transaction in the secondary market which will occur
sometime in the future. When-issued, forward commitment and delayed settlement
transactions involve the risk, however, that the yield or price obtained in a
transaction may be less favorable than the yield or price available in the
market when the securities delivery takes place. The Funds will set aside in a
segregated account cash or liquid securities equal to the amount of any
when-issued, forward commitment or delayed settlement transactions. Each Fund's
forward commitments, when-issued purchases and delayed settlements are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. In the event its forward commitments, when-issued purchases and
delayed settlements ever exceeded 25% of the value of its assets, a Fund's
liquidity and the ability of the investment adviser to manage the Fund might be
adversely affected. Each Fund does not intend to engage in these transactions
for speculative purposes but only in furtherance of its investment objective.
The market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of each Fund starting on the day the Fund agrees to purchase the
securities. A Fund does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
STAND-BY COMMITMENTS. In addition, the Funds may acquire "stand-by commitments"
with respect to Municipal Securities held in their respective portfolios. Under
a stand-by commitment, a dealer agrees to purchase at a Fund's option specified
Municipal Securities at a specified price. The Funds will acquire stand-by
commitments solely to facilitate portfolio liquidity and do not intend to
exercise their respective rights thereunder for trading purposes. The Funds
expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Funds may pay for a "stand-by commitment" either separately in
cash or by paying a higher price for portfolio securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities).
CALLABLE SECURITIES. The Funds may invest in callable municipal bonds. Callable
municipal bonds are municipal bonds which contain a provision in the indenture
permitting the issuer
13
<PAGE> 155
to redeem the bonds prior to their maturity dates at a specified price which
typically reflects a premium over the bonds' original issue price. These bonds
generally have call-protection (that is, a period of time during which the bonds
may not be called) which usually lasts for 7 to 10 years, after which time such
bonds may be called away. An issuer may generally be expected to call its bonds,
or a portion of them, during periods of relatively declining interest rates,
when borrowings may be replaced at lower rates than those obtained in prior
years. If the proceeds of a bond called under such circumstances are reinvested,
the result may be a lower overall yield due to lower current interest rates. If
bonds are purchased at a premium, some or all of that premium may not be
recovered by bondholders, such as the Funds, upon redemption, depending on the
redemption price.
ZERO COUPON SECURITIES. The Funds may invest in zero coupon securities. Zero
coupon securities are debt obligations which do not entitle the holder to any
periodic payments of interest prior to maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and therefore
are issued and traded at a discount from their face amounts or par value. Such
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, a Fund will realize no cash until the cash
payment date and, if the issuer defaults, the Fund may obtain no return at all
on its respective investments. The Funds will be required to include in income
(or, with respect to Municipal Securities, in exempt-interest income) daily
portions of original issue discount accrued which will cause the Funds to be
required to make distributions of such amounts to shareholders annually, even if
no payment is received before the distribution date.
REPURCHASE AGREEMENTS. The Funds may agree to purchase securities from
financial institutions, such as banks and broker-dealers that are deemed
creditworthy by the investment adviser under guidelines approved by the Funds'
Board of Directors, subject to the seller's agreement to repurchase them at an
agreed upon time and price ("repurchase agreements"). Repurchase agreements
maturing in more than seven days are considered illiquid investments and
investment in such repurchase agreements along with any other illiquid
securities will not exceed 15% and 10% of the value of the respective net assets
of the National Municipal Bond Fund and California Tax-Exempt Bond Fund under
normal market conditions. Securities subject to repurchase agreements are held
either by a custodian, or in the Federal Reserve/Treasury Book-Entry System. The
seller under a repurchase agreement will be required to maintain the value of
the securities subject to the agreement in an amount that exceeds the repurchase
price, and such value will be continuously monitored by the investment adviser
on an ongoing basis. Default by the seller would, however, expose the particular
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements. At the time a Fund enters into a reverse repurchase agreement (an
agreement under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a segregated
custodial account, liquid assets, such as U.S. Government securities or other
liquid high grade debt securities having a value equal to or greater than the
repurchase price (including accrued interest), and will subsequently
continuously monitor the account to ensure that such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase. Reverse repurchase agreements are considered to
be borrowings by the Fund under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
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<PAGE> 156
speculative character of the Fund's outstanding shares.
FUTURES AND RELATED OPTIONS. The Funds may invest in futures contracts and
related options relating to indices on municipal bonds as a hedge against
changes in its other assets' market values ("Municipal Bond Index Futures" or
"Futures").
If the investment adviser expects interest rates to rise, a Fund may sell a
futures contract or may sell a call option or purchase a put option on such
futures contract, as a hedge against a decrease in the value of the Fund. If the
investment adviser expects interest rates to decline, a Fund may purchase a
futures contract, or may purchase a call option or sell a put option on such
futures contract, to protect against an increase in the price of securities
which the Fund intends to purchase.
Each Fund will limit its hedging transactions in futures contracts and related
options so that, immediately after any such transaction, the aggregate initial
margin that is required to be posted by the Fund under the rules of the exchange
on which the futures contract (or futures option) is traded, plus any premiums
paid by the Fund on its open futures options positions, does not exceed 5% of
the Fund's total assets, after taking into account any unrealized profits and
losses on the Fund's open futures contracts and excluding the amount that a
futures option is "in-the-money" at the time of purchase. (An option to buy a
futures contract is "in-the-money" if the then current purchase price of the
underlying futures contract exceeds the exercise or strike price; an option to
sell a futures contract is "in-the-money" if the exercise or strike price
exceeds the then current purchase price of the contract that is the subject of
the option.) For a more detailed discussion of futures contracts and options and
the cost and risks related to such instruments, see Appendix B to the Statement
of Additional Information.
ILLIQUID SECURITIES. The National Municipal Bond Fund and California Tax-Exempt
Bond Fund will not knowingly invest more than 15% and 10% of the value of their
respective total assets in securities that are illiquid, including illiquid
variable and floating rate instruments that are not payable upon 7 days' notice
and do not have an active trading market.
RISK FACTORS AND SPECIAL CONSIDERATIONS. In seeking to achieve its investment
objective the National Municipal Bond Fund may invest, without limitation, in
industrial development bonds, which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. In pursuing its investment objective, the California
Tax-Exempt Bond Fund may invest under normal market conditions up to 20% of its
total assets in taxable instruments, including private activity bonds. Interest
on Municipal Securities that are private activity bonds, although exempt from
regular Federal income tax, may constitute an item of tax-preference for
purposes of the Federal alternative minimum tax. See "Tax Information." In
addition, although the Funds do not presently intend to do so on a regular
basis, each may invest more than 25% of its assets in Municipal Securities the
interest on which comes solely from revenues of similar projects. When a Fund's
assets are concentrated in obligations payable from revenues of similar
projects, the Fund will be subject to the particular risks (including economic,
business and political risks) related to such projects to a greater extent than
if its assets were not so concentrated. The value of a Fund's securities will
generally vary inversely with changes in prevailing interest rates. Such values
will also change in response to changes in the interest rates payable on new
issues of Municipal Securities. Should such interest rates rise, the values of
outstanding bonds, including those held by a Fund will decline. If interest
rates fall, the values of outstanding bonds will generally increase. Changes in
the value of a Fund's securities arising from these or other factors will cause
changes in the net asset value per share of the Fund.
HIGH YIELD, HIGH RISK SECURITIES. Up to 25% of each Fund's total assets may be
invested in
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<PAGE> 157
Municipal Securities rated below investment grade ("high yield, high risk
securities"), or in the case of the California Tax-Exempt Bond Fund, in unrated
securities determined to be of comparable quality.
RISKS RELATED TO HIGH YIELD, HIGH RISK SECURITIES. While any investment carries
some risk, some of the risks associated with high yield, high risk securities
are different from the risks associated with investment grade securities. The
risk of loss through default is greater because high yield, high risk securities
are usually unsecured and are often subordinate to an issuer's other
obligations. Additionally, the issuers of these securities frequently have high
debt levels and are thus more sensitive to difficult economic conditions,
individual corporate developments and rising interest rates. Consequently, the
market price of these securities, and the net asset value of each Fund's shares,
may be quite volatile.
RELATIVE YOUTH OF HIGH YIELD, HIGH RISK SECURITIES' MARKET. Because the market
for high yield, high risk securities, at least in its present size and form, is
relatively new, there remains some uncertainty about its performance level under
adverse market and economic environments. An economic downturn or increase in
interest rates could have a negative impact on both the market for high yield,
high risk securities (resulting in a greater number of bond defaults) and the
value of high yield, high risk securities held in a Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect high yield, high risk securities differently than other
securities. For example, the prices of high yield, high risk securities are more
sensitive to adverse economic changes or individual corporate developments than
are the prices of higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, a Fund may incur additional expenses to
seek recovery. In addition, periods of economic uncertainty would likely result
in increased volatility for the market prices of high yield, high risk
securities as well as a Fund's net asset value. In general, both the prices and
yields of high yield, high risk securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, a Fund's
valuation of a security and the price it is actually able to obtain when it
sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield, high risk
securities held by a Fund, especially in a thinly traded market. Illiquid or
restricted securities held by a Fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for high yield, high risk securities.
CREDIT RATINGS. S&P, Moody's, D&P and Fitch evaluate the safety of a high
yield, high risk security's principal and interest payments, but do not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, Bank of America performs its own analysis of the
issuers whose high yield, high risk securities a Fund purchases. Because of
this, a Fund's performance may depend more on the investment adviser's own
credit analysis than is
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the case for mutual funds investing in higher rated securities.
In selecting high yield, high risk securities, Bank of America considers factors
such as those relating to the creditworthiness of issuers, the ratings and
performance of the high yield, high risk securities, the protections afforded
the high yield, high risk securities and the diversity of a Fund's portfolio.
Bank of America continuously monitors the issuers of high yield, high risk
securities held in a Fund's portfolio for their ability to make required
principal and interest payments, as well as in an effort to control the
liquidity of a Fund's portfolio so that it can meet redemption requests.
The National Municipal Bond Fund will not invest in any security that has lower
than a C rating. The California Tax-Exempt Bond Fund may invest in Municipal
Securities rated C by Moody's, D by Standard & Poor's, D by Fitch or DD by Duff
& Phelps, or in unrated securities determined to be of comparable quality. The
National Municipal Bond Fund may retain a portfolio security whose rating has
been changed if Bank of America deems that retention of such security is
warranted. In general, lower rated debt securities are subject to risks of
market fluctuation or default (due to changes in the credit rating or financial
condition of the issuer) that are significantly greater than for securities in
the higher rating categories of S&P's, Moody's, Duff & Phelps or Fitch. Please
refer to the description of municipal bond ratings in the Appendix to the
Prospectus.
For your information, set forth below is the average distribution of ratings at
value for the National Municipal Bond Fund's and the California Tax-Exempt Bond
Fund's portfolio securities (including commercial paper and nonconvertible
bonds) for their last fiscal year:
NATIONAL MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
MOODY'S INVESTORS SERVICE, PERCENTAGE
INC. OF VALUE
- ----------------------------- ----------
<S> <C> <C>
Aaa 45.9%
Aa 20.4%
A 24.0%
Baa 5.9%
Ba or lower 0%
Not Rated 3.8%
Comparable to A 0%
Comparable to Baa 0%
Comparable to Ba or lower 0%
------
100.0%
======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE
STANDARD & POOR'S CORPORATION OF VALUE
- ----------------------------- ----------
<S> <C> <C>
AAA 42.9%
AA 16.8%
A 25.7%
BBB 5.9%
BB or lower 0%
Not Rated 8.7%
Comparable to A 0%
Comparable to BBB 0%
Comparable to BBB or lower 0%
------
100.0%
======
</TABLE>
CALIFORNIA TAX-EXEMPT BOND FUND
<TABLE>
<CAPTION>
MOODY'S INVESTORS SERVICE, PERCENTAGE
INC. OF VALUE
- ----------------------------- ----------
<S> <C> <C>
Aaa 50.0%
Aa 12.1%
A 11.7%
Baa 8.5%
Ba or lower 0%
Not Rated 17.7%
Comparable to A 0%
Comparable to Baa 0%
Comparable to Ba or lower 0%
------
100.0%
======
</TABLE>
17
<PAGE> 159
<TABLE>
<CAPTION>
PERCENTAGE
STANDARD & POOR'S CORPORATION OF VALUE
- ----------------------------- ----------
<S> <C> <C>
AAA 53.8%
AA 14.5%
A 18.3%
BBB 3.8%
BB or lower 0%
Not Rated 9.6%
Comparable to A 0%
Comparable to BBB 0%
Comparable to BBB or lower 0%
------
100.0%
======
</TABLE>
These ratings are described in the Appendix to this Prospectus.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Fund are not less favorable than
what they would be with any other qualified firm.
PORTFOLIO TURNOVER. Portfolio turnover will not be a limiting factor in making
portfolio decisions. Portfolio turnover may impose transaction costs on a Fund
and may increase the proportion of the income received by the Fund which
constitutes taxable capital gains. To the extent capital gains are realized,
distributions by the particular Fund of its allocated share of such gains may be
ordinary income for Federal tax purposes. See "Tax Information." Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs than would otherwise be the case. See "Financial Highlights" for the
Fund's portfolio turnover rate for the period ended February 28, 1997.
CALIFORNIA TAX-EXEMPT BOND FUND CONSIDERATIONS. The California Tax-Exempt Bond
Fund's concentration in California Municipal Securities raises additional
considerations. Payment of the interest and principal of these obligations
depends on the continuing ability of their issuers to meet their obligations
thereunder. Investors should consider the greater risk inherent in the
California Tax-Exempt Bond Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio,
and should compare the yield available on a portfolio of California issues with
the yield of a more diversified portfolio including non-California issues before
making an investment decision.
Many of the California Tax-Exempt Bond Fund's Municipal Securities are likely to
be obligations of California governmental issuers that rely to one extent or
another on real property taxes as a source of revenue. "Proposition Thirteen"
and similar California constitutional and statutory amendments and initiatives
in recent years have restricted the ability of California taxing entities to
increase real property tax revenues. Other initiatives approved by California
voters in recent years, through limiting various other taxes, have resulted in a
substantial reduction in state revenues. Decreased state revenues may result in
reductions in allocations of state revenues to local governments. Because of the
complex
18
<PAGE> 160
nature of the various initiatives mentioned above and certain possible
ambiguities and inconsistencies in their terms and the scope of various
exemptions and exceptions, as well as the impossibility of predicting the level
of future appropriations for state and local governmental entities, the impact
of these initiatives and related measures on the ability of California
governmental issuers to pay interest or repay principal on their obligations is
difficult to determine. There have, however, been certain adverse developments
with respect to Municipal Securities of California governmental issuers over the
past several years.
In addition to the various initiatives noted above, economic factors such as the
reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the California economy. In recent
years, these economic factors reduced revenues to the state government at a time
when expenses of state government such as education costs, various welfare costs
and other expenses were rising. Such economic factors adversely impacted the
ability of state and local California governmental entities to repay debt and
these factors, and others that cannot be predicted, may have an adverse impact
in the future.
A more detailed description of the special factors affecting investments in
California Municipal Securities is set forth in the Statement of Additional
Information.
19
<PAGE> 161
- -------------------------------------------------------------------------------
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUNDS' SHARES
AND REGARDING THE FUNDS' DIVIDENDS.
- -------------------------------------------------------------------------------
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- ----------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold to
individuals investing proceeds from a redemption of shares from another open-end
investment company on which such an individual paid a front-end sales load if
(i) such redemption occurred within 30 days prior to the purchase order, and
(ii) such other open-end investment company was not distributed and advised by
Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates. The two classes of shares in each Fund represent interests in the
same portfolio of investments of the particular Fund, have the same rights and
are identical in all respects except as discussed below. A Shares bear the
expenses of a Shareholder Services Plan. K Shares bear the expenses of a
Distribution Plan and/or Administrative and Shareholder Services Plan and have
exclusive voting rights with respect to such Plans. The two classes also have
different exchange privileges, as described below. The net income attributable
to A and K Shares and the dividends payable on A and K Shares will be reduced by
the amount of the: (a) Shareholder Services Plan fees attributable to A Shares,
(b) Distribution Plan fees and/or Administrative and Shareholder Services Plan
fees attributable to K Shares, respectively, and (c) the incremental expenses
associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
<TABLE>
<S> <C> <C>
(Value of Assets Attributable to the Class)
- (Liabilities Attributable to the Class)
NAV = --------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
A 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 a Fund
pursuant to procedures adopted by the Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market value. For
further information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
20
<PAGE> 162
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
---------------------------------------------------------
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
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.
- ---------------------------------------------------------
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 through FundStrategies(TM), including FundSelections(TM) from BA
Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from Bank of
America;
- - any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
or by or on behalf of agency accounts administered by any bank or trust
company affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open
on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain open on the
Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors and their spouses;
- - 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;
21
<PAGE> 163
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Funds may be purchased without a
front-end sales load pursuant to the Program.)
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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon U.S. Government Securities Fund, the Pacific Horizon
Capital Income Fund and shares of the Company's money market funds that can be
traced back to the purchase of shares carrying a sales load (or any combination
thereof) with an aggregate current value of $90,000. If you subsequently
purchase additional A Shares of a Fund carrying a sales load with a current
value of $10,000, the sales load applicable to the subsequent purchase would be
reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon 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
22
<PAGE> 164
receive an adjustment which reflects the further reduced sales load applicable
to your excess investment. It will be in the form of additional shares credited
to your account at the then current offering price applicable to a single
purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY
A OR K SHARES?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or K shares, you should consider all relevant
factors, including the dollar amount of your purchase, the length of time you
expect to hold the shares, the amount of any applicable front-end sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of A shares, whether you are eligible to purchase K
shares, and the relative level of services that are provided to different
classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the absence of a front-end sales charge. A shares also
bear the expenses of a shareholder service plan.
Alternatively, when you purchase K shares, you will not pay a front-end sales
charge and all of your monies will be fully invested at the time of purchase.
However, K shares are subject to annual distribution and/or administrative and
shareholder service fees.
23
<PAGE> 165
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Mail all subsequent
Application and mail it with investments to:
a check (payable to the
appropriate Fund) to the Pacific Horizon Funds, Inc.
address on the Account PO Box 182090
Application. The Company will Columbus, Ohio 43218-2090
not accept third party checks
for investment.
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Deliver your payment directly
3435 Stelzer Road Application and your payment to the address on the left.
Columbus, OH 43219-3035 directly to the address on
the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of shares of a particular
Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 166
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be minimum amount of $500 and
of money from your used to make an initial the maximum amount of $50,000
checking, NOW or bank purchase. per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------------------------------
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a
25
<PAGE> 167
net basis to the Transfer Agent. In these instances orders received by the
entity by 4:00 p.m. Eastern time on a business day will be effected as of 4:00
p.m. Eastern time that day if the order is actually received by the Transfer
Agent not later than the next business morning accompanied by payment in federal
funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by a Fund. If you purchase or redeem
shares directly from a Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
a Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
26
<PAGE> 168
- --------------------------------------------------------------------------------
TO SELL SHARES
================================================================================
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- --------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
National Municipal Bond Fund joint owner, must sign) to the Transfer Agent.
or California Tax-Exempt If you hold stock certificates for the shares being
Bond Fund redeemed, make sure to endorse them for transfer, have your
c/o Pacific Horizon Funds, signature on them guaranteed by your bank or another
Inc. guarantor institution (as described in the section entitled
P.O. Box 182090 "What Kind Of Paperwork Is Involved In Selling Shares?") and
Columbus, Ohio 43218-2090 include them with your request.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE> 169
- --------------------------------------------------------------------------------
TO SELL SHARES
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
person out of your Fund account in the amount of $500 or
more. The Transfer Agent (as your agent) will redeem the
necessary number of shares to cover the Check when it is
presented for payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s) and a set of
Checks will then be sent to the registered owner(s) at the
address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by
Check.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfer of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO AVAILABLE.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A Shares are redeemed, if you
purchase shares through Bank of America or a Service Organization they may
charge a fee for providing certain services in connection with investments in
Fund shares.
The Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts involuntarily if, after sixty
days' written
28
<PAGE> 170
notice, the account's net asset value remains below a $500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Shares so reinvested will be
purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
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DIVIDEND AND DISTRIBUTION POLICIES
Dividends from each Fund's net investment income are declared daily and paid
within five business days after the end of each month. Fund shares begin earning
dividends the day after payment in federal funds is received for such shares
through the business day such shares are redeemed. Each Fund's net realized
gains (after reduction for capital loss carryforwards, if any) are distributed
at least annually.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be cancelled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at P.O. Box 182090,
Columbus, Ohio 43218-2090. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
An investment in a Fund automatically entitles you to use this Privilege, unless
you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
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Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN
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YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING YOUR ACCOUNT AT
YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW or bank money
market account designated by you will be debited in the specified amount, and
Fund shares will be purchased, once a month, on either the first or fifteenth
day, or twice a month, on both days. Only accounts maintained at a domestic
financial institution which permits automatic withdrawals and is an Automated
Clearing House member are eligible. The Automatic Investment Program is one
means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
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There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. SUBJECT TO THESE LIMITATIONS, YOU
MAY DEPOSIT AS MUCH OF YOUR PAYMENTS AS YOU WISH.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
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THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Funds. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
In its advisory agreements with the Company (the "Advisory Agreements"), Bank of
America has agreed to manage the Funds' investments and to be responsible for,
place orders for, and make decisions with respect to, all purchases and sales of
the Funds' securities. Further, the investment advisory agreement with respect
to the National Municipal Bond Fund provides that Bank of America may employ a
sub-adviser provided that Bank of America remains fully responsible to such Fund
for the acts and omissions of the sub-adviser.
Stephen P. Scharre is the person primarily responsible for the day-to-day
investment management of the National Municipal Bond Fund. Mr. Scharre has been
associated with Bank of America (and Security Pacific National Bank before its
merger with Bank of America) since 1984. Mr. Scharre is a Chartered Financial
Analyst and member of the Los Angeles Society of Financial Analysts. Mr. Scharre
manages tax-exempt and tax-advantaged portfolios, including common trust funds
and several large institutional and high net worth accounts.
Kim Michalski is the person primarily responsible for the day-to-day investment
management of the California Tax-Exempt Bond Fund.
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Ms. Michalski has been the Fund's manager since September of 1989. Ms. Michalski
has been associated with Bank of America (and Security Pacific National Bank
before its merger with Bank of America) since 1983. Her primary emphasis is in
tax-exempt securities, and she manages two mutual funds and two common trust
funds.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.35% and
0.40% of the National Municipal Bond Fund's and California Tax-Exempt Bond
Fund's average daily net assets, respectively. These amounts may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers"). On July 1, 1996, the National Municipal Bond Fund withdrew its
investment in the National Municipal Bond Master Portfolio, an investment
portfolio of Master Investment Trust, Series II (the "Master Trust") having the
same investment objective as the National Municipal Bond Fund, and began
investing directly in portfolio securities pursuant to a new investment advisory
agreement between the Company and Bank of America which superseded the existing
advisory agreement between the Master Trust and Bank of America with respect to
the National Municipal Bond Master Portfolio. For the period March 1, 1996
through June 30, 1996, Bank of America waived its entire investment advisory fee
payable by the National Municipal Bond Master Portfolio. For the period July 1,
1996 through February 28, 1997, Bank of America waived its entire investment
advisory fee payable by the National Municipal Bond Fund. During the fiscal year
ended February 28, 1997, the California Tax-Exempt Bond Fund paid Bank of
America advisory fees at an effective annual rate of 0.29% of the Fund's average
daily net assets, and Bank of America waived a portion of its fee at an
effective annual rate of 0.11% of the Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Funds. Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly owned subsidiary of BISYS,
served as administrator.
Under its administration agreement with the Company, BISYS has agreed to: pay
the costs of maintaining the offices of the Company; provide a facility to
receive purchase and redemption orders; provide statistical and research data,
data processing services and clerical services; coordinate the preparation of
reports to shareholders of the Funds and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of each Fund's
shares for sale under state securities laws; maintain books and records of the
Funds; calculate the net asset value of the Funds; calculate the dividends and
capital gains distributions paid to shareholders; and generally assist in all
aspects of the operations of the Funds.
For its services as administrator, BISYS is entitled to receive an
administration fee from the National Municipal Bond Fund at the annual rate of
0.20% of such Fund's average daily net assets, and an administration fee from
the California Tax-Exempt Bond Fund at the annual rate of 0.30% of such Fund's
average daily net assets. These amounts may be reduced pursuant to undertakings
by BISYS. (See the information below under "Fee Waivers"). Prior to July 1,
1996, Concord was entitled to receive an administration fee payable at the
annual rate of 0.15% of the National Municipal Bond Fund's average daily net
assets and 0.05% of the National
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Municipal Bond Master Portfolio's average daily net assets. For the period March
1, 1996 through June 30, 1996, Concord waived its entire administration fee
payable by the National Municipal Bond Master Portfolio. For the fiscal year
ended February 28, 1997, Concord and BISYS waived its entire administration fee
payable by the National Municipal Bond Fund. During the same period, the
California Tax-Exempt Bond Fund paid Concord or BISYS administration fees at an
effective annual rate of 0.21% of such Fund's average daily net assets and
Concord or BISYS waived a portion of its fee at an effective annual rate of
0.09% of such Fund's average daily net assets. During the fiscal year ended
February 28, 1997, Concord and/or BISYS also reimbursed a portion of the
operating expenses with respect to the National Municipal Bond Fund.
Pursuant to the authority granted in its administration agreement, BISYS or a
subcontractor has entered into an agreement with The Bank of New York ("BONY")
to provide certain accounting, bookkeeping, pricing and dividend and
distribution calculation services to the Funds. The Funds bear all fees and
expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286, serves as
the Custodian of the National Municipal Bond Fund and California Tax-Exempt Bond
Fund. BISYS Fund Services, Inc., a wholly owned subsidiary of BISYS, is the
transfer and dividend disbursing agent of the Funds and is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds bear the
expenses incurred in their operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers . Periodically, during the course of each Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of these entities. However, the service providers retain the ability
to discontinue such fee waivers and/or expense reimbursements at any time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS ANDDISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR
EXCHANGE OF SHARES IN THE FUNDS.
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As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interest of its shareholders.
As a result of this qualification, each Fund generally is not required to pay
federal income taxes to the extent its earnings are distributed in accordance
with the Code.
Dividends derived from interest on Municipal Securities ("exempt-interest
dividends") typically will not be subject to regular federal income tax. To the
extent, if any, that dividends paid to you are derived from taxable interest,
futures transactions, gain attributable to market discount or the excess of net
short-term capital gain over net long-term capital loss, such dividends will be
subject to regular federal income tax and California state personal income tax,
whether or not the dividends are reinvested. Any distributions you receive
comprised of the excess of net long-term capital gain over net short-term
capital loss ("capital gain dividend") will be taxable to you as a long-term
capital gain no matter how long you have held Fund shares. Such dividends are
not eligible for the dividends received deduction allowed to corporations.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the California Tax-Exempt Bond Fund's total assets consists of California
Exempt Securities, the California Tax-Exempt Bond Fund will be qualified to pay
dividends exempt from California state personal income tax to its shareholders.
The dividends exempt from that tax will be those that come from interest
attributable to California Municipal Securities and certain specified federal
obligations. (Such exemption may not apply, however, to investors who are
"substantial users" or "related persons" with respect to facilities financed by
portfolio securities held by the California Tax-Exempt Bond Fund. Additional tax
information regarding "substantial users" and "related persons" can be found in
the Statement of Additional Information). If you are subject to California state
franchise tax or California state corporate income tax, your dividends may still
be taxed as ordinary or capital gain dividends, despite the personal income tax
exemption.
Distributions of net investment income from the California Tax-Exempt Bond Fund
may be subject to state or local taxes other than the California state personal
income tax under state or local law, even though all or a part of those
distributions may come from interest on tax-exempt obligations that, if you had
received them directly, would be exempt from such taxes. Consult your tax
adviser with special reference to your own tax situation.
The portion of dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included by you as an item of tax
preference for purposes of determining liability (if any) for the federal
alternative minimum tax applicable to individuals and corpo-
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rations and the environmental tax applicable to corporations. Corporate
shareholders also must take exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum and
environmental tax purposes. Shareholders receiving Social Security benefits
should note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold shares for six months or less
and during that time receive an exempt-interest dividend attributable to those
shares, any loss realized on the sale or exchange of those shares will be
disallowed to the extent of the exempt-interest dividend.
If you hold shares for six months or less and during that time receive a capital
gain dividend on those shares, any loss realized on the sale or exchange of
those shares will be treated as long-term capital loss to the extent of the
capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Interest on indebtedness incurred by you to purchase or carry Fund shares
generally is not deductible for federal income tax purposes.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a capital gain dividend, you should be aware that the amount of
the forthcoming dividend, although in effect a return of capital, will be
taxable to you.
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MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD.
PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT INTENDED TO
INDICATE FUTURE RESULTS.
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Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30 day
period. Tax-equivalent yield demonstrates the level of taxable yield that would
be necessary to produce an after-tax equivalent to a tax-free yield.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), yield and
tax-equivalent yield may be quoted in advertisements or in communications to
shareholders. Both methods of calculating total return assume dividends and
capital gains distributions made by
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a Fund during the period are reinvested in Fund shares, and include the maximum
front-end sales charge for A Shares. Each Fund may also advertise total return
data without reflecting the sales load imposed on the purchase of Fund shares in
accordance with the rules of the Securities and Exchange Commission. Quotations
that do not reflect the sales load will, of course, be higher than quotations
that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund calculates its "tax equivalent yield" by increasing its yield
(calculated as described above) by the amount necessary to reflect the payment
of federal income taxes at a stated rate. The tax-equivalent yield will always
be higher than a Fund's yield.
An investor in a Fund may find it particularly useful to compare a Fund's
tax-exempt yield and the equivalent yield from taxable investments. For an
investor in a low tax bracket, it may not be beneficial to invest in a
tax-exempt investment if a higher yield after taxes could be received from
taxable investment.
THE FOLLOWING TABLE ILLUSTRATES FOR THE CALIFORNIA TAX-EXEMPT BOND FUND THE
DIFFERENCES BETWEEN HYPOTHETICAL TAX-FREE YIELDS AND TAX-EQUIVALENT YIELDS FOR
DIFFERENT TAX BRACKETS. YOU SHOULD BE AWARE, HOWEVER, THAT TAX BRACKETS CAN
CHANGE OVER TIME AND THAT YOUR TAX ADVISER SHOULD BE CONSULTED FOR SPECIFIC
YIELD CALCULATIONS. (THE FEDERAL TAX RATES USED BELOW ARE THOSE CURRENTLY
AVAILABLE FOR 1997, WHILE THE CALIFORNIA TAX RATES USED BELOW ARE THOSE
APPLICABLE FOR 1997.) THESE YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY. THE
FEDERAL TAX BRACKETS USED UNDER "COMBINED CALIFORNIA & FEDERAL TAX BRACKET" TAKE
INTO EFFECT THE FULL DEDUCTION OF CALIFORNIA STATE TAXES FOR THE CALIFORNIA
TAX-EXEMPT BOND FUND BUT DO NOT TAKE INTO ACCOUNT THE EFFECT OF REDUCING THE
DEDUCTIBILITY OF ITEMIZED DEDUCTIONS FOR TAXPAYERS WITH ADJUSTED GROSS INCOME
OVER $114,700 OR THE POSSIBLE EFFECT OF THE FEDERAL ALTERNATIVE MINIMUM TAX.
ADDITIONALLY, EFFECTIVE TAX BRACKETS AND EQUIVALENT TAXABLE YIELDS MAY BE HIGHER
THAN THOSE SHOWN.
38
<PAGE> 180
<TABLE>
<CAPTION>
MARRIED FILING JOINTLY
- -----------------------------
COMBINED
CALIFORNIA
& FEDERAL TAX-FREE YIELD
TAX -------------------------------------------------------------------------
INCOME BRACKET 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- ----------------------------- ---- ---- ----- ----- ----- ----- ----- -----
TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$9,333-22,118 16.70% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00% 9.60%
$22,119-34,906 18.40% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58% 9.19% 9.80%
$34,907-36,000 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.78% 9.39% 10.01%
$36,001-48,456 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34% 11.08% 11.82%
$48,457-61,240 33.76% 6.79% 7.55% 8.30% 9.08% 9.81% 10.57% 11.32% 12.08%
$61,241-91,850 34.70% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72% 11.48% 12.25%
$91,851-140,000 37.42% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19% 11.98% 12.78%
$140,001-212,380 41.95% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06% 12.92% 13.78%
$212,381-250,000 42.40% 7.81% 8.68% 9.55% 10.42% 11.28% 12.15% 13.02% 13.89%
$250,001-424,760 45.64% 8.28% 9.20% 10.12% 11.04% 11.98% 12.88% 13.80% 14.72%
over 424,760 46.24% 8.37% 9.30% 10.23% 11.16% 12.09% 13.02% 13.95% 14.88%
</TABLE>
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies
Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
================================================================================
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 400
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.
39
<PAGE> 181
The Board of Directors has authorized the issuance of: 100 million shares of
Class G Common Stock, 100 million shares of Class G -- Special Series 3 Common
Stock and 100 million shares of Class G -- Special Series 5 Common Stock,
representing interests in the California Tax-Exempt Bond Fund, and 100 million
shares of Class Q Common Stock, 100 million shares of Class Q -- Special Series
3 Common Stock and 100 million shares of Class Q -- Special Series 5 Common
Stock, representing interests in the National Municipal Bond Fund; and
additional classes of shares representing interests in other investment
portfolios of the Company. Class G and Class Q Common Stock are the "A" Shares,
Class G -- Special Series 3 Common Stock and Class Q -- Special Series 3 Common
Stock are the "M" Shares and Class G -- Special Series 5 Common Stock and Class
Q -- Special Series 5 Common Stock are the "K" Shares. As of the date of this
prospectus, M Shares have not been offered to the public. The Board of Directors
may similarly classify or reclassify any class of shares (including unissued
Class G Common Stock, Class G -- Special Series 3 Common Stock, Class G --
Special Series 5 Common Stock, Class Q Common Stock, Class Q -- Special Series 3
Common Stock or Class Q -- Special Series 5 Common Stock) into one or more
series. This Prospectus relates primarily to the Funds' A and K Shares. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the cover page of this Prospectus.
The two classes of shares in each Fund which are publicly offered represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except (a) A Shares bear the
expenses of a Shareholder Services Plan and (b) K Shares bear the expenses of a
Distribution Plan and/or Administrative and Shareholder Services Plan. The two
classes also have different exchange privileges.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to A and K Shares and the dividends
payable on such Shares will be reduced by the amount of the: (a) Shareholder
Services Plan fees attributable to A Shares, (b) Distribution Plan fees and/or
Administrative and Shareholder Services Plan fees attributable to K Shares,
respectively, and (c) the incremental expenses associated with such Plans. A and
K Shares may have different performance results due to sales charges and other
expenses attributable to distribution, administrative service and/or shareholder
servicing plans applicable with respect to a particular share class. 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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares and only holders of K Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution Plan and Administrative and Shareholder Service Plan
attributable to K Shares. The Funds do not presently intend to hold annual
meetings of shareholders to elect directors or for other business unless and
until such time as less than a majority of the directors holding office have
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
40
<PAGE> 182
have the right to call a shareholder meeting to consider the removal of one or
more directors. Such meetings will be held when requested by the shareholders of
10% or more of the Company's outstanding shares of common stock. The Funds will
assist in shareholder communications in such matters to the extent required by
law and the Company's undertaking with the Securities and Exchange Commission.
================================================================================
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1997, the National Municipal Bond Fund made
payments under the Plan at an effective annual rate of 0.14% of the average
daily net assets of such Fund's A Shares, and the Distributor waived fees at the
annual rate of 0.11% of the Fund's average daily net assets for A Shares. For
the same period, the California Tax-Exempt Bond Fund made payments under the
Plan at the effective annual rate of 0.25% of the Fund's average daily net
assets for A Shares.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and
41
<PAGE> 183
alternative means for continuing the servicing of such shareholders would be
sought. In such event, changes in the operation of the Company might occur and a
shareholder serviced by such bank might no longer be able to avail itself of the
automatic investment or other services then being provided by the bank. It is
not expected that shareholders would suffer any adverse financial consequences
as a result of any of these occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of each Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Funds (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders or for distribution to
existing K shareholders of the Funds) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses include under the Administrative and
Shareholder Services Plan, but are not limited to, expenses incurred in
connection with administrative services provided by the Distributor and payments
to Service Organizations for the provision of administrative services to
beneficial owners of K Shares such as establishing and maintaining accounts and
records relating to their clients who invest in K Shares, providing information
to the Funds necessary for accounting or sub-accounting; and providing
statements periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act. For the period ended February 28, 1997 the Distributor waived its entire
fee under the Distribution Plan with respect to the National Municipal Bond Fund
and the California Tax-Exempt Bond Funds' K shares. For the same period, the
Funds made payments under the Administrative and Shareholder Services Plan at
the effective annual rates of 0.25% of the average daily net assets of such
Funds' K shares, and the Distributor waived fees under the Administrative and
Shareholder Services Plan at the effective annual rates of 0.75% of the average
daily net assets of such Funds' K shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
42
<PAGE> 184
================================================================================
APPENDIX A
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Excerpts from Moody's description of its municipal debt ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa -- judged to be of high quality by all
standards, A -- possess many favorable investment attributes and are considered
as upper medium-grade obligations; Baa -- considered medium grade obligations,
i.e. they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C -- protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B indicates a general lack of characteristics of
desirable investment, Caa represents bonds which are in poor standing, Ca
represents a high degree of speculation and C represents the lowest rated class
of bonds); Caa, Ca and C bonds may be in default.
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from "AAA" issues only in small degree. Debt rated "A" is
considered to have a strong capacity to pay interest and repay principal
although such issues are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of speculation and "C"
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Debt rated "CI" is reserved for
income bonds on which no interest is being paid. Debt rated "D" is in default.
The "D" rating is used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories. The rating "r" may be
attached to highlight derivative, hybrid and certain other obligations that S&P
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only mortgage
securities.
The following summarizes the ratings used by D&P for municipal debt. Debt rated
"AAA" is of the highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt. Debt rated "AA" is of
high credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions. Debt rated "A" has
protection factors which are average but adequate. However, risk factors are
more variable and greater in periods of economic stress. Debt rated "BBB"
possess below average protection factors but such protection factors are still
43
<PAGE> 185
considered sufficient for prudent investment. Considerable variability in risk
is present during economic cycles. Debt rated below "BBB" is considered to be
below investment grade. Although below investment grade, debt rated "BB" is
deemed likely to meet obligations when due. Debt rated "B" possesses the risk
that obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely payment of
principal, interest or preferred dividends. Debt rated "DD" represents defaulted
obligations. To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus or
minus sign to show relative standing within these major categories.
The following summarizes the four highest ratings used by Fitch for municipal
debt:
"AAA"-- Debt considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA"-- Debt considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as debt rated "AAA." Because debt
rated in the "AAA" and "AA" categories is not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A"-- Debt considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt with higher ratings.
"BBB"-- Debt considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on this
debt, and therefore, impair timely payment. The likelihood that the ratings
of this debt will fall below investment grade is higher than for debt with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD" "DD," and "D"-- Debt that possesses
one of these ratings is considered by Fitch to be a speculative investment.
The ratings "BB" to "C" represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for Debt issues not in default. For defaulted Debt, the rating
"DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch ratings from
and including "AA" to "C" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within these major rating categories.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's for short-term notes:
MIG-1/VMIG-1 -- deemed to be of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing; MIG-2/VMIG-2 -- judged to be of high
quality, with margins of protection ample although not so large as in the
preceding group; MIG-3/VMIG-3 -- deemed to be of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established; MIG-4/
44
<PAGE> 186
VMIG-4 -- considered to be of adequate quality, carrying specific risk but
having protection commonly regarded as required of an investment security and
not distinctly or predominantly speculative. Loans bearing the designation "SG"
are of speculative quality and lack margins of protection.
Standard & Poor's ratings for municipal notes are as follows: SP-1 -- very
strong or strong capacity to pay principal and interest; those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation;
SP-2 -- satisfactory capacity to pay principal and interest; and
SP-3 -- speculative capacity to pay principal and interest.
The three highest rating categories of D&P for short-term municipal debt are
"D-1," "D-2" and "D-3." D&P employs three designations, "D-1+," "D-1" and
"D-1 -- ," within the highest rating category. "D-1+" indicates highest
certainty of timely payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is outstanding, and
safety is just below risk-free U.S. Treasury short-term obligations. "D-1"
indicates very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
"D-1 --" indicates high certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors are
very small. "D-2" indicates good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small. "D-3" indicates satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected. D&P may also rate
short-term municipal debt as "D-4" or "D-5." "D-4" indicates speculative
investment characteristics. "D-5" indicates that the issuer has failed to meet
scheduled principal and/or interest payments.
The following summarizes the rating categories used by Fitch for short-term
municipal obligations:
"F-1+" securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
"F-2" securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
Issues assigned a "D" rating are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is
45
<PAGE> 187
considered to be strong. Those issues determined to possess extremely strong
safety characteristics are denoted "A-1+." Capacity for timely payment of issues
with the "A-2" designation is considered to be satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1." Issues
rated "A-3" have an adequate capacity for timely payment. They are, however,
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designation. Issues rated "B" are regarded as
having only speculative capacity for timely payment. The rating of "C" is
assigned to short-term debt obligations with a doubtful capacity for payment.
Issues rated "D" are in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of 9
months. The ratings "Prime-1" and "Prime-2" are the two highest commercial paper
ratings assigned by Moody's. Issuers or related supporting institutions rated
"Prime-1" are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers or related supporting institutions rated
"Prime-2" are considered to have a strong capacity for repayment of short-term
promissory obligations. Issuers or related supporting institutions rated
"Prime-3" have an acceptable capacity for repayment of short-term promissory
obligations. The effects of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is maintained.
Issues rated "Not Prime" do not fall within any of the Prime rating categories.
D&P and Fitch each use the short-term municipal debt ratings described above for
commercial paper.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
46
<PAGE> 188
TXI-0014
PACIFIC HORIZON MUTUAL FUNDS
National Municipal
Bond Fund
California Tax-Exempt
Bond Fund
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 189
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Asset Allocation Fund and Capital Income Fund
------------------------
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
1. Cover Page............................. Cover Page
2. Synopsis............................... Expense Summary
3. Condensed Financial Information........ Financial Highlights;
Measuring Performance
4. General Description of Registrant...... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund................. The Business of the Funds
5.A. Management's Discussion of
Fund Performance..................... *
6. Capital Stock and Other
Securities........................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered............................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase............... How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings.............. *
- ----------
* Item inapplicable or answer negative.
<PAGE> 190
PROSPECTUS
JUNE 24, 1997
PACIFIC HORIZON ASSET ALLOCATION FUND
PACIFIC HORIZON CAPITAL INCOME FUND
Investment Portfolios offered by Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Asset Allocation Fund") is a
diversified mutual fund whose investment objective is to obtain long-term growth
from capital appreciation and dividend and interest income. The Asset Allocation
Fund seeks to achieve its objective by actively allocating investments among the
three major asset categories: bonds, equity securities and cash equivalents.
The PACIFIC HORIZON CAPITAL INCOME FUND (the "Capital Income Fund" and,
collectively with the Asset Allocation Fund, the "Funds") is a diversified
mutual fund whose investment objective is to provide investors with a total
investment return, comprised of current income and capital appreciation,
consistent with prudent investment risk. In seeking its investment objective,
the Capital Income Fund invests in a diversified portfolio consisting
principally of convertible bonds and convertible preferred stocks of domestic
issuers.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America National Trust
and Savings Association ("Bank of America" or the "investment adviser") serves
as the Funds' investment adviser. Based in San Francisco, California, Bank of
America and its affiliates have over $50 billion under management, including
over $14 billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference. More information about the Funds is contained in
a Statement of Additional Information that has been filed with the Securities
and Exchange Commission. To obtain a free copy, call 800-332-3863. The Statement
of Additional Information, as it may be revised from time to time, is dated June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investment in the Funds involves investment
risk, including the possible loss of principal.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Funds or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 191
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 10 INVESTMENT OBJECTIVES
10 TYPES OF INVESTMENTS
15 FUNDAMENTAL LIMITATIONS
16 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 22 HOW TO BUY SHARES
22 What Is My Minimum Investment In The Funds?
22 What Alternative Sales Arrangements Are Available?
22 How Are Shares Priced?
25 How Do I Decide Whether To Buy A or K Shares?
26 How Can I Buy Shares?
27 What Price Will I Receive When I Buy Shares?
28 What Else Should I Know To Make A Purchase?
28 HOW TO SELL SHARES
28 How Do I Redeem My Shares?
30 What NAV Will I Receive For Shares I Want To Sell?
30 What Kind Of Paperwork Is Involved In Selling Shares?
30 How Quickly Can I Receive My Redemption Proceeds?
31 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION
POLICIES 31
SHAREHOLDER SERVICES 32 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
32 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
33 WHAT IS TELETRADE?
33 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
34 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT
IT?
34 CAN I ARRANGE PERIODIC WITHDRAWALS?
34 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER
FUNDS?
34 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 35 FUND MANAGEMENT
35 Service Providers
TAX INFORMATION 38
MEASURING PERFORMANCE 39
DESCRIPTION OF SHARES 40
PLAN PAYMENTS 42
APPENDIX A 45
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
</TABLE>
<PAGE> 192
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 23 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A and K Shares; the estimated operating expenses for A and K Shares of the
Asset Allocation Fund expected to be incurred during the current fiscal year and
the operating expenses of the A and K Shares of the Capital Income Fund incurred
during its last fiscal year. Actual expenses may vary. A hypothetical example
based on the summary is also shown.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
A SHARES K SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of
original purchase price or
redemption proceeds, whichever
is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees 0.55% 0.55%
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses 0.15% 0.15%
------- -------
Total Operating Expenses (After
Fee Waivers)+ 0.95% 1.45%
======= =======
----------------------------------------------
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Asset Allocation Fund's K
Shares would be 1.70% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Asset Allocation Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. For a further
description of shareholder transaction expenses and the Asset Allocation
Fund's operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
2
<PAGE> 193
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 54 $74 $95 $156
K Shares $ 15 $46 $79 $174
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
CAPITAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES K SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred Sales
Load (as a percentage of
original purchase price or
redemption proceeds, whichever
is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees 0.65% 0.65%
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
------- -------
Other Expenses 0.28% 0.28%
------- -------
Total Operating Expenses (After
Fee Waivers)+ 1.18% 1.68%
======= =======
----------------------------------------------
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Fund's K Shares would be
1.93% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees
may not exceed the annual rate of 1.00% of the average net assets of the
Fund's K Shares. However, it is expected that during the current fiscal year,
such fees will not exceed 0.75% of the average net assets of the Fund's K
Shares. Because of the Rule 12b-1, administrative and/or shareholder services
fees paid by the Capital Income Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. For further
description of shareholder transaction expenses and the Capital Income Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 56 $81 $ 107 $182
K Shares $ 17 $53 $ 91 $199
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
3
<PAGE> 194
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.40% and 0.45% of
the Asset Allocation Fund's and the Capital Income Fund's respective average
daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Asset
Allocation Fund's average daily net assets and 0.20% of the Capital Income
Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a front-
end sales charge nor a contingent deferred sales charge, but incur fees under a
Distribution Plan and/or an Administrative and Shareholder Services Plan, with
respect to K Shares. See the section entitled "How Do I Decide Whether to Buy A
or K Shares?" on page 25.
4
<PAGE> 195
================================================================================
FINANCIAL HIGHLIGHTS
The Capital Income Fund commenced operations on September 25, 1987 as the Total
Return Fund (the "Predecessor Fund"), a separate portfolio of a Massachusetts
business trust called The Horizon Capital Funds. On January 1, 1989, the
Predecessor Fund changed its name to The Pacific Horizon Convertible Securities
Fund and on January 9, 1990 was reorganized as a portfolio of the Company. On
September 16, 1991, the Capital Income Fund changed its name to the Pacific
Horizon Capital Income Fund.
The tables below show certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's investment
results for the periods ending on or prior to August 31, 1989, the combined
investment results of the Capital Income Fund and the Predecessor Fund for the
period from September 1, 1989 through February 28, 1990 and the Capital Income
Fund's investment results for the seven years in the period ended February 28,
1997). On July 22, 1996, the Asset Allocation Fund and Capital Income Fund
initially funded K shares. Prior to June 23, 1997, the Asset Allocation Fund
operated as part of a master-feeder structure and invested all of its assets in
a diversified investment portfolio of an open-end, management investment company
(the "Master Portfolio") which had an identical investment objective as that of
the Asset Allocation Fund. On June 23, 1997, the Fund withdrew its assets from
the Master Portfolio and invested them directly in portfolio securities. The
information for each of the: 1) three fiscal years in the three year period
ended February 28, 1997 and the period ended February 28, 1994 with respect to A
Shares of the Asset Allocation Fund and the period ended February 28, 1997 with
respect to K Shares of the Asset Allocation Fund, and 2) five fiscal years in
the five year period ended February 28, 1997 with respect to A Shares of the
Capital Income Fund and the period ended February 28, 1997 with respect to K
Shares of the Capital Income Fund has been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report on the financial statements
containing such information is incorporated by reference in the Statement of
Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
5
<PAGE> 196
ASSET ALLOCATION FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED JANUARY 18, 1994
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, (INCEPTION DATE)
1997(a) 1996 1995 THROUGH FEBRUARY 28, 1994
------------ ------------ ------------ -------------------------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of
period $ 17.52 $ 15.15 $14.84 $ 15.00
------- ------- ------ ------
Income from Investment Operations:
Net investment income 0.48 0.52 0.48 0.03
Net realized and unrealized gains
(losses) on investment transactions 2.50 2.86 0.24 (0.19)
------- ------- ------ ------
Total income (loss) from
investment operations 2.98 3.38 0.72 (0.16)
------- ------- ------ ------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.46) (0.53) (0.41) --
Distributions to shareholders from net
realized gains on investment
transactions (0.64) (0.48) -- --
------- ------- ------ ------
Total dividends and
distributions (1.10) (1.01) (0.41) --
------- ------- ------ ------
Net change in net asset value per share 1.88 2.37 0.31 (0.16)
------- ------- ------ ------
Net asset value per share, end of period $ 19.40 $ 17.52 $15.15 $ 14.84
======= ======= ====== ======
Total Return++ 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000) $ 34,838 $ 22,355 $5,694 $ 666
Ratio of expenses to average net
assets* 1.25% 0.62% 0.00% 0.00%+
Ratio of net investment income to
average net assets* 2.59% 3.49% 4.25% 4.20%+
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Reflects the Asset Allocation Fund's proportionate share of the Master Portfolio's expenses, the Master Portfolio's
fee waivers and expense reimbursements and fee waivers and expense reimbursements of the Asset Allocation Fund. Such
fee waivers and expense reimbursements had the effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by 0.69%, 2.30%, 7.89% and 83.95% (annualized)
for the periods ended February 28, 1997, February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended February 28, 1994, and do not include the effect of
the maximum 4.50% sales charge on A Shares.
(a) As of July 22, 1996, the Fund designated the existing series of Shares as "A" Shares.
</TABLE>
6
<PAGE> 197
ASSET ALLOCATION FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEBRUARY 28, 1997
-----------------
<S> <C>
Net asset value per share, beginning of period $ 17.23
------
Income from Investment Operations:
Net investment income 0.19
Net realized and unrealized gains (losses) on investments 2.80
------
Total income from investment operations 2.99
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.18)
Distributions to shareholders from net realized gains on investment
transactions (0.64)
------
Total dividends and distributions (0.82)
------
Net change in net asset value per share 2.17
------
Net asset value per share, end of period $ 19.40
======
Total Return 17.69%*
Ratios/supplemental data:
Net assets, end of period (000) $ 748
Ratio of expenses to average net assets 1.94%+
Ratio of net investment income to average net assets 2.31%+
</TABLE>
- ---------------
* Not Annualized.
+ Annualized. Reflects the Asset Allocation Fund's proportionate share of the
Master Portfolio's expenses, the Master Portfolio's fee waivers and expenses
reimbursements and the fee waivers and expense reimbursements of the Asset
Allocation Fund. Such fee reductions and expense reimbursements had the effect
of reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 1.32% for the period
ended February 28, 1997.
7
<PAGE> 198
CAPITAL INCOME FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997(a) 1996 1995 1994 1993++ 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 16.42 $ 13.65 $ 15.42 $ 13.32 $ 12.01 $10.23 $ 9.83
-------- -------- -------- -------- ------- ------ ------
Income from Investment
Operations:
Net investment income 0.57 0.62 0.57 0.50 0.56 0.53 0.59
Net realized and
unrealized gains (losses)
on investment transactions 2.34 2.84 (1.43) 2.36 1.79 2.06 0.35
-------- -------- -------- -------- ------- ------ ------
Total income (loss) from
investment operations 2.91 3.46 (0.86) 2.86 2.35 2.59 0.94
-------- -------- -------- -------- ------- ------ ------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income (0.57) (0.69) (0.54) (0.48) (0.60) (0.55) (0.54)
Distributions to
shareholders from net
realized gains on
investment transactions (1.41) -- (0.37) (0.28) (0.44) (0.26) --
-------- -------- -------- -------- ------- ------ ------
Total dividends and
distributions (1.98) (0.69) (0.91) (0.76) (1.04) (0.81) (0.54)
-------- -------- -------- -------- ------- ------ ------
Net change in net asset
value per share 0.93 2.77 (1.77) 2.10 1.31 1.78 0.40
-------- -------- -------- -------- ------- ------ ------
Net asset value per share,
end of period $ 17.35 $ 16.42 $ 13.65 $ 15.42 $ 13.32 $12.01 $10.23
======== ======== ======== ======== ======= ====== ======
Total returnP 18.53% 25.96% (5.61)% 21.85% 20.62% 26.21% 10.17%
Ratios/Supplemental Data:
Net assets, end of period
(000) $309,309 $246,746 $198,251 $191,491 $ 19,613 $6,032 $1,186
Ratio of expenses to
average net assets*** 1.18% 1.23% 0.97% 0.46% 0.07% -- --
Ratio of net investment
income to average net
assets*** 3.40% 4.05% 4.48% 4.19% 5.00% 5.63% 6.32%
Portfolio turnover ratio 124% 57% 94% 103% 216% 278% 236%
Average commission rate
paid(b) $ 0.0210 -- -- -- -- -- --
<CAPTION>
YEAR PERIOD
PERIOD ENDED ENDED ENDED
FEBRUARY 28, AUGUST 31, AUGUST 31,
1990** 1989 1988*
------------ ---------- ----------
<S> <C> <C> <C>
Net asset value per share,
beginning of period $10.88 $ 8.99 $ 9.55
------ ------ ------
Income from Investment
Operations:
Net investment income 0.28 0.55 0.50
Net realized and
unrealized gains (losses)
on investment transactions (0.12) 1.96 (0.74)
------ ------ ------
Total income (loss) from
investment operations 0.16 2.51 (0.24)
------ ------ ------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income (0.31) (0.62) (0.32)
Distributions to
shareholders from net
realized gains on
investment transactions (0.90) -- --
------ ------ ------
Total dividends and
distributions (1.21) (0.62) (0.32)
------ ------ ------
Net change in net asset
value per share (1.05) 1.89 (0.56)
------ ------ ------
Net asset value per share,
end of period $ 9.83 $10.88 $ 8.99
====== ====== ======
Total returnP 1.46%+ 29.34% (2.26)%+
Ratios/Supplemental Data:
Net assets, end of period
(000) $ 962 $ 688 $ 255
Ratio of expenses to
average net assets*** -- -- 0.35%+
Ratio of net investment
income to average net
assets*** 5.87%+ 6.26% 7.14%+
Portfolio turnover ratio 153% 253% 211%
Average commission rate
paid(b) -- -- --
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period September 25, 1987 (commencement of operations) through August 31, 1988.
** For the period September 1, 1989 through February 28, 1990.
*** Includes fee waivers and expense reimbursements. Such fee waivers and expense reimbursements had the effect of
decreasing the ratio of expenses to average net assets and increasing the ratio of net investment income to average
net assets by 0.17%, 0.74%, 3.27%, 6.23%, 14.64%, 27.82% (annualized), 35.19% and 61.95% (annualized) for the fiscal
years or periods ended February 28, 1995, February 28, 1994, February 28, 1993, February 29, 1992, February 28,
1991, February 28, 1990, August 31, 1989 and August 31, 1988, respectively. During the fiscal years ended February
28, 1997 and February 29, 1996, the Fund received credits from its custodian for interest earned on uninvested cash
balances which were used to offset custodian fees and expenses. If such credits had not occurred, the ratio of
expenses to average net assets (without fee waivers and/or expense reimbursements) would have been 1.19% and 1.26%,
respectively. The ratio of net investment income to average net assets was not affected by such credits.
+ Not annualized.
++ Security Pacific National Bank served as investment adviser through April 21, 1992. Bank of America National Trust
and Savings Association served as investment adviser commencing April 22, 1992.
P The total return figures listed do not include the effect of the maximum 4.50% sales charge on A Shares.
(a) As of July 22, 1996, the Fund designated the existing series of shares as "A" Shares.
(b) Represents the dollar amount of commissions paid on portfolio transactions divided by the total number of shares
purchased or sold for which commissions were charged and is calculated on the basis of the portfolio as a whole
without distinguishing between the classes of shares issued. Disclosure is not required for prior periods.
</TABLE>
8
<PAGE> 199
CAPITAL INCOME FUND
Selected data for a K Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEBRUARY 28, 1997
-----------------
<S> <C>
Net asset value per share, beginning of period $ 16.24
-------
Income from Investment Operations:
Net investment income 0.32
Net realized and unrealized gains on investment transactions 2.43
-------
Total income from investment operations 2.75
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.28)
Distributions to shareholders from net realized gains on investment transactions (1.41)
-------
Total dividends and distributions (1.69)
-------
Net change in net asset value per share 1.06
-------
Net asset value per share, end of period $ 17.30
=======
Total return 17.47%*
Ratios/supplemental data:
Net assets, end of period (000) $ 1
Ratio of expenses to average net assets 1.66%+
Ratio of net investment income to average net assets 2.85%+
Portfolio turnover rate 124%
Average commission rate paid(a) $0.0210
</TABLE>
- ---------------
* Not Annualized.
+ Annualized. During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee waivers and expense reimbursements had the effect of
reducing the ratio of expenses to average net assets and increasing the ratio
of net investment income to average net assets by 0.25% for the period ended
February 28, 1997. Fees paid by third parties had no effect on the ratio of
expenses to average net assets.
(a) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the portfolio as
a whole without distinguishing between the classes of shares issued.
Disclosure is not required for prior periods.
9
<PAGE> 200
- --------------------------------------------------------------------------------
FUND INVESTMENTS
- ---------------------------------------------------------
INVESTMENT OBJECTIVES
ASSET ALLOCATION FUND
The Asset Allocation Fund seeks to obtain long-term growth from capital
appreciation and dividend and interest income. The Asset Allocation Fund seeks
to achieve its objective by actively allocating investments among the three
major asset categories: bonds, equity securities and cash equivalents. The Asset
Allocation Fund may be appropriate for investors who want long-term capital
appreciation and current dividend and interest income.
CAPITAL INCOME FUND
The Capital Income Fund seeks to provide investors with a total investment
return, comprised of current income and capital appreciation, consistent with
prudent investment risk. In seeking its investment objective, the Capital Income
Fund invests in a diversified portfolio consisting principally of convertible
bonds and convertible preferred stocks of domestic issuers. The Capital Income
Fund may be appropriate for investors who are seeking a highly competitive
return over the long term comprised of current income and capital appreciation
and who are also willing to accept the relative risks described in this
Prospectus associated with seeking such returns.
WHILE THE FUNDS STRIVE TO ATTAIN THEIR INVESTMENT OBJECTIVES, THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
- ---------------------------------------------------------
TYPES OF INVESTMENTS
ASSET ALLOCATION FUND -- GENERAL INVESTMENTS.
The Asset Allocation Fund is a diversified portfolio which will invest
substantially all of its assets through a balanced approach using bonds, equity
securities and cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index.
Bonds acquired by the Asset Allocation Fund will be investment grade at the time
of purchase, and may include corporate and government obligations,
mortgage-backed securities and municipal securities. Investment grade bonds are
bonds that are rated in one of the four highest rating categories by a
nationally recognized statistical rating organization, i.e., BBB or better by
Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch") or Baa or better
by Moody's Investors Service, Inc. ("Moody's"). While bonds with such ratings
are regarded as having adequate capacity to pay interest and repay principal,
adverse economic conditions or changing circumstances could lead to a weakened
capacity to pay interest and repay principal. Bonds with the lowest investment
grade rating (i.e., BBB or Baa) do not have outstanding investment
characteristics and may have speculative characteristics as well. Unrated
securities will be purchased only if Bank of America determines that they are of
comparable quality to the rated securities in which the Asset Allocation Fund
may invest. Under normal market conditions at least 25% of the Fund's total
assets will be invested in fixed income senior securities.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government or one of its
agencies or instrumentalities. The Asset Allocation Fund will not invest more
than 35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if
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the bond interest rate is higher than currently prevailing interest rates.
Similarly, a risk associated with mortgage-backed securities is early pay down
resulting from refinancing of the underlying mortgages. The rate of such
prepayments, and hence the life of the security, will primarily be a function of
current market rates. In periods of falling interest rates, the rate of
prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds will generally be at lower rates than the rates on the
prepaid obligations.
The Asset Allocation Fund may also invest, from time to time, in obligations
issued by state and local governmental issuers ("Municipal Securities"). The
purchase of Municipal Securities may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the performance of such
securities, on a pre-tax basis, is comparable to that of corporate or U.S.
Government obligations. Dividends received by shareholders which are
attributable to interest income received from Municipal Securities generally
will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Asset Allocation Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Asset Allocation
Fund are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of such
private activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The Asset Allocation Fund may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The value of securities held by the Asset Allocation Fund will vary with changes
in interest rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P or similarly rated by another NRSRO or if unrated, will be
determined by Bank of America to be of comparable quality under procedures
established by the Board.
The Asset Allocation Fund may also make other investments as described more
fully below under "Other Investment Practices and Considerations."
CAPITAL INCOME FUND -- GENERAL INVESTMENTS.
The convertible bonds and preferred stock ("Convertible Securities") held in the
Capital Income Fund's portfolio will, for the most part, be securities issued by
U.S. issuers. The Capital Income Fund has a fundamental policy that under normal
circumstances at least 65% of its total assets will be invested in Convertible
Securities. Up to 15% of its assets also may be held in Eurodollar Convertible
Securities.
The Company's Board of Directors will evaluate whether a satisfactory total
return has been
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achieved by comparing the Capital Income Fund's return against a number of
indices such as:
- - the Standard & Poor's 500 Stock Index;
- - the First Boston Convertible Index; and
- - the Lipper Convertible Bond Market Index.
Similar to straight debt obligations, convertible securities pay a fixed rate of
interest and return principal at maturity; unlike straight debt, they may be
converted into a set amount of corporate common stock. Investors should note
that the Capital Income Fund may convert its Convertible Securities when
conditions are not necessarily favorable for their disposition or because of
developments with respect to the issuers or trading markets of such Convertible
Securities.
Notwithstanding the fundamental investment policy above, however, for temporary
defensive purposes at times when Bank of America believes such a position is
warranted by uncertain or unusual market conditions, the Capital Income Fund may
invest without limit in securities issued or guaranteed by the U.S. Government
(and its agencies and instrumentalities), money market securities and investment
grade debt securities, or may hold its assets in cash.
The Convertible Securities in which the Capital Income Fund invests (including
bonds, notes and preferred stock) are convertible into common stock at a stated
price within a specified period of time. When investing in such Convertible
Securities the Capital Income Fund is looking for the opportunity, through the
conversion feature, to participate in the capital appreciation of the common
stock into which the Convertible Securities are convertible, while earning
higher current income than is available from the common stock.
CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible Securities have unique
investment characteristics because they:
- - generally have higher yields than common stocks;
- - generally are less subject to a decline in value than their underlying common
stocks because of their fixed income characteristics; and
- - generally provide for the potential of capital appreciation if the market
value of their underlying common stock increases.
An issuer of a Convertible Security may have the option to redeem it at a price
established in the Convertible Security's governing instruments. If a
Convertible Security is called for redemption, the Capital Income Fund will have
to either permit the redemption, convert the Convertible Security into the
underlying common stock or sell the Convertible Security to a third party. Any
of these actions could adversely affect the Capital Income Fund's ability to
attain its objective.
The Capital Income Fund would convert a Convertible Security either to permit
the orderly disposition of the investment or when it has reached maturity or
been called for redemption. The Capital Income Fund might also convert a
Convertible Security if the underlying common stock's dividend rate increased
above the yield on the Convertible Security.
Generally, Convertible Securities are not "investment grade" (that is, not rated
within the four highest rating categories by a nationally recognized statistical
rating organization such as S&P, D&P, Fitch or Moody's). Convertible Securities
acquired by the Capital Income Fund that are rated below investment grade, or
that are not rated, present greater risks as to the timely payment of principal
and interest (or dividends). The Capital Income Fund intends that the
Convertible Securities it purchases will be rated at least "B" by a nationally
recognized statistical rating organization, or that if the investment is unrated
it will be deemed of comparable quality by Bank of America.
For your information, set forth below is the average distribution of ratings at
value for the Capital Income Fund's portfolio securities
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(including commercial paper and nonconvertible bonds) for its last fiscal year:
<TABLE>
<CAPTION>
MOODY'S INVESTORS PERCENTAGE
SERVICE, INC. OF VALUE
- ----------------------------------- ----------
<S> <C>
Aaa 1.5%
Aa 4.6%
A 16.8%
Baa 19.2%
Ba or lower 54.9%
Not Rated 3.0%
Comparable to Aaa 3.0%
Comparable to Aa 0%
Comparable to A 0%
Comparable to Baa 0%
Comparable to Ba or lower 0%
----------
100.0%
==========
</TABLE>
<TABLE>
<CAPTION>
STANDARD & POOR'S PERCENTAGE
CORPORATION OF VALUE
- ------------------------------------ ----------
<S> <C>
AAA 1.5%
AA 4.0%
A 20.8%
BBB 20.8%
BB or lower 49.9%
Not Rated 3.0%
Comparable to AAA 3.0%
Comparable to AA 0%
Comparable to A 0%
Comparable to BBB 0%
Comparable to BBB or lower 0%
----------
100.0%
==========
</TABLE>
These ratings are described in the Appendix to this Prospectus.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries some
risk, some of the risks associated with lower-rated Convertible Securities are
different from the risks associated with investment grade securities. The risk
of loss through default is greater because lower-rated securities are usually
unsecured and are often subordinate to an issuer's other obligations.
Additionally, the issuers of these securities frequently have high debt levels
and are thus more sensitive to difficult economic conditions, individual
corporate developments and rising interest rates. Consequently, the market price
of these securities, and the net asset value of the Capital Income Fund's
shares, may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market for
lower-rated securities, at least in its present size and form, is relatively
new, there remains some uncertainty about its performance level under adverse
market and economic environments. An economic downturn or increase in interest
rates could have a negative impact on both the market for lower-rated securities
(resulting in a greater number of bond defaults) and the value of lower-rated
securities held in the Capital Income Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect lower-rated securities differently than other securities. For
example, the prices of lower-rated securities are more sensitive to adverse
economic changes or individual corporate developments than are the prices of
higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, the Capital Income Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices of
lower-rated securities as well as the Capital Income Fund's net asset value. In
general, both the prices and yields of lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is
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<PAGE> 204
not an established secondary market for the security or the security is thinly
traded. As a result, the Capital Income Fund's valuation of a security and the
price it is actually able to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by the Capital Income Fund, especially in a thinly traded market. Illiquid or
restricted securities held by the Capital Income Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for lower-rated securities.
CREDIT RATINGS. S&P, Moody's and other nationally recognized statistical rating
organizations evaluate the safety of a lower-rated security's principal and
interest payments, but do not address market value risk. Because the ratings of
the rating agencies may not always reflect current conditions and events, in
addition to using recognized rating agencies and other sources, Bank of America
performs its own analysis of the issuers whose lower-rated securities the
Capital Income Fund purchases. Because of this, the Capital Income Fund's
performance may depend more on the investment adviser's own credit analysis than
is the case for mutual funds investing in higher rated securities.
In selecting Convertible Securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the Convertible Securities, the protections afforded the Convertible
Securities and the diversity of the Capital Income Fund's portfolio. Bank of
America continuously monitors the issuers of lower-rated securities held in the
Capital Income Fund's portfolio for their ability to make required principal and
interest payments, as well as in an effort to control the liquidity of the
Capital Income Fund's portfolio so that it can meet redemption requests.
If a portfolio security undergoes a rating revision, the Capital Income Fund may
continue to hold the security if Bank of America determines such retention is
warranted.
EURODOLLAR CONVERTIBLE SECURITIES. Eurodollar Convertibles, in which the
Capital Income Fund may invest up to 15% of its total assets, are fixed income
securities of a U.S. or foreign issuer that are issued in U.S. dollars outside
of the U.S. and are convertible into or exchangeable for specified equity
securities. Eurodollar Convertibles in which the Capital Income Fund invests
will be convertible into or exchangeable for foreign equity securities.
Investments in foreign issuers may be affected by changes in currency rates and
exchange control regulations. There is typically less publicly available
information about a foreign company than about a U.S. company, and foreign
brokerage commissions and custody fees are generally higher than in the U.S. In
addition, foreign companies may be subject to less stringent reserve, auditing
and reporting requirements than their U.S. counterparts, and their securities
may be less liquid and more volatile than those of U.S. issuers. Investments in
foreign securities are also subject to local political and economic
developments, expropriation or nationalization of assets and the imposition of
withholding taxes.
OTHER SECURITIES. In addition to Convertible Securities, and subject to the
fundamental investment policy above, the Capital Income Fund also may invest in:
- - securities issued or guaranteed by the U.S. Government (and its agencies and
instrumentalities);
- - nonconvertible bonds and dividend-paying equity securities that are
consistent with the Fund's investment objective;
- - options and futures; and
- - money market securities.
The Capital Income Fund may purchase bank obligations including CDs and bankers'
accept-
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ances issued by domestic branches of U.S. banks that have total assets of more
than $2.5 billion. The Capital Income Fund may also make interest-bearing
savings deposits in commercial banks in amounts not exceeding 5% of its total
assets.
Commercial paper rated in the top rating category by S&P, Moody's or other
rating agencies, and unrated commercial paper determined to be of comparable
quality by Bank of America, may also be purchased. In addition, the Capital
Income Fund may invest in debt securities rated BBB or higher by S&P or other
rating agencies or Baa or higher by Moody's. See "Convertible Securities" for
the rating requirements for convertible securities.
As noted above, the Capital Income Fund can purchase obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of some of these agencies and instrumentalities, such as the Small
Business Administration or the Maritime Administration, are backed by the full
faith and credit of the U.S.; others, like the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, including the Student Loan
Marketing Association, are backed solely by the issuer's credit. There is no
assurance that the U.S. Government would support a U.S. Government-sponsored
entity if it were not required to do so by law.
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds may not be changed without a vote by the
holders of a majority of the outstanding shares of the particular Fund. Policies
requiring such a vote to effect a change are known as "fundamental." A number of
the other fundamental investment limitations are summarized below.
The Asset Allocation 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 or it would own
more than 10% of the voting securities of such issuer, except that up to 25%
of its total assets may be invested without regard to these limitations; and
provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the
same investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value in
excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its total assets, and may
enter into repurchase agreements as long as repurchase agreements maturing in
more than seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock indexes
and options on any such futures if such options are written by other persons
and if (i) the futures or options are listed on a national securities or
commodities exchange, (ii) the aggregate premiums paid on all such options
that are held at any time do not exceed 20% of its total net assets, and
(iii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
THE CAPITAL INCOME FUND:
1. Under normal circumstances, will invest at least 65% of its total assets
in Convertible Securities (including, for a period of two months following
their conversion, securities
15
<PAGE> 206
acquired upon conversion of Convertible
Securities).
2. May not make loans, although it may invest in debt securities, enter into
repurchase agreements and lend its portfolio securities as discussed herein.
3. May not invest more than 10% of its total assets in certain illiquid
investments. Investors should note, however, that certain securities that
might otherwise be considered illiquid, particularly securities that are not
registered under the federal securities laws but for which the Board of
Directors or Bank of America (pursuant to guidelines adopted by the Board) has
determined a liquid trading market exists, are not subject to this 10%
limitation.
4. May not purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that: (a) the
Fund may, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs; and (b) the Fund may purchase and
sell futures contracts and options on futures contracts.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Asset Allocation Fund may invest in securities of foreign issuers
that may or may not be publicly traded in the United States, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Asset Allocation
Fund to invest no more than 25% of its net assets (at the time of purchase) in
foreign securities. The Asset Allocation Fund may be subjected to additional
risks associated with the holding of property abroad such as future political
and economic developments, currency fluctuations, possible withholding of tax
payments, possible seizure or nationalization of foreign assets, possible
establishment of currency exchange control regulations or the adoption of other
foreign government restrictions that might adversely affect the payment of
principal or interest on foreign securities in the Asset Allocation Fund. In
addition, securities of some foreign companies are less liquid, and their prices
more volatile than domestic companies, have less publicly available information
about foreign companies, and such foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies.
VARIABLE RATE INSTRUMENTS. The Asset Allocation Fund may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Asset Allocation Fund, master demand notes may not be
marketable. Consequently, the ability to redeem such notes may depend on the
borrower's ability to pay which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or the
equivalent by another nationally recognized statistical rating organization
("NRSRO"), (c) are backed by a bank letter of credit or (d) are determined by
Bank of America to be of a quality comparable to securities described in either
clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position,
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<PAGE> 207
the Funds may invest in securities issued by other investment companies whose
investment objectives are consistent with those of the Fund's and money market
funds advised by Bank of America. No more than 10% of the value of a Fund's
total assets will be invested in securities of other investment companies, with
no more than 5% invested in the securities of any one investment company; except
that with respect to the investment in a money market mutual fund advised by
Bank of America, a Fund is permitted to invest the greater of 5% of its net
assets or $2.5 million. A Fund may hold no more than 3% of the outstanding
voting stock of any other investment company. As a shareholder of another
investment company, the Funds would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees.
ASSET-BACKED SECURITIES. The Asset Allocation Fund may purchase asset-backed
securities. Asset-backed securities consist of undivided fractional interests in
pools of consumer loans (unrelated to mortgage loans) or receivables held in a
trust. Examples include certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on the loans
or receivables are passed through to certificate holders. Asset-backed
securities may be issued by either governmental or non-governmental entities.
Payment on asset-backed securities of private issuers is typically supported by
some form of credit enhancement, such as a letter of credit, surety bond,
limited guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's par value
until exhausted. Ultimately, asset-backed securities are dependent upon payment
of the consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables. All asset-backed securities purchased by the Asset Allocation Fund
will either be issued or guaranteed by a U.S. Government entity or rated AAA by
S&P, Aaa by Moody's or have an equivalent rating from any other rating agency.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Asset Allocation Fund must be reinvested
in securities whose yields reflect interest rates prevailing at the time. Thus,
the Asset Allocation Fund's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
reinvestments are in lower yielding securities. The actual maturity and realized
yield will therefore vary based upon the prepayment experience of the underlying
asset pool and prevailing interest rates at the time of prepayment. Asset-backed
securities may be subject to greater risk of default during periods of economic
downturn than other instruments. Also, while the secondary market for
asset-backed securities is ordinarily quite liquid, in times of financial
stress, the secondary market may not be as liquid as the market for other types
of securities, which could result in the Asset Allocation Fund's experiencing
difficulty in valuing or liquidating such securities.
OPTIONS. The Asset Allocation Fund may purchase put and call options on listed
securities and stock indexes so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Fund (this restriction does not
apply to options on futures contracts). Put options may be purchased in order to
protect the Asset Allocation Fund's securities in expectation of a declining
market and call options may be purchased to benefit from anticipated price
increases in the underlying securities or index. The Asset Allocation Fund may
not write put options but may write fully covered call options as long as the
Fund remains fully covered throughout the life of the option, either by owning
the optioned securities or possessing a
17
<PAGE> 208
call issued by another writer that is identical in all respects to the call
written by the Fund.
The Capital Income Fund may sell, or "write," covered call options on securities
it owns in order to obtain the premium for doing so, and may purchase put
options on securities it owns (or which it may acquire through conversion or
exchange of other securities it owns) as a hedging technique. The aggregate
value of the Capital Income Fund's assets subject to options written may not
exceed 25% of its total assets (taken at market value on the date written) and
the aggregate premiums on options purchased by the Capital Income Fund will not
exceed 5% of its total assets.
Closing purchase transactions on previously written options may be entered into
by the Funds to realize a profit and/or to permit the Funds to write another
option on the underlying security. A Fund might write another option on the
underlying security in order to provide for a different exercise price or
expiration date. A profit or loss will be realized when an option is closed to
the extent the cost of the closing transaction is less or more, respectively,
than the premium received for writing the option.
When an option written by a Fund is exercised, the Fund will receive the
exercise price for the security as provided for in the option, but it loses the
opportunity to receive the price which it could have obtained for the security
in the open market, which will likely be higher than the exercise price of the
option.
Put options purchased by a Fund give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. A Fund may sell a put option prior to the time the
securities underlying the option are actually sold, which will result in a gain
or loss to the Fund depending on whether the amount received from the sale is
more or less than the premium and other transaction costs associated with the
option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. The Funds will only write options where
Bank of America believes a liquid secondary market will exist on a national
securities exchange for options of the same series, which would permit a Fund to
close out its option positions. There are no assurances that a liquid secondary
market will exist on an exchange for a particular option or at any particular
time. In fact, for some options no secondary market on an exchange may exist at
all. If a Fund cannot close out an option, it will not be able to sell the
securities underlying the option until the option expires or is exercised.
Furthermore, a Fund's ability to engage in transactions in options may be
limited by IRS requirements that a Fund receive less than 30% of its gross
income from certain securities, including options and futures contracts, held by
the Fund for less than three months. Bank of America does not believe that
transactions in options will significantly affect a Fund's ability to meet IRS
requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Asset Allocation Fund may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options). The Capital
Income Fund may enter into financial futures contracts (as well as purchase or
sell related options). The Funds may enter into transactions in futures and
related options in order to hedge against anticipated fluctuations or changes
resulting from relevant market conditions in the values of the securities held
by the particular Fund or that the Fund intends to purchase or sell, and where
the transactions are economically appropriate for the
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reduction of risks inherent in the ongoing management of the particular Fund.
Neither Fund may purchase or sell a futures contract or a related option unless
immediately after any such transaction the sum of the aggregate amount of margin
deposits on its existing futures positions and the amount of premiums paid for
related options does not exceed 5% of a Fund's total assets (after taking into
account certain technical adjustments). For a more detailed description of
futures contracts and options and the costs and risks related to such
instruments, see the Statement of Additional Information.
REPURCHASE AGREEMENTS. The Funds may buy securities subject to the seller's
agreement to repurchase them within a specified time at a fixed price (equal to
the purchase price plus interest). These transactions are known as repurchase
agreements. Under these agreements, the Asset Allocation Fund will acquire
securities from either a bank (which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's, or the equivalent from another
NRSRO) or a registered broker-dealer. The Capital Income Fund will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Company's Board of Directors. The Capital Income Fund intends
that such agreements will not have maturities longer than 60 days.
Repurchase agreements maturing in more than seven days are considered illiquid
investments and investment in such repurchase agreements along with any other
illiquid securities will not exceed 10% of the value of the net assets of a
Fund. Repurchase agreements will be entered into only for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the particular Fund's custodian or its agent will have physical possession of
the securities or the securities will be transferred to such Fund's custodian,
by appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, a Fund might incur a loss if the value of
the securities securing the repurchase agreement declines, and might incur
disposition costs in connection with liquidating the securities. In addition, if
bankruptcy proceedings are commenced with respect to the seller, realization of
the securities by a Fund may be delayed or denied. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these arrangements, the Funds will sell portfolio securities to either a
bank (which, with respect to the Asset Allocation Fund, has a commercial paper
rating of A-2 or better by S&P or Prime-2 or better by Moody's) or a registered
broker-dealer, with an agreement to repurchase the security on an agreed date,
price and interest payment. Reverse repurchase agreements involve the possible
risk that the value of portfolio securities a Fund relinquishes may decline
below the price a Fund must pay when the transaction closes. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of a Fund's outstanding shares.
When a Fund enters into a reverse repurchase agreement, it places in a separate
custodial account either liquid assets or other high grade debt securities that
have a value equal to or greater than the repurchase price. The account is then
continuously monitored by Bank of America to make sure that an appropriate value
is maintained. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
19
<PAGE> 210
The Capital Income Fund will only enter into reverse repurchase agreements to
avoid the need to sell portfolio securities to meet redemption requests during
unfavorable market conditions.
SECURITIES LENDING. In order to earn additional income, each Fund may lend its
portfolio securities to entities (broker-dealers, for the Asset Allocation Fund,
and financial institutions, such as banks and brokers, for the Capital Income
Fund) that Bank of America considers to be of good standing. With respect to the
Asset Allocation Fund, borrowers of portfolio securities may not be affiliated
directly or indirectly with the Company. If the broker-dealer should become
bankrupt, however, a Fund could experience delays in recovering its securities.
A securities loan will only be made when, in Bank of America's judgment, the
possible reward from the loan justifies the possible risks. In addition, such
loans will not be made if, as a result, the value of securities loaned by the
Asset Allocation Fund and the Capital Income Fund exceeds 10% and 30% of their
respective total assets. Securities loans will be fully collateralized.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. Additionally, the Capital Income
Fund may purchase or sell securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by a
Fund to purchase or sell particular securities with payment and delivery taking
place at a future date (perhaps one or two months later), permit a Fund to
lock-in a price or yield on a security, regardless of future changes in interest
rates. Delayed settlement describes a securities transaction in the secondary
market for which settlement will occur sometime in the future. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place. The
Fund will set aside in a segregated account cash or liquid securities equal to
the amount of any when-issued or forward commitment transactions. These
transactions are not to exceed 25% of the value of each Fund's total assets
absent unusual market conditions, and will not be entered into for speculative
purposes, but only in furtherance of each Fund's investment objective.
ILLIQUID SECURITIES. The Asset Allocation Fund and Capital Income Fund will not
invest more than 10% of the value of their respective total assets (determined
at the time of acquisition) in securities that are illiquid. If, after the time
of acquisition, events cause this limit to be exceeded, a Fund will take steps
to reduce the aggregate amount of illiquid securities as soon as is reasonably
practicable.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of shares of the Funds by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds' distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Fund are not less favorable than
what they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Asset Allocation Fund's investment practices may
result in portfolio turnover greater than that of other mutual fund
20
<PAGE> 211
portfolios, and the Capital Income Fund's investment practices may result in
portfolio turnover that is substantially greater than that of other mutual fund
portfolios. Although no commissions are paid on bond transactions, purchases
and sales are at net prices which reflect dealers' mark-ups and mark-downs, and
a higher portfolio turnover rate for bond investments will result in the
payment of more dealer mark-ups and mark-downs than would otherwise be the
case. Higher rates of turnover may require payment of brokerage commissions,
impose other transaction costs and could increase substantially the amount of
income received by a 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"). Portfolio turnover
will not be a limiting factor in making investment decisions for the Funds. For
further information concerning portfolio turnover, see the Financial Highlights
and Statement of Additional Information.
21
<PAGE> 212
================================================================================
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS
REGARDING BUYING AND SELLING THE FUND'S SHARES AND REGARDING THE FUND'S
DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
- ---------------------------------------------------------
- ---------------------------------------------------------
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.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books; (d) accounts under Section 403(b)(7) of the
Code; (e) deferred compensation plans under Section 457 of the Code and (f)
certain other retirement plans. The two classes of shares in each Fund represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares bear the expenses of a Shareholder Services Plan. K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such Plans. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on
22
<PAGE> 213
A Shares. Each class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
--------------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
A 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 a Fund
pursuant to procedures adopted by the Asset Allocation Fund's and the Capital
Income Fund's Board of Directors. Short-term debt securities are valued at
amortized cost, which approximates market value. For further information about
valuing securities, see the Statement of Additional Information. For price and
yield information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of Funds
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
<TABLE>
<CAPTION>
---------------------------------------------------------
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
-------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Funds.
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.
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 by an investor who is a shareholder of the SRF shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - 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;
- - any purchase through FundStrategies(TM), including FundSelections(TM) from BA
Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from Bank of
America;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
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
23
<PAGE> 214
were the beneficial owner of shares of a Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account remains
open on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain open on the
Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors and their spouses;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of a Fund's
shares of a Fund (and their spouses and minor children) to the extent
permitted by such organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only, a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Funds may be purchased without a
front-end sales load pursuant to the Program.)
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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund and shares of the Company's money market funds
that can be traced back to the purchase of shares carrying a sales load (or any
combination thereof) with an aggregate current value of $90,000. If you
subsequently purchase additional A Shares of a Fund carrying a sales load with a
current value of $10,000, the sales load applicable to the subsequent purchase
would be reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a
24
<PAGE> 215
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.
HOW DO I DECIDE WHETHER TO BUY A OR K SHARES?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or K shares, you should consider all relevant
factors, including the dollar amount of your purchase, the length of time you
expect to hold the shares, the amount of any applicable front-end sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of A shares, whether you are eligible to purchase K
shares, and the relative level of services that are provided to different
classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the absence of a front-end sales charge. A shares also
bear the expenses of a shareholder service plan.
Alternatively, when you purchase K shares, you will not pay a front-end sales
charge and all of your monies will be fully invested at the time of purchase.
However, K shares are subject to annual distribution and/or administrative and
shareholder service fees.
25
<PAGE> 216
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
- --------------------------------------------------------------------------------
TO BUY SHARES
================================================================================
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUNDS' TRANSFER AGENT)
Contact them directly Contact them directly
for instructions. for instructions.
- ----
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Mail all subsequent
Application and mail it with investments to:
a check (payable to the
appropriate Fund) to the Pacific Horizon Funds, Inc.
address on the Account P.O. Box 182090
Application. Columbus, Ohio 43218-2090
The Company will not accept
third party checks for
investment.
- ----
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Deliver your payment directly
3435 Stelzer Road Application and your payment to the address on the left.
Columbus, OH 43219-3035 directly to the address on
the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of shares of a particular
Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE> 217
- --------------------------------------------------------------------------------
TO BUY SHARES
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY TELETRADE TeleTrade Privileges may not be Purchases may be made in the
(a service permitting used to make an initial minimum amount of $500 and
transfers purchase. the maximum amount of $50,000
of money from your per transaction as soon as
checking, NOW or bank appropriate information
money market account) regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
- ----
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- ----
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m.
27
<PAGE> 218
Eastern time on a business day will be effected as of 4:00 p.m. Eastern time
that day if the order is actually received by the Transfer Agent not later than
the next business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by a Fund. If you purchase or redeem
shares directly from a Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
a Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
28
<PAGE> 219
- --------------------------------------------------------------------------------
TO SELL SHARES
===============================================================================
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Asset Allocation Fund or joint owner, must sign) to the Transfer Agent.
Capital Income Fund If you hold stock certificates for the shares being
c/o Pacific Horizon Funds, redeemed, make sure to endorse them for transfer, have your
Inc. signature on them guaranteed by your bank or another
P.O. Box 182090 guarantor institution (as described in the section entitled
Columbus, Ohio 43218-2090 "What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver your signed, written request (each owner, including
3435 Stelzer Road each joint owner, must sign) and any certificates (endorsed
Columbus, OH 43219-3035 for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
------------------------------
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE> 220
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE
ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A Shares are redeemed, if you
purchase shares through Bank of America or a Service Organization they may
charge a fee for providing certain services in connection with investments in
Fund shares.
The Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a
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request in proper form, except as provided by the rules of the Securities and
Exchange Commission. If the shares to be redeemed have been purchased by check
or by TeleTrade, the Company will, upon the clearance of the purchase check or
TeleTrade payment, mail the redemption proceeds within seven business days. This
does not apply to situations where a Fund receives payment in cash or
immediately available funds for the purchase of shares. The Company may suspend
the right of redemption or postpone the date of payment upon redemption (as well
as suspend the recordation of the transfer of shares) for such periods as are
permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Shares so reinvested will be
purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
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DIVIDEND AND DISTRIBUTION POLICIES
Dividends from a Fund's net income is declared and paid as a dividend on a
quarterly basis and net realized capital gains (if any) are distributed at least
annually. Dividends are paid within five business days after the quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be cancelled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at
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P.O. Box 182090, Columbus, Ohio 43218-2090. The election or revocation will
become effective with respect to dividends paid after it is received and
processed by the Transfer Agent.
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING
YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
Your investments grow tax deferred until withdrawal at retirement and in many
cases the initial investment is tax deductible.
For details, contact the Funds' distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and should
consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. No additional sales load will be incurred when
exchanging A Shares purchased with a sales load for A Shares of another load
fund of the Company or Time Horizon Funds.
An investment in a Fund automatically entitles you to use this Privilege, unless
you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled
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"What Is TeleTrade?" for a description of the Company's policy regarding
responsibility for telephone instructions.) You may also send exchange
instructions in writing by following directions set forth previously under "How
to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
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
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Investment Program is one means by which you may use Dollar Cost Averaging in
making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF
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$50,000 PER TRANSACTION) IF YOU RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR
CERTAIN VETERAN'S, MILITARY OR OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT.
Subject to these limitations, you may deposit as much of your payments as you
wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
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THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolios. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
In its advisory agreements with the Company (collectively, the "Advisory
Agreements"), Bank of America has agreed to manage the Funds' investments and to
be responsible for, place orders for, and make decisions with respect to, all
purchases and sales of the Funds' securities. The Advisory Agreements also
provide that Bank of America may, in its discretion, provide advisory services
to the Funds 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 Funds for the acts and
omissions of the sub-adviser.
The Asset Allocation Committee of Bank of America's Global Investment Management
Division establishes general parameters for the selection of securities for the
Asset Allocation Fund. Robert Pyles, Senior Vice President and Director of
Equity, and Steven L. Vielhaber are primarily responsible for the selection of
particular securities for the equity and fixed-income portions, respectively, of
the Asset Allocation Fund. Mr. Pyles has been the Asset Allocation Fund's
manager since November 1994 and has been associated with Bank of America's
Northwest Division and its predecessor since 1976. Mr. Pyles also manages mutual
Fund managers for the Pacific Horizon Capital Income Fund and currently manages
various common trust, employee benefit and individual accounts for Bank of
America. Mr. Vielhaber has been the
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Asset Allocation Fund's manager since April 1994 and has been employed by Bank
of America since 1993. Prior thereto, Mr. Vielhaber had been Director of Fixed
Income Marketing at Dimensional Fund Advisers since 1990, and Vice President and
Manager of Investments at Gibraltar Savings from 1986 to 1990.
Ed Cassens, Vice President and Senior Portfolio Manager of BofA Capital
Management, Inc. is primarily responsible for the day-to-day investment
activities of the Capital Income Fund. Mr. Cassens has been the Capital Income
Fund's manager since November 1994 and has been associated with Bank of
America's Northwest Division and its predecessor since 1966. Mr. Cassens
currently manages Bank of America's EBT Convertible Securities Trust and
Convertible Securities Common Trust Fund and has managed the Seafirst Equity
Income Common Trust Fund since 1987.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.40% and
0.45% of the Asset Allocation Fund's and Capital Income Fund's respective
average daily net assets. These amounts may be reduced pursuant to undertakings
by Bank of America. (See the information below under "Fee Waivers.") Prior to
June 23, 1997, Bank of America was entitled to receive an investment advisory
fee at the annual rate of 0.55% of the average daily net assets of the Asset
Allocation Master Portfolio (an investment portfolio of Master Investment Trust,
Series I ("Master Trust") having the same investment objective as the Asset
Allocation Fund) in which the Asset Allocation Fund invested its assets. On that
date, the Asset Allocation Fund withdrew its investment in the Asset Allocation
Master Portfolio and began investing directly in portfolio securities pursuant
to a new investment advisory agreement between the Company and Bank of America
which superseded the existing advisory agreement between the Master Trust and
Bank of America with respect to the Asset Allocation Master Portfolio. During
the fiscal year ended February 28, 1997, the Asset Allocation Master Portfolio
paid Bank of America advisory fees at an effective annual rate of 0.16% of the
Asset Allocation Master Portfolio's average daily net assets, and Bank of
America waived a portion of its fee at an effective annual rate of 0.39% of the
Asset Allocation Master Portfolio's average daily net assets. For the same
period, the Capital Income Fund paid Bank of America advisory fees at an
effective annual rate of 0.45% of the Capital Income Fund's average daily net
assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments" below, and may
receive fees charged directly to their accounts in connection with investments
in shares of the Funds.
ADMINISTRATOR
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Funds . Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly-owned subsidiary of BISYS
served as administrator.
Under its administration agreements with the Company, BISYS has agreed to: pay
the costs of maintaining the offices of the Company; provide a facility to
receive purchase and redemption orders; provide statistical and research data,
data processing services and clerical services; coordinate the preparation of
reports to shareholders of the Funds and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of each Fund's
shares for sale under state securities laws; maintain books and records of the
Funds; calculate the net asset value of the Funds; calculate the dividends and
capital gains distributions paid to shareholders; and generally assist in all
aspects of the operations of the Funds.
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For its services as administrator, BISYS is entitled to receive an
administration fee from the Asset Allocation Fund at the annual rate of 0.15% of
such Fund's average daily net assets, and an administration fee from the Capital
Income Fund at the annual rate of .20% of such Fund's average daily net assets.
These amounts may be reduced pursuant to undertakings by BISYS. (See the
information below under "Fee Waivers.") Prior to June 23, 1997, Concord or BISYS
was entitled to receive an administration fee payable at the annual rate of
0.15% of the Asset Allocation Fund's average daily net assets and 0.05% of the
Asset Allocation Master Portfolio's average daily net assets. For the fiscal
year ended February 28, 1997, the Asset Allocation Master Portfolio and the
Capital Income Fund paid Concord and BISYS administration fees at an effective
annual rate of 0.01% and 0.20% of the Asset Allocation Master Portfolio's and
the Capital Income Fund's respective average daily net assets, and Concord and
BISYS waived a portion of its fee with respect to the Asset Allocation Master
Portfolio at an effective annual rate of 0.04% of the Asset Allocation Master
Portfolio's average daily net assets. For the same period, Concord and BISYS
waived its entire administration fee payable by the Asset Allocation Fund.
During the fiscal year ended February 28, 1997, Concord and/or BISYS also
reimbursed a portion of the operating expenses with respect to the Asset
Allocation Fund.
Pursuant to the authority granted in its administration agreements, BISYS or a
sub-contractor has entered into agreements with PFPC, Inc. ("PFPC") under which
PFPC (with respect to the Asset Allocation Fund) and The Bank of New York
("BONY") (with respect to the Capital Income Fund) provide certain accounting,
bookkeeping, pricing and dividend and distribution calculation services to the
Funds. The Asset Allocation Fund bears all fees and expenses charged by PFPC,
and the Capital Income Fund bears all fees and expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Asset Allocation Fund. The
Bank of New York, 90 Washington Street, New York, New York 10286, serves as the
Custodian of the Capital Income Fund. BISYS Fund Services, Inc., a wholly-owned
subsidiary of BISYS, is the transfer and dividend disbursing agent for each of
the Funds and is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds bear the
expenses incurred in their operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of each Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of these entities. However, the service providers retain the ability
to discontinue such fee waivers and/or expense reimbursements at any time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE
OR EXCHANGE OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
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STATE AND LOCAL TAXES
A portion of the dividends that you receive may be derived from investments in
U.S. Government obligations. These dividends may not be entitled to the same
exemptions from state and local income taxes that would have been available if
you had purchased U.S. Government obligations directly. Because state and local
taxes may be different than the federal taxes described above, you should
consult your tax adviser regarding these taxes.
================================================================================
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND
IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30-day
period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A Shares. Each Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a
30-day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30-day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. A Fund's
total return also may be compared to indices such as: the Dow Jones Industrial
Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman Bond
Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield
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for a stated period of time. Performance is generally a function of the kind and
quality of the instruments in a portfolio, portfolio maturity, operating
expenses and market conditions. Not included in a Fund's calculations of total
return and yield are fees charged by Bank of America and Service Organizations
directly to their customer accounts in connection with investments in the Fund
(e.g. account maintenance fees, compensating balance requirements or fees based
upon account transactions, assets or income).
================================================================================
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 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class F Common Stock, 100 million shares of Class F -- Special Series 3 Common
Stock and 100 million shares of Class F -- Special Series 5 Common Stock,
representing interests in the Capital Income Fund; 100 million shares of Class O
Common Stock, 100 million shares of Class O -- Special Series 3 Common Stock,
100 million shares of Class O -- Special Series 5 Common Stock and 100 million
shares of Class O -- Special Series 7 Common Stock, representing interests in
the Asset Allocation Fund and additional classes of shares representing
interests in other investment portfolios of the Company. Class F and Class O
Common Stock are the "A" Shares, Class F -- Special Series 3 Common Stock and
Class O -- Special Series 3 Common Stock are the "M" Shares; Class F -- Special
Series 5 Common Stock and Class O -- Special Series 5 Common Stock are the "K"
Shares; and Class O -- Special Series 7 Common Stock are the "SRF" Share. As of
the date of this prospectus, M Shares have not been offered to the public. The
Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class O Common Stock, Class O -- Special Series 3 Common
Stock, Class O -- Special Series 5 Common Stock, Class O -- Special Series 7
Common Stock, Class F Common Stock, Class F -- Special Series 3 Common Stock or
Class F -- Special Series 5 Common Stock) into one or more series. This
Prospectus relates primarily to the Funds' A and K Shares. For more information
about the Asset Allocation Fund's SRF Shares or about the Company's other
portfolios, contact the Company at the telephone number listed on the cover page
of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into the
Company. A Shares are sold to investors choosing the front-end sales charge
alternative unless an exemption to the sales charge is otherwise available,
which is the case for eligible retirement accounts. A Shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. K Shares are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. See
40
<PAGE> 231
"Shareholder Guide--What Alternative Sales Arrangements are Available?" for a
description of eligible purchasers of K Shares.
A Shares, K Shares and SRF Shares each have certain purchase, redemption and
exchange privileges. Additionally, A Shares and K Shares have certain
shareholder services, such as TeleTrade, an automatic investment program, an
automatic withdrawal plan, a directed distribution plan and a direct deposit
program.
The three classes of shares in the Asset Allocation Fund and the two classes of
shares in the Capital Income Fund which are publicly offered represent interests
in the same portfolio of investments of the particular Fund, have the same
rights and are identical in all respects except (a) SRF Shares and A Shares bear
the expenses of their respective Shareholder Services Plans; and (b) K Shares
bear the expenses of a Distribution Plan and/or Administrative and Shareholder
Services Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution Plan fees and/or Administrative and Shareholder
Services Plan fees attributable to K Shares, respectively, and (c) the
incremental expenses associated with such Plans. SRF, A and K Shares may have
different performance results due to sales charges and other expenses
attributable to distribution, administrative service and/or shareholder
servicing plans applicable with respect to a particular share class.
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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares; only holders of K Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution Plan and Administrative and Shareholder Services Plan
attributable to K Shares; and only holders of SRF Shares will be entitled to
vote on matters submitted to a vote of shareholders relating to the Shareholder
Services Plan attributable to SRF Shares. The Funds do not presently intend to
hold annual meetings of shareholders to elect directors or for other business
unless and until such time as less than a majority of the directors holding
office have been elected by the shareholders. At that time, the directors then
in office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
41
<PAGE> 232
================================================================================
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1997, the Asset Allocation Fund made payments
under the Plan at an effective annual rate of 0.25% of the A Shares' average
daily net assets. For the same period, the Capital Income Fund made payments
under the Plan at an effective annual rate of 0.25% of the A Shares' average
daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's
42
<PAGE> 233
K Shares. Such distribution expenses include expenses incurred in connection
with advertising and marketing each Fund's K Shares; payments to Service
Organizations for assistance in connection with the distribution of K Shares;
and expenses incurred in connection with preparing, printing and distributing
prospectuses for the Funds (except those used for regulatory purposes, for
solicitation or distribution to existing or potential A shareholders, or for
distribution to existing K shareholders of the Funds) and in implementing and
operating the Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares, such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting and providing statements periodically
to clients showing their position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act. For the period ended February 28, 1997, the Asset Allocation Fund made
payments under the Distribution, Administrative and Shareholder Services Plans
at the effective annual rate of 0.75% of the average daily net assets of the
Asset Allocation Fund's K Shares, and the Distributor waived fees under the
Distribution, Administrative and Shareholder Services Plans at the effective
annual rate of 0.25% the average daily net assets of the Asset Allocation Fund's
K Shares. For the same period, the Capital Income Fund made payments under the
Distribution, Administrative and Shareholder Services Plans at the effective
annual rate 0.75% of the average daily net asset value of the Capital Income
Fund's K Shares, and the Distributor waived fees under the Distribution,
Administrative and Shareholder Services Plans at the effective annual rate of
0.25% of the average daily net assets of the Capital Income Fund's K Shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
43
<PAGE> 234
================================================================================
APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa -- judged to be of high quality by all
standards; A -- deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa -- considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of desirable investment, Caa represents bonds which are in poor
standing, Ca represents a high degree of speculation and C represents the lowest
rated class of bonds); Caa, Ca and C bonds may be in default. Moody's applies
numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa to
B. The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic rating
category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and to repay
principal for debt in this category than for higher rated categories. Debt rated
"BB," "B," "CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. Debt rated
"CI" is reserved for income bonds on which no interest is being paid. Debt rated
"D" is in default. This rating is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. The ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Excerpts from Fitch's description of its corporate bond ratings:
"AAA" -- considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA" -- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A" -- deemed investment grade and of high credit quality,
although
44
<PAGE> 235
the capacity to pay interest and repay principal may be more susceptible to the
adverse changes in economic conditions and circumstances than bonds with higher
ratings; "BBB" is considered to be investment grade and is regarded as having
satisfactory credit quality with an adequate capacity to pay interest and repay
principal although adverse changes in economic conditions and circumstances are
more likely to impair timely payment than for higher rated categories; "BB,"
"B," "CCC," "CC," "C," "DDD," "DD," and "D" -- regarded as speculative
investments. The ratings "BB" to "C" represent the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch short-term ratings apply to debt obligations that are payable on demand or
have original maturities of generally up to three years. The designation "F-1"
indicates that the securities possess very strong credit quality. Those
securities determined to possess exceptionally strong credit quality are denoted
with a plus (+) sign designation. Securities rated "F-2" are considered to
possess good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
45
<PAGE> 236
GRI-0013
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
ASSET ALLOCATION FUND
CAPITAL INCOME FUND
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 237
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Blue Chip Fund and Aggressive Growth Fund
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C>
1. Cover Page............................. Cover Page
2. Synopsis............................... Expense Summary
3. Condensed Financial Information........ Financial Highlights;
Measuring Performance
4. General Description of Registrant...... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund................. The Business of the Funds
5.A. Management's Discussion of
Fund Performance..................... *
6. Capital Stock and Other
Securities........................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered............................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase............... How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings.............. *
</TABLE>
_________________
* Item inapplicable or answer negative.
<PAGE> 238
PROSPECTUS
JUNE 24, 1997
<TABLE>
<S> <C>
PACIFIC HORIZON BLUE CHIP FUND
PACIFIC HORIZON AGGRESSIVE GROWTH FUND
Investment Portfolios Offered by Pacific
Horizon Funds, Inc.
</TABLE>
- --------------------------------------------------------------------------------
The PACIFIC HORIZON BLUE CHIP FUND (the "Blue Chip Fund") is a diversified
mutual fund whose investment objective is long-term capital appreciation through
investments in blue chip stocks.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE BLUE CHIP FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY (THE "MASTER PORTFOLIO" AND, TOGETHER WITH THE AGGRESSIVE
GROWTH FUND, THE "PORTFOLIOS") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF
THE BLUE CHIP FUND. THE BLUE CHIP FUND WILL PURCHASE SHARES OF THE MASTER
PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE OF THE BLUE CHIP FUND WILL
RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE MASTER PORTFOLIO'S
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. SEE
"OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON
PAGE 17 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
The PACIFIC HORIZON AGGRESSIVE GROWTH FUND (the "Aggressive Growth Fund" and,
collectively with the Blue Chip Fund, the "Funds") is a diversified mutual fund
whose investment objective is to maximize capital appreciation. In seeking its
investment objective, the Aggressive Growth Fund invests primarily in common
stocks and securities convertible into common stocks. Income received is
incidental to the Aggressive Growth Fund's objective of capital appreciation.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are offered by Pacific Horizon Funds, Inc. (the "Company"), an
open-end, series management investment company. Bank of America National Trust
and Savings Association ("Bank of America" or the "investment adviser") serves
as the Portfolios' investment adviser. Based in San Francisco, California, Bank
of America and its affiliates have over $50 billion under management, including
over $14 billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference. More information about the Funds is contained in
a Statement of Additional Information that has been filed with the Securities
and Exchange Commission. To obtain a free copy, call 800-332-3863. The Statement
of Additional Information, as it may be revised from time to time, is dated June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investment in the Funds involves investment
risk, including the possible loss of principal.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, in
connection with the offering of the Funds' shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Funds or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 239
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 10 INVESTMENT OBJECTIVES
10 TYPES OF INVESTMENTS
11 FUNDAMENTAL LIMITATIONS
12 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 19 HOW TO BUY SHARES
19 What Is My Minimum Investment In The Funds?
19 What Alternative Sales Arrangements Are Available?
19 How Are Shares Priced?
22 How Do I Decide Whether To Buy A Or K Shares?
24 How Can I Buy Shares?
25 What Price Will I Receive When I Buy Shares?
26 What Else Should I Know To Make A Purchase?
26 HOW TO SELL SHARES
26 How Do I Redeem My Shares?
28 What NAV Will I Receive For Shares I Want To Sell?
28 What Kind Of Paperwork Is Involved In Selling Shares?
28 How Quickly Can I Receive My Redemption Proceeds?
29 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION
POLICIES 29
SHAREHOLDER SERVICES 30 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
30 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
31 WHAT IS TELETRADE?
31 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
32 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT
IT?
32 CAN I ARRANGE PERIODIC WITHDRAWALS?
32 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER
FUNDS?
32 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 33 FUND MANAGEMENT
33 Service Providers
TAX INFORMATION 36
MEASURING PERFORMANCE 37
DESCRIPTION OF SHARES 38
PLAN PAYMENTS 40
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
</TABLE>
<PAGE> 240
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 20 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Master Portfolio which are allocable to the Blue Chip Fund. Operating expenses
include fees for portfolio management, maintenance of shareholder accounts,
general administration, distribution (in the case of K Shares only), shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A and K Shares, the operating expenses of the A and K Shares of the Blue
Chip Fund (including the operating expenses of the Master Portfolio which are
allocable to the Blue Chip Fund) expected to be incurred during the current
fiscal year, and the operating expenses incurred by the A and K Shares of the
Aggressive Growth Fund during their last fiscal year. Actual expenses may vary.
A hypothetical example based on the summary is also shown.
BLUE CHIP FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None
Maximum Sales Load Imposed
on Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a percentage
of original purchase price
or redemption proceeds,
whichever is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of average
net assets)
Management Fees 0.70% 0.70%
12b-1 Fees (or in the case
of certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses 0.23% 0.23%
------- -------
Total Operating Expenses
(After Fee Waivers) + 1.18% 1.68%
======= =======
</TABLE>
-------------------------------------------
+ Absent fee waivers, Total Operating Expenses for the Blue Chip Fund's K Shares
would be 1.93% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Blue Chip Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the NASD Regulations, Inc. For a further
description of shareholder transaction expenses and the Blue Chip Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
2
<PAGE> 241
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1)........................ $ 56 $81 $ 107 $182
K Shares........................... $ 17 $53 $ 91 $199
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None
Maximum Sales Load Imposed
on Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees 0.90% 0.90%
12b-1 Fees (or in the case
of certain Class K Shares,
Administrative Service
Fees) (After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
Other Expenses 0.27% 0.27%
------- -------
Total Operating Expenses
(After Fee Waivers)+ 1.42% 1.92%
======= =======
</TABLE>
------------------------------------------
+ Absent fee waivers, Total Operating Expenses for the Fund's K Shares would be
2.17% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's K Shares. The total of
all 12b-1 fees, administrative services fees and shareholder services fees may
not exceed the annual rate of 1.00% of the average net assets of the Fund's K
Shares. However, it is expected that during the current fiscal year, such fees
will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Aggressive Growth Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. For a further
description of shareholder transaction expenses and the Aggressive Growth
Fund's operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
3
<PAGE> 242
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated.
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 59 $88 $ 119 $208
K Shares $ 19 $60 $ 104 $224
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.50% and 0.60% of
the Master Portfolio's and the Aggressive Growth Fund's respective average
daily net assets; and
- - an administration fee payable at the annual rate of 0.15% and 0.05% of the
Blue Chip Fund's and the Master Portfolio's respective average daily net
assets and 0.30% of the Aggressive Growth Fund's average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Blue Chip Fund and the Master Portfolio in which the Blue Chip
Fund's assets are invested will be less than or approximately equal to the
expenses which the Blue Chip Fund would incur if the Company retained the
services of an investment adviser for the Blue Chip Fund and the assets of the
Blue Chip Fund were invested directly in the type of securities held by the
Master Portfolio. Further, the Directors believe that the shareholders of the
Blue Chip Fund may participate in the ownership of a larger portfolio of
securities than could be achieved directly by the Blue Chip Fund. There can be
no assurance, however, that such will be the case or that any economies of scale
that might occur if other investors acquire shares of the Master Portfolio will
be realized.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge, with respect to A Shares and thereafter be subject to
annual fees under a Shareholder Services Plan; or incur neither a front-end
sales charge or a contingent deferred sales charge, but incur fees under a
Distribution Plan and/or an Administrative and Shareholder Services Plan with
respect to K shares. See the section entitled "How Do I Decide Whether to Buy A
or K Shares?" on page 22.
4
<PAGE> 243
================================================================================
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results for
the Funds for the years and periods indicated. On July 22, 1996 the Blue Chip
Fund and the Aggressive Growth Fund initially funded K shares. The information
for each of the: 1) three fiscal years in the three year period ended February
28, 1997 and the period ended February 28, 1994 with respect to A Shares of the
Blue Chip Fund and the period ended February 28, 1997 with respect to K Shares
of the Blue Chip Fund, and 2) five fiscal years in the five year period ended
February 28, 1997 with respect to A Shares of the Aggressive Growth Fund and the
period ended February 28, 1997 with respect to K Shares of the Aggressive Growth
Fund has been audited by Price Waterhouse LLP, independent accountants, whose
unqualified report on the financial statements containing such information is
incorporated by reference in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
5
<PAGE> 244
BLUE CHIP FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 13,
1994
FOR THE FOR THE FOR THE (INCEPTION DATE)
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997(A) 1996 1995 1994
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of period $ 20.53 $ 15.81 $14.97 $15.00
-------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.23 0.26 0.31 0.02
Net realized and unrealized gains (losses) on
investment transactions 5.21 4.96 0.80 (0.05)
-------- ------- ------- -------
Total income (loss) from investment operations 5.44 5.22 1.11 (0.03)
-------- ------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.22) (0.28) (0.27) --
-------- ------- ------- -------
Distributions to shareholders from net
realized gains on investment transactions (0.53) (0.22) -- --
-------- ------- ------- -------
Total dividends and distributions (0.75) (0.50) (0.27) --
-------- ------- ------- -------
Net change in net asset value per share 4.69 4.72 0.84 (0.03)
-------- ------- ------- -------
Net asset value per share, end of period $ 25.22 $ 20.53 $15.81 $14.97
======== ======= ======= =======
Total Return* 27.01% 33.39% 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period (000) $152,748 $ 66,933 $6,002 $1,180
Ratio of expenses to average net assets** 1.28% 0.83% 0.00% 0.00%+
Ratio of net investment income to average
net assets** 0.99% 1.63% 2.46% 2.92%+
</TABLE>
- ---------------
<TABLE>
<C> <S>
* The total returns listed are not annualized for the period ended February 28, 1994, and do not include the effect of
the maximum 4.50% sales charge on A Shares.
** Reflects the Blue Chip Fund's proportionate share of the Master Portfolio's expenses, the Master Portfolio's fee
waivers and expense reimbursements and fee waivers and expense reimbursements of the Blue Chip Fund. Such fee
waivers and expense reimbursements had the effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by 0.43%, 1.45%, 6.32% and 55.00% (annualized)
for the periods ended February 28, 1997, February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
+ Annualized.
(a) As of July 22, 1996, the Portfolio designated the existing series of shares as "A" Shares.
</TABLE>
6
<PAGE> 245
BLUE CHIP FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH FEBRUARY 28, 1997
-------------------------
<S> <C>
Net asset value per share, beginning of period $ 20.38
--------
Income from Investment Operations:
Net investment income 0.07
Net realized and unrealized gains on investment transactions 5.35
--------
Total income from investment operations 5.42
--------
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.07)
--------
Distributions to shareholders from net realized gains on investment
transactions (0.53)
--------
Total dividends and distributions (0.60)
--------
Net change in net asset value per share 4.82
--------
Net asset value per share, end of period $ 25.20
====================
Total Return 26.96%++
Ratios/Supplemental Data:
Net assets, end of period (000) $ 1,454
Ratio of expenses to average net assets 1.92%+
Ratio of net investment income to average net assets 0.45%+
</TABLE>
- ---------------
+ Annualized. Reflects the Blue Chip Fund's proportionate share of the Master
Portfolio's expenses, the Master Portfolio's fee waivers and expense
reimbursements and fee waivers and expense reimbursements of the Blue Chip
Fund. Such fee waivers and expense reimbursements had the effect of reducing
the ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 0.20% (annualized) for the period
ended February 28, 1997.
++ Not Annualized.
7
<PAGE> 246
AGGRESSIVE GROWTH FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------------------------------------
FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 29, FEB. 29, FEB. 28, FEB. 28, FEB. 29, FEB. 29,
1997(A) 1996 1995 1994 1993+ 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value per
share,
beginning
of period $ 23.49 $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17 $ 14.49 $ 13.41 $ 17.67
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from
Investment
Operations:
Net investment
income (loss) (0.25) (0.27) (0.22) (0.37) (0.26) (0.15) (0.17) (0.17) (0.06) 0.08
Net realized
and unrealized
gains (losses)
on investment
transactions 2.26 8.35 (0.95) 3.02 (2.26) 9.21 6.33 2.85 1.14 (3.37)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income
(loss) from
investment
operations 2.01 8.08 (1.17) 2.65 (2.52) 9.06 6.16 2.68 1.08 (3.29)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Dividends
and Distributions:
Dividends to
shareholders from
net investment
income -- -- -- -- -- -- -- -- -- (0.10)
Distributions to
shareholders
from net realized
gains on
investment
transactions (5.90) (5.20) (3.92) (1.63) (0.73) (3.64) (0.82) -- -- (0.87)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net change
in net asset
value per
share (3.89) 2.88 (5.09) 1.02 (3.25) 5.42 5.34 2.68 1.08 (4.26)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset
value per
share, end of
period $ 19.60 $ 23.49 $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17 $ 14.49 $ 13.41
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return* 9.13% 40.88% (3.59)% 10.54% (8.76)% 41.11% 37.01% 18.50% 8.05%P (18.42)%P
Ratios/Supple-
mental Data:
Net assets,
end of
period
(000) $202,907 $180,347 $131,879 $158,091 $159,517 $178,228 $107,421 $ 85,637 $ 91,487 $134,000
Ratio of
expenses to
average net
assets 1.42%++ 1.51%++ 1.46% 1.52% 1.49%++ 1.44%++ 1.55%++ 1.51%++ 1.28%++ 1.21%++
Ratio of net
investment income
(loss) to
average
net assets (1.26)% 1.35% 1.04% 1.20% 1.15%++ 1.14%++ 0.85%++ 0.82%++ (0.30)%++ 0.55%++
Portfolio
turnover rate 99% 93% 92% 43% 43% 73% 155% 175% 276% 384%
Average
commission
rate paid(b) $ 0.0312 -- -- -- -- -- -- -- -- --
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Security Pacific National Bank served as investment adviser through April 21, 1992. Bank of America National Trust
and Savings Association served as investment adviser commencing April 22, 1992.
++ Includes fee waivers and expense reimbursements. Such fee waivers and expense reimbursements had the effect of
decreasing the ratio of expenses to average net assets and increasing the ratio of net investment income (loss) to
average net assets by 0.02%, 0.03%, 0.09%, 0.01%, 0.26% and 0.12%, for the years ended February 28, 1997 and
February 29, 1996, the Fund received credits from its custodian for interest earned on uninvested cash balances
which were used to offset custodian and expenses. If such credits had not occurred, the ratio of expenses to average
net assets (without fee waivers and/or expense reimbursements) would have been 1.64%, respectively. The ratio of net
investment income was not affected by such credits.
P Unaudited.
* The total return figures presented do not include the effect of the maximum 4.50% sales charge on A Shares.
(a) As of July 22, 1996, the Portfolio designated the existing series of shares as "A" Shares.
(b) Represents the dollar amount of commissions paid on portfolio transactions divided by the total number of shares
purchased or sold for which commissions were charged and is calculated on the basis of the portfolio as a whole
without distinguishing between the classes of shares issued. Disclosure is not required for prior periods.
</TABLE>
8
<PAGE> 247
AGGRESSIVE GROWTH FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH FEBRUARY 28, 1997
-------------------------
<S> <C>
Net asset value per share, beginning of period $ 24.20
-----------
Income from Investment Operations:
Net investment (loss) (0.06)
Net realized and unrealized gains on investment transactions 1.29
-----------
Total income from investment operations 1.23
-----------
Less Dividends and Distributions:
Distributions to shareholders from net realized gains on investment
transactions (5.90)
-----------
Net change in net asset value (4.67)
-----------
Net asset value per share, end of period $ 19.53
====================
Total Return 5.65%+
Ratios/Supplemental Data:
Net assets, end of period (000) $ 340
Ratio of expenses to average net assets* 1.95%++
Ratio of net investment income to average net assets* (1.78)%++
Portfolio Turnover Rate 99%
Average commission rate paid(a) $0.0312
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Not Annualized.
++ Annualized.
* Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of decreasing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.27% and 0.25%, respectively, for the period ended
February 28, 1997. During the period ended February 28, 1997, the Fund
received credits from its custodian for interest earned on uninvested
balances which were used to offset custodian fees and expenses. If such
credits had not occurred, the ratio of expenses to average net assets would
have been 2.22%. The ratio of net investment income was not affected by
such credits.
(a) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the portfolio as
a whole without distinguishing between the classes of shares issued.
</TABLE>
9
<PAGE> 248
================================================================================
FUND INVESTMENTS
- ---------------------------------------------------------
INVESTMENT OBJECTIVES
BLUE CHIP FUND
The Blue Chip Fund seeks to achieve long-term capital appreciation through
investments in blue chip stocks. The Blue Chip Fund may be appropriate for
investors who want the potential for capital appreciation over the long-term.
THE BLUE CHIP FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF
ITS INVESTABLE ASSETS IN THE MASTER PORTFOLIO. THE MASTER PORTFOLIO HAS THE SAME
INVESTMENT OBJECTIVE AS THE BLUE CHIP FUND.
AGGRESSIVE GROWTH FUND
The Aggressive Growth Fund seeks to achieve maximum capital appreciation. In
seeking its investment objective, the Aggressive Growth Fund invests primarily
in common stocks and securities convertible into common stocks of issuers from a
variety of industries that it is believed have the potential for above-average
growth. Any income received is incidental to capital appreciation. The
Aggressive Growth Fund may be appropriate for investors who want long-term asset
growth and are willing to accept stock market volatility and who want to
participate in a diversified portfolio of companies with strong growth
potential.
WHILE EACH PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
- ---------------------------------------------------------
TYPES OF INVESTMENTS
SINCE THE INVESTMENT CHARACTERISTICS OF THE BLUE CHIP FUND WILL CORRESPOND TO
THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS
INVESTMENTS OF AND TECHNIQUES CURRENTLY EMPLOYED BY THE MASTER PORTFOLIO AND THE
AGGRESSIVE GROWTH FUND.
GENERAL INVESTMENTS
MASTER PORTFOLIO. The Master Portfolio is a diversified portfolio which will
invest substantially all of its assets in stocks included in either the Dow
Jones Industrial Average or the Standard & Poor's 500 Index. The Master
Portfolio will hold approximately 100 stocks. The Master Portfolio expects that
under normal market conditions at least 80% of its total assets will be invested
in blue chip stocks and the other 20% may be invested in cash equivalent
securities.
Cash equivalents are the following short-term interest bearing instruments:
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities (some of which may be subject to repurchase agreements),
certificates of deposit, bankers' acceptances, time deposits and other
interest-bearing deposits issued by domestic and foreign banks and foreign
branches of U.S. banks, foreign government securities, and commercial paper
issued by U.S. and foreign issuers which is rated at the time of purchase at
least Prime-2 by Moody's Investors Service, Inc. ("Moody's") or A-2 by Standard
& Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit
Co. ("D&P") and Fitch Investor Services, Inc. ("Fitch").
The Master Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
AGGRESSIVE GROWTH FUND. The Aggressive Growth Fund is a diversified portfolio
comprised mainly of common stocks and securities convertible into common stocks.
The Aggressive Growth Fund's holdings will consist primarily of common stocks of
domestic companies, most of which will be small-capitalized companies, that Bank
of America expects will achieve above-average growth in earnings and price.
Small-capitalized companies generally have limited product lines,
10
<PAGE> 249
markets and financial resources, and are dependent upon a limited management
group. As a result of the Aggressive Growth Fund's investments, an investment in
the Aggressive Growth Fund involves substantial risks (see "Risk Factors"
below).
While the Aggressive Growth Fund intends to invest primarily in common stock and
securities convertible into such stock, its policy is flexible as to the
proportion of its assets that will be invested in common stocks, and the
proportion may be changed without shareholder approval. However, as a matter of
fundamental policy, not less than 65% of the Aggressive Growth Fund's total
assets will be invested in equity securities (except during temporary defensive
periods).
During temporary defensive periods, or at other times subject to the limitation
above, the Aggressive Growth Fund may hold cash equivalents such as money market
instruments, which include short-term bank time deposits, certificates of
deposit and bankers' acceptances, commercial paper (which is unsecured
promissory notes issued by corporations) and obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (some of which may be
subject to repurchase agreements) and invest in preferred stocks and other
fixed-income corporate and U.S. Government bonds with ratings of AA or better by
a nationally recognized statistical rating organization (or unrated bonds of
comparable quality) that cannot be converted into common stocks.
In addition, up to 20% of the Aggressive Growth Fund's total assets may be
invested in securities issued by foreign issuers. Such investments will be made
either directly in such issuers or indirectly through American Depositary
Receipts ("ADRs") or closed-end investment companies. (Investments in closed-end
investment companies will not make up more than 10% of the Aggressive Growth
Fund's total assets.)
The Aggressive Growth Fund may also purchase put and call options, write covered
call options, purchase and sell futures contracts and purchase futures options
as described below under "Other Investment Practices."
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds and the Master Portfolio may not be
changed without a vote by the holders of a majority of the outstanding shares of
the particular Fund or of the outstanding interests of the Master Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below.
Neither the Blue Chip Fund nor the Master Portfolio may:
1. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to 25%
of its total assets may be invested without regard to these limitations; and
provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the
same investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons, except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value in
excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its total assets, and may
enter into repurchase agreements as long as repurchase agreements maturing in
more than seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts
11
<PAGE> 250
on financial instruments, such as bank certificates of deposit and U.S.
Government securities, foreign currencies and stock indexes and options on
any such futures if such options are written by other persons and if (i) the
futures or options are listed on a national securities or commodities
exchange, (ii) the aggregate premiums paid on all such options that are held
at any time do not exceed 20% of its total net assets, and (iii) the
aggregate margin deposits required on all such futures or options thereon
held at any time do not exceed 5% of its total assets.
The Aggressive Growth Fund may not:
1. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities to a limited extent.
2. Invest more than 10% of its total assets in instruments that the Board of
Directors determines to be illiquid. Investors should note, however, that
certain securities that might otherwise be considered illiquid, such as
variable amount master demand notes with maturities of nine months or less,
as well as securities that are not registered under the federal securities
laws but for which the Board of Directors or Bank of America (pursuant to
guidelines adopted by the Board) has determined a liquid trading market
exists, are not subject to this 10% limitation.
3. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs (with certain exceptions, including the
ability to enter into futures contracts and related options).
In addition, except for temporary defensive periods, the Aggressive Growth Fund
will invest at least 65% of its total assets in equity securities.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Master Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate of the premiums paid for
options does not exceed 2% of the net assets of the Master Portfolio (this
restriction does not apply to options on futures contracts). Put options may be
purchased in order to protect the Master Portfolio's securities in expectation
of a declining market, and call options may be purchased to benefit from
anticipated price increases in the underlying securities or index. The Master
Portfolio may not write put options but may write fully covered call options as
long as the Master Portfolio remains fully covered throughout the life of the
option, either by owning the optioned securities or possessing a call issued by
another writer that is identical in all respects to the call written by the
Master Portfolio.
The Aggressive Growth Fund may sell, or "write," covered call options and may
buy put and call options on particular securities or various stock indices. In
addition, in order to "hedge" against changes in currency exchange rates, the
Aggressive Growth Fund may acquire options relating to foreign currencies.
Premiums paid for options purchased by the Aggressive Growth Fund will not
exceed 5% of its net assets and securities subject to options written by the
Aggressive Growth Fund will not exceed 25% of its net assets. All options will
be listed on a national securities exchange and issued by the Options Clearing
Corporation.
A call option for a particular security gives the purchaser of the option the
right to buy, and a writer the obligation to sell, the underlying security at
the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium
12
<PAGE> 251
paid to the writer is the consideration for undertaking the obligations under
the option contract. A put option for a particular security gives the purchaser
the right to sell the underlying security to the writer at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security. In contrast to an option on a particular security,
an option on a stock index provides the parties to the contract with the right
to receive or obligation to make a cash settlement upon exercise of the option
by its purchaser.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a Portfolio gives up the opportunity to profit from an increase in
the market price of the underlying security above the exercise price (except to
the extent the premium represents such a profit). Moreover, the Portfolio will
not be able to sell the underlying security on which a call option has been
written until the option expires or is exercised or the Portfolio closes out the
option. In addition, except to the extent that a call option written by the
Portfolio on a particular index is covered by an option on the same index
purchased by the Portfolio, movements in the index may cause the Portfolio to
incur a loss. Such loss might be lessened to the extent that the value of the
securities held by the Portfolio changed during the time the option was
outstanding.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Portfolios may purchase and sell stock index futures contracts (as
well as purchase related options) and, as relates to the Aggressive Growth Fund,
purchase and sell foreign currency futures contracts (as well as purchase
related options). The Portfolios may engage in futures transactions to hedge
against changes resulting from market conditions in the values of the securities
held by the particular Portfolio or which the Portfolio intends to purchase, or
in the case of the Aggressive Growth Fund, to protect against fluctuating
currency exchange rates. The Portfolios will only enter into these transactions
where they are economically appropriate for the reduction of risks inherent in
the ongoing management of the particular Portfolio.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the value of a specified stock index
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. A Portfolio may not purchase or sell a
futures contract or purchase related options unless immediately after any such
transaction the aggregate amount of margin deposits on its existing futures
positions and the amount of premiums paid for related options does not exceed 5%
of the Portfolio's total assets (after taking into account certain technical
adjustments).
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 a Portfolio may be exposed to risk of loss.
The loss incurred by a Portfolio in entering into futures contracts and in
writing call options on futures contracts is potentially unlimited and may
exceed the amount of the premium received. Futures markets are highly volatile
and the use of futures may increase the volatility of a Portfolio'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 a Portfolio.
For a more detailed description of futures contracts and options and the costs
and risks related
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<PAGE> 252
to such instruments, see the Statement of Additional Information.
SHORT-TERM OBLIGATIONS. Subject to the investment policies stated above, the
Master Portfolio may invest in short-term obligations such as variable and
floating rate instruments, including master demand notes. Although payable on
demand by the Master Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes may depend on the borrower's
ability to pay, which will be continuously monitored by Bank of America. Such
notes will be purchased only from domestic corporations that either (a) are
rated Aa or better by Moody's or AA or better by S&P, or the equivalent from
another nationally recognized statistical rating organization ("NRSRO") (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P, or the
equivalent by another NRSRO (c) are backed by a bank letter of credit or (d) are
determined by Bank of America to be of a quality comparable to securities
described in either clause (a) or (b).
Money market instruments such as short-term bank time deposits, certificates of
deposit and bankers' acceptances, commercial paper, and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities as well as
repurchase agreements and variable and floating rate instruments, may be
purchased by the Aggressive Growth Fund as long as such instruments are rated
within the two highest rating categories. Unrated instruments may also be
purchased if they are of comparable quality. Investments in variable and
floating rate instruments that have no active trading market and are not payable
upon seven days' notice will be subject to the percentage limitation on illiquid
instruments described above. During the current fiscal year, the Aggressive
Growth Fund does not expect to invest more than 5% of its total assets at any
time in any particular type of money market instrument.
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, a Portfolio may invest in securities issued by other investment
companies whose investment objectives are consistent with those of the Portfolio
and money market funds advised by Bank of America. No more than 10% of the value
of a Portfolio's respective total assets will be invested in securities of other
investment companies, with no more than 5% invested in the securities of any one
investment company; except that with respect to the investment in a money market
mutual fund advised by Bank of America, a Portfolio is permitted to invest the
greater of 5% of its net assets or $2.5 million. In addition, the Portfolios may
each hold no more than 3% of the outstanding voting stock of any other
investment company. The Aggressive Growth Fund may acquire shares of closed-end
investment companies, including companies that invest in foreign issuers,
subject to the requirements of applicable securities laws. Although these
closed-end companies may have policies that differ from the Aggressive Growth
Fund's policies, their management and other types of expenses will be similar to
those borne by the Aggressive Growth Fund. As a shareholder of another
investment company, the Portfolios would bear, along with other shareholders,
their pro rata portion of the other investment company's expenses, including
advisory fees. Such expenses are in addition to the expenses a Portfolio pays in
connection with its own operations.
REPURCHASE AGREEMENTS. The Portfolios may also enter into repurchase agreements.
Under these agreements, the Master Portfolio will acquire securities from either
a bank which has a commercial paper rating of A-2 or better by S&P or Prime-2 or
better by Moody's (or the equivalent from another nationally recognized
statistical ratings organization) or a registered broker-dealer, and the seller
agrees to repurchase them within a specified time at a fixed price (equal to the
purchase price plus interest). The Aggressive Growth Fund may also acquire such
securities if rated within the two highest ratings categories. Repurchase
agreements are considered to be loans under the Investment Company Act of
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<PAGE> 253
1940 (the "1940 Act"). Repurchase agreements maturing in more than seven days
are considered illiquid investments and investment in such repurchase agreements
along with any other illiquid securities will not exceed 10% of the value of the
total assets of a Portfolio. Repurchase agreements will be entered into only for
debt obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances or commercial
paper, and either the Portfolios' custodian or its agent will have physical
possession of the securities or the securities will be transferred to the
Portfolios' custodian, by appropriate entry in the Federal Reserve Bank's
records and, in either case, will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Portfolios might incur a loss if the
value of the securities securing the repurchase agreement declines, and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization upon the securities by the Portfolios may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may enter into reverse repurchase
agreements. Under these arrangements, a Portfolio will sell a security held by
the Portfolio to either a bank (which has a commercial paper rating of A-2 or
better by S&P, Prime-2 or better by Moody's or the equivalent by another NRSRO)
or a registered broker-dealer, with an agreement to repurchase the security on
an agreed date, price and interest payment. When a Portfolio enters into a
reverse repurchase agreement, it places in a separate custodial account either
liquid assets or other liquid high grade debt securities that have a value equal
to or greater than the repurchase price (including accrued interest). The
account is then continuously monitored to make sure that an appropriate value is
maintained. Reverse repurchase agreements involve the possible risk that the
value of portfolio securities the Portfolios relinquish may decline below the
price the Portfolios must pay when the transaction closes. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of the particular Portfolio's outstanding
shares.
SECURITIES LENDING. In order to earn additional income, each Portfolio may lend
its portfolio securities to broker-dealers that Bank of America considers to be
of good standing. Borrowers of portfolio securities may not be affiliated
directly or indirectly with the Company or the particular Portfolio. If the
broker-dealer should become bankrupt, however, a Portfolio could experience
delays in recovering its securities. A securities loan will only be made when,
in Bank of America's judgment, the possible reward from the loan justifies the
possible risks. In addition, such loans will not be made if, as a result, the
value of securities loaned exceeds 10% and 30% of the total assets of the Master
Portfolio and the Aggressive Growth Fund, respectively. Securities loans will be
fully collateralized.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Both
Portfolios may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Aggressive Growth
Fund may purchase or sell securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit a
Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. Delayed settlement
refers to a transaction in the secondary market that will settle some time in
the future. These transactions involve the
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risk that the price or yield obtained may be less favorable than the price or
yield available when the delivery takes place. The Portfolios will set aside in
a segregated account cash or liquid securities equal to the amount of any when-
issued, forward commitment or delayed settlement transactions. When-issued
purchases, forward commitments and delayed settlements are not expected to
exceed 25% of the value of a Portfolio's total assets under normal
circumstances. These transactions will not be entered into for speculative
purposes, but primarily in order to hedge against anticipated changes in
interest rates.
DIVERSIFICATION. In compliance with current Securities and Exchange Commission
rules, the Aggressive Growth Fund intends to limit its investments in the
securities of any single issuer to no more than 5% of its total assets (measured
at the time of purchase), although up to 25% of its total assets may be invested
without regard to this limitation.
RISK FACTORS. Although investing in any mutual fund has certain inherent risks,
an investment in the Aggressive Growth Fund may have even greater risks than
investments in most other types of mutual funds. The Aggressive Growth Fund is
not a complete investment program, and it may not be appropriate for an investor
if he or she cannot bear financially the loss of at least a significant portion
of his or her investment. The Aggressive Growth Fund's net asset value per share
is subject to rapid and substantial changes because greater risk is assumed in
seeking maximum growth. The securities of the smaller companies which the
Aggressive Growth Fund expects to emphasize may be subject to more abrupt or
erratic market movements than larger, more established companies, both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
Many of the securities which Bank of America believes would have the greatest
growth potential may be considered highly speculative. Additionally, such
securities may not be traded every day or in the volume typical of trading on a
national securities exchange. As a result, the disposition by the Aggressive
Growth Fund of portfolio securities, to meet redemptions or otherwise, may
require the Aggressive Growth Fund to sell these securities at a discount from
market prices, to sell during periods when such disposition is not desirable, or
to make many small sales over a lengthy period of time.
The Portfolio's investments in foreign securities, whether made directly or
indirectly, also involve certain inherent risks, including political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns, changes in foreign currency exchange rates and the
possibility of adverse changes in investment or exchange control regulations.
There is typically less publicly available information about a foreign company
than about a U.S. company. Moreover, these companies may be subject to less
stringent reserve, auditing and reporting requirements than their U.S.
counterparts. Additionally, foreign stock markets are generally not as developed
or efficient as those in the U.S., and in most foreign markets volume and
liquidity are less than in the U.S. fixed commissions on foreign stock exchanges
are also generally higher than the negotiated commissions on U.S. exchanges, and
there is generally less government supervision and regulation of foreign stock
exchanges, brokers and companies than in the U.S. There is also the possibility
that foreign governments could expropriate assets or levy confiscatory taxes,
set limitations on the removal of assets or suffer adverse diplomatic
developments.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. A Portfolio will only write options where
Bank of America believes a liquid secondary market will exist on a national
securities exchange for options of the same series, which would permit a
Portfolio to close out its option position. There is no assurance that a liquid
secondary market will exist on an exchange for a particular option or at any
particular time. In fact, for some options no secondary market on an exchange
may exist at all. If a
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Portfolio cannot close out an option, it will not be able to sell the securities
underlying the option until the option expires or is exercised.
Furthermore, a Portfolio's ability to engage in transactions in options may be
limited by IRS requirements on its gross income from certain securities,
including options and futures contracts, held by a Portfolio for less than three
months. Bank of America does not believe that transactions in options will
significantly affect a Portfolio's ability to comply with IRS requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
PORTFOLIO TRANSACTIONS. Investment decisions for each Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Portfolio. When a purchase
or sale of the same security is made at substantially the same time on behalf of
a Portfolio and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Portfolio or the size of the position
obtained or sold by a Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Portfolio are not less favorable
than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. High portfolio turnover rates can result in corresponding
increases in brokerage commissions and other transaction costs. The Aggressive
Growth Fund's investment practices in particular, which involve an effort to own
stocks during periods of accelerating earnings growth and strong relative price
momentum, may result in portfolio turnover greater than that of other mutual
fund portfolios. Short-term capital gains realized from securities transactions
are taxable to shareholders as ordinary income. See "Financial Highlights" for
the Aggressive Growth Fund's portfolio turnover rate for the period ended
February 28, 1997.
MASTER-FEEDER STRUCTURE. The Blue Chip Fund is an open-end investment portfolio
that seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio which has the same investment
objective as the Blue Chip Fund. The Blue Chip Fund may withdraw its investment
in the Master Portfolio at any time if the Board of Directors of the Company
determines that it is in the best interest of the Blue Chip Fund to do so. Upon
such withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all of the assets of the Blue Chip Fund in
another pooled investment entity having the same investment objective as the
Blue Chip Fund or the hiring of an investment adviser to manage the Blue Chip
Fund's assets in accordance with the investment policies described above with
respect to the Master Portfolio. See "Expense Summary," "Fund Investments" and
"Fund Management" for a description of this investment objective and the
investment policies, restrictions, management and expenses of the Blue Chip Fund
and the Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Blue Chip Fund and other entities that may invest in the Master
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Portfolio from time to time (e.g., other investment companies and commingled
trust funds) will each be liable for all obligations of the Master Portfolio.
However, the risk of the Blue Chip Fund's incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
exists and the Master Portfolio itself is unable to meet its obligations.
Accordingly, the Company's Board of Directors believes that neither the Blue
Chip Fund nor its shareholders will be adversely affected by reason of the Blue
Chip Fund's investing in the Master Portfolio. As stated above, the investment
objective of the Blue Chip Fund and the Master Portfolio is a fundamental policy
and may not be changed, in the case of the Blue Chip Fund, without the vote of
its shareholders or, in the case of the Master Portfolio, without the vote of
its interest holders. As with any mutual fund, other investors in the Master
Portfolio could control the results of voting at the Master Portfolio level in
certain instances (e.g., a change in fundamental policies by the Master
Portfolio which was not approved by the Blue Chip Fund's shareholders). This
could result in the Blue Chip Fund's withdrawal of its investment in the Master
Portfolio, and in increased costs and expenses for the Blue Chip Fund. Further,
the withdrawal of other entities that may from time to time invest in the Master
Portfolio could have an adverse effect on the performance of the Master
Portfolio and the Blue Chip Fund, such as decreased economies of scale and
increased per share operating expenses. In addition, the total withdrawal by
another investment company as an investor in the Master Portfolio will cause the
Master Portfolio to terminate automatically in 120 days unless the Blue Chip
Fund and any other investors in the Master Portfolio unanimously agree to
continue the business of the Master Portfolio. If unanimous agreement is not
reached to continue the Master Portfolio, the Board of Directors of the Company
would need to consider alternative arrangements for the Blue Chip Fund, such as
those described above. When the Fund is required to vote as a shareholder of the
Master Portfolio, current regulations provide that in those circumstances the
Fund may either seek instructions from its security holders with regard to
voting of such proxies and vote such proxies in accordance with such
instructions, or the Fund may vote its shares in the Master Portfolio in the
same proportion of all other security holders in the Master Portfolio. The
policy of the Fund, and other similar investment companies, to invest their
investable assets in trusts such as the Master Portfolio is a relatively recent
development in the mutual fund industry and, consequently, there is a lack of
substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Master Portfolio which may have higher or lower fees and expenses than those of
the Blue Chip Fund and which may therefore have different performance results
than the Blue Chip Fund. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling 800-332-3863.
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================================================================================
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
- ---------------------------------------------------------
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.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books; (d) accounts under Section 403(b)(7) of the
Code; (e) deferred compensation plans under Section 457 of the Code; and (f)
certain other retirement plans. The two classes of shares in each Fund represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares bear the expenses of a Shareholder Services Plan. K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such Plans. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset
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value per share plus a front-end sales load on A Shares. Each class calculates
its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
-------------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Portfolios' investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Master Portfolio or Aggressive Growth Fund, as appropriate, pursuant to
procedures adopted by the Master Portfolio's Board of Trustees or the Aggressive
Growth Fund's Board of Directors. Short-term debt securities are valued at
amortized cost, which approximates market value. For further information about
valuing securities, see the Statement of Additional Information. For price
information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
---------- --------- --------- -----------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
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.
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 by an investor who is a shareholder of SRF shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - 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;
- - any purchase through FundStrategies(TM), including FundSelections(TM) from BA
Invest-
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ment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from Bank of
America;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
or by or on behalf of agency accounts administered by any bank or trust
company affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open
on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain open on the
Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors and their spouses;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Funds may be purchased without a
front-end sales load pursuant to the Program.)
TS 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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
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<PAGE> 260
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of a Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon 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.
HOW DO I DECIDE WHETHER TO BUY A OR K SHARES?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or K shares, you should consider all relevant
factors, including the dollar amount of your purchase, the length of time you
expect to hold the shares, the amount of any applicable front-end sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of A shares, whether you are eligible to purchase K
shares, and the relative level of services that are provided to different
classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the
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<PAGE> 261
absence of a front-end sales charge. A Shares also bear the expense of a
shareholder service plan. Alternatively, when you purchase K shares, you will
not pay a front-end sales charge and all of your monies will be fully invested
at the time of purchase. However, K shares are subject to annual distribution
and/or administrative and shareholder service fees.
23
<PAGE> 262
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Mail all subsequent
Application and mail it with investments to:
a check (payable to the
appropriate Fund) to the Pacific Horizon Funds, Inc.
address on the Account P.O. Box 182090
Application. The Company will Columbus, Ohio 43218-2090
not accept third party checks
for investment.
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Deliver your payment directly
3435 Stelzer Road Application and your payment to the address on the left.
Columbus, OH 43219-3035 directly to the address on
the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of shares of a particular
Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 263
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2987 to make
your purchase.
- ----
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- ----
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a
25
<PAGE> 264
net basis to the Transfer Agent. In these instances orders received by the
entity by 4:00 p.m. Eastern time on a business day will be effected as of 4:00
p.m. Eastern time that day if the order is actually received by the Transfer
Agent not later than the next business morning accompanied by payment in federal
funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by a Fund. If you purchase or redeem
shares directly from a Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
a Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
26
<PAGE> 265
- --------------------------------------------------------------------------------
TO SELL SHARES
===============================================================================
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Blue Chip Send a signed, written request (each owner, including each
Fund or Aggressive Growth Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds, If you hold stock certificates for the shares being
Inc. redeemed, make sure to endorse them for transfer, have your
P.O. Box 182090 signature on them guaranteed by your bank or another
Columbus, Ohio 43218-2090 guarantor institution (as described in the section entitled
"What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE
(Blue Chip Fund only) As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE> 266
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved in Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when A Shares are redeemed, if you
purchase shares through Bank of America or a Service Organization they may
charge a fee for providing certain services in connection with investments in
Fund shares.
The Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a
28
<PAGE> 267
request in proper form, except as provided by the rules of the Securities and
Exchange Commission. If the shares to be redeemed have been purchased by check
or by TeleTrade, the Company will, upon the clearance of the purchase check or
TeleTrade payment, mail the redemption proceeds within seven business days. This
does not apply to situations where a Fund receives payment in cash or
immediately available funds for the purchase of shares. The Company may suspend
the right of redemption or postpone the date of payment upon redemption (as well
as suspend the recordation of the transfer of shares) for such periods as are
permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds, within 90 days of your
redemption trade date without paying a sales load. 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 Blue Chip Fund are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments in the Master Portfolio which are allocable to that Fund.
The Blue Chip and Aggressive Growth Funds' net income is declared and paid as a
dividend on a quarterly and annual basis, respectively, and net realized capital
gains (if any) are distributed at least annually. Dividends with respect to the
Blue Chip and Aggressive Growth Funds are paid within five business days after
quarter or year end, respectively.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be cancelled and will be reinvested in the Fund at
the
29
<PAGE> 268
per share net asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at P.O. Box 182090,
Columbus, Ohio 43218-2090. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
================================================================================
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Funds' distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and should
consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
An investment in a Fund automatically entitles you to use this Privilege, unless
you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send
30
<PAGE> 269
exchange instructions in writing by following directions set forth previously
under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
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.
31
<PAGE> 270
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERN-
32
<PAGE> 271
MENT. Subject to these limitations, you may deposit as much of your payments as
you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
================================================================================
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolios. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
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 eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
In separate advisory agreements with Master Trust and the Company (collectively,
the "Advisory Agreements"), Bank of America has agreed to manage the Portfolios'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolios' securities. The advisory
agreement for the Master Portfolio also provides that Bank of America may: 1) in
its discretion, provide advisory services through its own employees or employees
of one or more of its affiliates that are under the common control of Bank of
America's parent, BankAmerica Corporation, provided such employees are under the
management of Bank of America and 2) employ a sub-adviser provided that Bank of
America remains fully responsible to the Master Portfolio for the acts and
omissions of the sub-adviser.
Bank of America Illinois' Investment Advisors Division is responsible for the
day-to-day investment activities of the Master Portfolio. The investment
management team is headed by James Miller, Executive Vice President and Chief
Investment Officer of BofA Illinois (a wholly-owned subsidiary of BankAmerica
Corporation). Mr. Miller has been the Master Portfolio's manager since May 1995
and has been associated with BofA Illinois Investment Management (and its
predecessor Continental Bank) since 1988. Mr. Miller is a Chartered Financial
Analyst, a member of the Association of Investment Management and Research, and
a former Director of the Investment Analysts Society of Chicago.
Robert Pyles, Senior Vice President and Director of Equity, is primarily
responsible for the day-to-day investment activities of the Aggressive Growth
Fund. He also manages mutual fund managers for the Pacific Horizon Capital
Income Fund and is primarily responsible for the selection of particular
securities for the equity portion
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of the Pacific Horizon Asset Allocation Fund. Mr. Pyles has been the Fund's
manager since June 1997 and has been associated with Bank of America's Northwest
Division and its predecessor, since 1976. Mr. Pyles currently manages various
common trust, employee benefit and individual accounts for Bank of America.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.50% and
0.60% of the Master Portfolio's and Aggressive Growth Fund's average daily net
assets, respectively. These amounts may be reduced pursuant to undertakings by
Bank of America. (See the information below under "Fee Waivers.") Prior to June
23, 1997, Bank of America was entitled to receive an investment advisory fee at
the annual rate of 0.75% of the Master Portfolio's average daily net assets.
During the fiscal year ended February 28, 1997, the Master Portfolio paid Bank
of America advisory fees at an effective annual rate of 0.48% of the Master
Portfolio's average daily net assets, and Bank of America waived a portion of
its fee at an effective annual rate of 0.27% of the Master Portfolio's average
daily net assets. For the same period, the Aggressive Growth Fund paid Bank of
America advisory fees at an effective annual rate of 0.60% of that Fund's
average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Funds. Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3435, respectively. Prior to November 1, 1996 Concord
Holding Corporation ("Concord"), an indirect, wholly-owned subsidiary of BISYS
served as administrator.
Under its administration agreements with the Company and the Master Portfolio,
BISYS has agreed to: pay the costs of maintaining the offices of the Company and
the Master Portfolio; provide a facility to receive purchase and redemption
orders; provide statistical and research data, data processing services and
clerical services; coordinate the preparation of reports to shareholders of the
Funds, interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolio; calculate the net asset value of
the Funds and the Master Portfolio; calculate the dividends and capital gains
distributions paid to shareholders; and generally assist in all aspects of the
operations of the Funds and the Master Portfolio.
For its services as administrator, BISYS is entitled to receive an
administration fee from the Blue Chip Fund at the annual rate of 0.15% of the
Fund's average daily net assets, an administration fee from the Master Portfolio
at the annual rate of 0.05% of such Portfolio's average daily net assets and an
administration fee from the Aggressive Growth Fund at the annual rate of 0.30%
of the Fund's average daily net assets. These amounts may be reduced pursuant to
undertakings by BISYS. (See the information below under "Fee Waivers.") For the
fiscal year ended February 28, 1997, Concord and BISYS waived their entire
administration fee payable by the Blue Chip Fund. For the same period, the
Master Portfolio and the Aggressive Growth Fund paid Concord and BISYS
administration fees at an effective annual rate of 0.03% and 0.30% of such
Portfolios' respective average daily net assets, and Concord and BISYS waived a
portion of its fee with respect to the Master Portfolio at an effective annual
rate of 0.02% of the Master Portfolio's average daily net assets. During the
fiscal year ended February 28, 1997, Concord and/or BISYS also reimbursed a
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<PAGE> 273
portion of the operating expenses with respect to the Blue Chip Fund.
Pursuant to the authority granted in its administration agreements, BISYS or a
subcontractor has entered into agreements with PFPC, Inc. ("PFPC") (with respect
to the Blue Chip Fund and the Master Portfolio) and The Bank of New York
("BONY") (with respect to the Aggressive Growth Fund) under which PFPC, and an
off-shore affiliate of PFPC, and BONY provide certain accounting, bookkeeping,
pricing and dividend and distribution calculation services to the Funds and the
Master Portfolio. The Funds and the Master Portfolio bear all fees and expenses
charged by PFPC for these services, and the Aggressive Growth Fund bears all
fees and expenses charged by BONY for these services.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly-owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania 19103 serves as the Custodian of the Blue Chip Fund and the Master
Portfolio. The Bank of New York, 90 Washington Street, New York, New York 10286,
serves as the Custodian of the Aggressive Growth Fund. BISYS Fund Services,
Inc., a wholly-owned subsidiary of BISYS, is the transfer and dividend
disbursing agent for each of the Funds and is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds and Master
Portfolio bear the expenses incurred in their operations. Expenses can be
reduced by voluntary fee waivers and expense reimbursements by Bank of America
and other service providers. Periodically, during the course of each Fund's
fiscal year, Bank of America and other service providers may prospectively
choose not to receive fee payments and/or may assume certain expenses of the
Funds or the Master Portfolio as a result of competitive pressures and in order
to preserve and protect the business and reputation of these entities. However,
the service providers retain the ability to discontinue such fee waivers and/or
expense reimbursements at any time.
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<PAGE> 274
================================================================================
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF
DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT STATEMENTS
BECAUSE
THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR CAPITAL GAINS OR LOSSES
UPON YOUR
ULTIMATE SALE OR EXCHANGE OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interest of its shareholders.
As a result of this qualification, each Fund generally is not required to pay
federal income taxes to the extent its earnings are distributed in accordance
with the Code. It is expected that the Master Portfolio will not be subject to
federal income taxes. The Master Portfolio intends to qualify as a partnership
(or other pass-through entity) for federal income tax purposes. As such, the
Master Portfolio is not subject to tax, and the Blue Chip Fund will be treated
for federal income tax purposes as recognizing its pro rata share of the Master
Portfolio's income and deductions and owning its pro rata share of the Master
Portfolio's assets. The Blue Chip Fund's status as a regulated investment
company is dependent on, among other things, the Master Portfolio's continued
qualification as a partnership (or other pass-through entity) for federal income
tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a
36
<PAGE> 275
redemption or exchange of these shares. However, if you exchange such shares for
shares of another investment portfolio of the Company within 90 days of the
purchase and are able to reduce the sales load on the new shares through the
Exchange Privilege, the reduction may not be included in the tax basis of your
exchanged shares for the purpose of calculating your gain or loss from the
exchange. It may be included in the tax basis of the new shares subject to this
same limitation.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
================================================================================
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN
AND AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND
IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), may be
quoted in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
Each Fund may compare its total return to that of other mutual funds with
similar investment objectives and to stock and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in a Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
37
<PAGE> 276
================================================================================
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 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class D Common Stock, 100 million shares of Class D -- Special Series 3 Common
Stock and 100 million shares of Class D -- Special Series 5 Common Stock
representing interests in the Aggressive Growth Fund; 100 million shares of
Class N Common Stock, 100 million shares of Class N -- Special Series 3 Common
Stock ; 100 million shares of Class N -- Special Series 5 Common Stock; and 100
million shares of Class N -- Special Series 7 Common Stock, representing
interests in the Blue Chip Fund as well as additional classes of shares
representing interests in other investment portfolios of the Company. Class D
and Class N Common Stock are the "A" Shares, Class D -- Special Series 3 Common
Stock and Class N -- Special Series 3 Common Stock are the "M" Shares and Class
D -- Special Series 5 Common Stock and Class N -- Special Series 5 Common Stock
are the "K" Shares and Class N -- Special Series 7 Common Stock are the "SRF"
Shares. As of the date of this Prospectus, M Shares have not been offered to the
public. The Board of Directors may similarly classify or reclassify any class of
shares (including unissued Class D Common Stock, Class D -- Special Series 3
Common Stock, Class D -- Special Series 5 Common Stock, Class N Common Stock,
Class N -- Special Series 3 Common Stock, Class N -- Special Series 5 Common
Stock or Class N -- Special Series 7 Common Stock) into one or more series. This
Prospectus relates primarily to the Funds' A and K Shares. For more information
about the Blue Chip Fund's SRF Shares or about the Company's other portfolios,
contact the Company at the telephone number listed on the cover page of this
Prospectus.
SRF Shares of the Blue Chip Fund are offered for investment by eligible
retirement accounts and are neither subject to a front-end sales charge nor a
contingent deferred sales charge. SRF Shares will automatically convert to A
Shares on the third anniversary of the reorganization date of the Seafirst
Retirement Funds into the Company. A Shares are sold to investors choosing the
front-end sales charge alternative unless an exemption to the sales charge is
otherwise available, which is the case for eligible retirement accounts. A
Shares may be purchased directly by the public, by clients of Bank of America
through their qualified trust and agency accounts, or by clients of securities
dealers, financial institutions (including banks) and other industry
professionals, such as investment advisers, accountants and estate planning
firms that have entered into service and/or selling agreements with the
Distributor. K Shares are neither subject to a front-end sales charge nor a
contingent deferred sales charge. See "Shareholder Guide-What Alternative Sales
Arrangements are Available?" for a description of eligible purchasers of K
Shares.
A Shares, K Shares and SRF Shares each have certain purchase, redemption and
exchange privileges. Additionally, A Shares and K Shares have certain
shareholder services, such as TeleTrade, an automatic investment program, an
automatic withdrawal plan, a directed distribution plan and a direct deposit
program.
The three classes of shares in the Blue Chip Fund and the two classes of Shares
in the Aggressive Growth Fund which are publicly offered repre-
38
<PAGE> 277
sent interests in the same portfolio of investments of the particular Fund, have
the same rights and are identical in all respects except (a) SRF Shares and A
Shares bear the expenses of their respective Shareholder Services Plans; and (b)
K Shares bear the expenses of a Distribution Plan and/or Administrative and
Shareholder Services Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution Plan fees and/or Administrative and Shareholder
Services Plan fees attributable to K Shares, respectively, and (c) the
incremental expenses associated with such Plans. SRF, A and K Shares may have
different performance results due to sales charges and other expenses
attributable to distribution, administrative service and/or shareholder
servicing plans applicable with respect to a particular share class.
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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares; only holders of K Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution Plan and Administrative and Shareholder Services Plan
attributable to K Shares and only holders of SRF Shares will be entitled to vote
on matters submitted to a vote of shareholders relating to the Shareholder
Services Plan attributable to SRF Shares. The Funds do not presently intend to
hold annual meetings of shareholders to elect directors or for other business
unless and until such time as less than a majority of the directors holding
office have been elected by the shareholders. At that time, the directors then
in office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
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================================================================================
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND
A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which A
Shares of each Fund reimburse the Distributor for shareholder servicing fees the
Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1997, the Blue Chip Fund made payments under the
Plan at the effective annual rate of 0.25% of the A Shares' average daily net
assets. For the same period, the Aggressive Growth Fund made payments under the
Plan at the effective annual rate of 0.25% of the A Shares' average daily net
assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's K Shares. Such
distribution expenses include
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<PAGE> 279
expenses incurred in connection with advertising and marketing each Fund's K
Shares; payments to Service Organizations for assistance in connection with the
distribution of K Shares; and expenses incurred in connection with preparing,
printing and distributing prospectuses for the Funds (except those used for
regulatory purposes, for solicitation or distribution to existing or potential A
shareholders, or for distribution to existing K shareholders of the Funds) and
in implementing and operating the Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares, such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Funds
necessary for accounting or sub-accounting, and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized), of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act. For the period ended February 28, 1997, the Blue Chip Fund made payments
under the Distribution, Administrative and Shareholder Services Plans at the
effective annual rate of 0.75% of the average daily net assets of the Blue Chip
Fund's K Shares, and the Distributor waived fees under the Distribution,
Administrative and Shareholder Services Plans at the effective annual rate of
0.25% of the average daily net assets of the Blue Chip Fund's K Shares. For the
same period, the Aggressive Growth Fund made payment under the Distribution,
Administrative and Shareholder Services Plans at the effective annual rate of
0.75% of the average daily net assets of the Aggressive Growth Fund's K Shares,
and the Distributor waived fees under the Distribution, Administrative and
Shareholder Services Plans at the effective annual rate of 0.25%, of the average
daily net assets of the Aggressive Growth Fund's K Shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
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GRW-0008
PACIFIC HORIZON MUTUAL FUNDS
Blue Chip Fund
Aggressive Growth
Fund
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 281
PACIFIC HORIZON FUNDS, INC.
Class A Shares of the
Short-Term Government Fund
----------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
Part A
<S> <C> <C>
1. Cover Page................................................. Cover Page
2. Synopsis................................................... Expense Summary
3. Condensed Financial Information............................ Financial Highlights;
Measuring Performance
4. General Description of Registrant.......................... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund..................................... The Business of the Funds
5.A. Management's Discussion of
Fund Performance......................................... *
6. Capital Stock and Other
Securities............................................... Description of Shares;
Dividends and Distributions
Policies; Tax Information
7. Purchase of Securities Being
Offered................................................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase................................... How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings.................................. *
</TABLE>
- ----------
<PAGE> 282
PROSPECTUS
JUNE 24, 1997
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
An Investment Portfolio Offered by Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
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 $50 billion under management, including over $14 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 June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 283
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
FUND INVESTMENTS 5 INVESTMENT OBJECTIVE
5 DURATION AND MATURITY
5 TYPES OF INVESTMENTS
6 FUNDAMENTAL LIMITATIONS
7 RISK FACTORS -- OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
SHAREHOLDER GUIDE 10 HOW TO BUY SHARES
10 What Is My Minimum Investment In The Fund?
10 How Are Shares Priced?
14 How Can I Buy Shares?
15 What Price Will I Receive When I Buy Shares?
16 What Else Should I Know To Make A Purchase?
16 HOW TO SELL SHARES
16 How Do I Redeem My Shares?
18 What NAV Will I Receive For Shares I Want To Sell?
18 What Kind Of Paperwork Is Involved In Selling Shares?
19 How Quickly Can I Receive My Redemption Proceeds?
19 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION 19
POLICIES
SHAREHOLDER SERVICES 20 CAN I USE THE FUND IN MY RETIREMENT PLAN?
20 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
21 WHAT IS TELETRADE?
21 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
22 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT
IT?
22 CAN I ARRANGE PERIODIC WITHDRAWALS?
22 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
22 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 23 FUND MANAGEMENT
23 Expenses
23 Service Providers
24 Fee Waivers
TAX INFORMATION 25
MEASURING PERFORMANCE 26
DESCRIPTION OF SHARES 27
PLAN PAYMENTS 28
- ------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 284
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 10 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 operating expenses expected to be incurred during the
current fiscal year. Actual expenses may vary. A hypothetical example based on
the summary is also shown.
---------------------------------------------------------
<TABLE>
<S> <C>
A SHARES
--------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50%
Maximum 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
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees
(After Fee Waivers)+ 0%
12b-1 Fee 0%
Shareholder Services Fee
(After Fee Waivers)+ 0.20%
Other Expenses (After Expense
Reimbursements)+ 0.65%
-----
Total Operating Expenses (After Fee
Waivers and Expense
Reimbursements)+ 0.85%
=====
</TABLE>
+ Management intends to waive fees and reimburse certain Other Expenses on
behalf of the Fund. Absent fee waivers and/or expense reimbursements,
Management Fees would be 0.45% of the average net assets (annualized); Other
Expenses for the Fund's A Shares would be 1.37% of average net assets
(annualized); and Total Operating Expenses for the Fund's A Shares would be
2.07% of average net assets (annualized). Absent fee waivers, Shareholder
Services Fees for the Fund's A Shares would be 0.25% (annualized) of average
daily net assets.
2
<PAGE> 285
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 53 $ 71 $ 90 $145
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
load.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
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.
3
<PAGE> 286
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the period indicated. The Fund commenced operations on August 2,
1996 by offering a single series of shares known as A Shares. This information
has been audited by Price Waterhouse LLP, independent accountants, whose
unqualified report on the financial statements containing such information is
incorporated by reference in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with such financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund is
available in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
Selected data for an A Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997(a)
--------------------
<S> <C>
Net asset value per share, beginning of period $ 10.00
------
Income from Investment Operations:
Net investment income 0.32
Net realized gains on investment transactions 0.01
------
Total income from investment operations 0.33
Less Dividends and Distributions:
Dividends to shareholders from net investment income (0.32)
Distributions to shareholders from net realized gains on investment
transactions (0.01)
------
Total Dividends and Distributions (0.33)
------
Net change in net asset value per share --
------
Net asset value per share, end of period $ 10.00
======
Total Return 3.33%(c)
Ratios/supplemental data:
Net assets, at end of period (000) $ 16,000
Ratio of expenses to average net assets* 0.11%(b)
Ratio of net investment income to average net assets* 5.53%(b)
Portfolio turnover rate 81%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee reductions and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 3.04% for the period ended
February 28, 1997.
(a) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
(b) Annualized.
(c) Not annualized.
4
<PAGE> 287
- --------------------------------------------------------------------------------
FUND INVESTMENTS
- --------------------------------------------------------------------------------
---------------------------------------------------------
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.
---------------------------------------------------------
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
5
<PAGE> 288
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
6
<PAGE> 289
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.
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,
7
<PAGE> 290
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-
8
<PAGE> 291
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. Turn-over 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 rate will not be a
limiting factor in making investment decisions. See "Financial Highlights" for
the Fund's portfolio turnover rate for the period ended February 28, 1997.
9
<PAGE> 292
================================================================================
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS
REGARDING BUYING AND SELLING THE FUND'S SHARES AND REGARDING THE FUND'S
DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
- ---------------------------------------------------------
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.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
----------------------------------------------------------
NAV =
Number of Outstanding Shares
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.
10
<PAGE> 293
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the Fund
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
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.
- --------------------------------------------------------------------------------
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.
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 by an investor who is a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - 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;
- - any purchase through FundStrategies(TM), including FundSelections(TM) from BA
Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from Bank of
America;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
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 and their spouses;
- - 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
11
<PAGE> 294
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;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Fund may be purchased without a
front-end sales load pursuant to the Program.)
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).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales 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 charge applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon 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 commit-
12
<PAGE> 295
ment. 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.
13
<PAGE> 296
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Mail all subsequent
Application and mail it with investments to:
a check (payable to Pacific
Horizon Short-Term Government Pacific Horizon Funds, Inc.
Fund) to the address on the P.O. Box 182090
Account Application. The Columbus, Ohio 43218-2090
Company will not accept third
party checks for investment.
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver an Account Deliver your payment directly
3435 Stelzer Road Application and your payment to the address on the left.
Columbus, OH 43219-3035 directly to 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>
- --------------------------------------------------------------------------------
14
<PAGE> 297
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------------------------------
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the 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
15
<PAGE> 298
orders received by the entity by 4:00 p.m. Eastern time on a business day will
be effected as of 4:00 p.m. Eastern time that day if the order is actually
received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account. Certificates for shares will not be
issued.
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. The Company will not accept third
party checks for investment. Please remember that the Company reserves the right
to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
16
<PAGE> 299
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Short-Term Government Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds,
Inc.
P.O. Box 182090
Columbus, Ohio 43218-2090
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) to the address on the left.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE> 300
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
payee from your Fund account in the amount of $500 or more.
The Transfer Agent (as your agent) will redeem the necessary
number of shares to cover the Check when it is presented for
payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s) and a set of
Checks will then be sent to the registered owner(s) at the
address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Fund itself imposes no charge when A Shares are redeemed,
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.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for (i) an
amount in excess of $50,000 per day, (ii) any amount if the redemption proceeds
are
18
<PAGE> 301
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. 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 within five business days after the end of each
month. Fund shares begin earning dividends the day after payment in federal
funds is received for such shares through the business day such shares are
redeemed.
You will automatically receive dividends and capital gain distributions in
additional shares of the Fund for which the dividend was declared
19
<PAGE> 302
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?" If you elect to receive distributions in cash, and if your checks (1)
are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be cancelled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, BISYS Fund Services, Inc., at P.O. Box 182090,
Columbus, Ohio 43218-2090. 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.
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.
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.
20
<PAGE> 303
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
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
21
<PAGE> 304
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.
CAN MY DIVIDENDS FROM THE FUND BE
INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN
AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL
22
<PAGE> 305
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 eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
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
23
<PAGE> 306
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.") For the period August 2, 1996 (commencement of operations) to
February 28, 1997, Bank of America waived its entire advisory fee with respect
to the Short-Term Government Fund. For the same period, Bank of America
reimbursed a portion of the Short-Term Government Fund's operating expenses.
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
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Fund. Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43210-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly-owned subsidiary of BISYS
served as Administrator.
Under its administration agreement with the Company, BISYS 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, BISYS 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 BISYS. (See the information below under "Fee Waivers.") For the period ended
February 28, 1997, BISYS and Concord waived its entire administration fee with
respect to the Short-Term Government Fund.
Pursuant to authority granted in the administration agreement, BISYS or a
subcontractor has entered into an agreement with PFPC, Inc. ("PFPC") under which
PFPC provides certain accounting, bookkeeping, pricing and dividend and
distribution calculation services to the Fund. The Fund bears all fees and
expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th floor, Philadelphia, PA
19101 serves as the Custodian of the Fund. BISYS Fund Services, Inc., a
wholly-owned subsidiary of BISYS, 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
waivers and expense reimbursements by Bank of America and other service
providers. Periodically,
24
<PAGE> 307
during the course of the Fund's fiscal year, Bank of America and other service
providers 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 these entities. 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 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
25
<PAGE> 308
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.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the 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 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
26
<PAGE> 309
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 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class U Common Stock, 100 million shares of Class U -- Special Series 3 Common
Stock; 100 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 "M"
Shares. Class U -- Special Series 5 are "K" Shares. As of the date of this
prospectus, "M" 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 cover page of this Prospectus.
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 holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable 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 have 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.
27
<PAGE> 310
================================================================================
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. For the
period ended February 28, 1997, the Distributor waived its entire shareholder
services fee with respect to the Fund's A shares.
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.
28
<PAGE> 311
SGB-0004
PACIFIC HORIZON MUTUAL FUNDS
SHORT-TERM
GOVERNMENT FUND
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 312
PACIFIC HORIZON FUNDS, INC.
SRF Shares of the
Intermediate Bond (formerly, Flexible Bond) Fund, Blue Chip Fund and
Asset Allocation Fund
------------------------
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
1. Cover Page............................. Cover Page
2. Synopsis............................... Expense Summary
3. Condensed Financial Information........ Financial Highlights;
Measuring Performance
4. General Description of Registrant...... Description of Shares; Cover
Page; Fund Investments; Other
Investment Practices;
Fundamental Limitations
5. Management of the Fund................. The Business of the Funds
5.A. Management's Discussion of
Fund Performance..................... *
6. Capital Stock and Other
Securities........................... Description of Shares;
How to Invest in SRF Shares -
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered............................... How to Invest in SRF Shares;
The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase............... Redemption of SRF Shares;
Plan Payments
9. Pending Legal Proceedings.............. *
- ----------
* Item inapplicable or answer negative.
<PAGE> 313
PROSPECTUS
JUNE 24, 1997
<TABLE>
<S> <C>
PACIFIC HORIZON INTERMEDIATE BOND FUND
PACIFIC HORIZON BLUE CHIP FUND
PACIFIC HORIZON ASSET ALLOCATION FUND
Investment Portfolios Offered by Pacific
Horizon Funds, Inc.
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus applies to the SRF Shares of the Pacific Horizon Intermediate
Bond Fund, Pacific Horizon Blue Chip Fund and Pacific Horizon Asset Allocation
Fund (each a "Fund" and collectively the "Funds"), three diversified mutual
funds offered by Pacific Horizon Funds, Inc. (the "Company").
The PACIFIC HORIZON INTERMEDIATE BOND FUND, formerly the Flexible Bond Fund (the
"Intermediate Bond Fund"), is a diversified mutual fund whose investment
objective is to obtain interest income and capital appreciation. The
Intermediate Bond Fund seeks its objective by investing in investment grade
intermediate and longer term bonds, including corporate and governmental fixed
income obligations, mortgage-backed securities, municipal securities and cash
equivalents.
The PACIFIC HORIZON BLUE CHIP FUND (the "Blue Chip Fund") is a diversified
mutual fund whose investment objective is long-term capital appreciation through
investments in blue chip stocks.
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Asset Allocation Fund") is a
diversified mutual fund whose investment objective is to obtain long-term growth
from capital appreciation and dividend and interest income. The Asset Allocation
Fund seeks to achieve its objective by actively allocating investments among the
three major asset categories: bonds, equity securities and cash equivalents.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE INTERMEDIATE BOND AND BLUE CHIP FUNDS SEEK TO ACHIEVE THEIR
RESPECTIVE INVESTMENT OBJECTIVES BY INVESTING ALL THEIR INVESTABLE ASSETS IN
FUNDS OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY (THE "INTERMEDIATE BOND
MASTER PORTFOLIO" AND THE "BLUE CHIP MASTER PORTFOLIO," RESPECTIVELY;
COLLECTIVELY, THE "MASTER PORTFOLIOS" AND, TOGETHER WITH THE ASSET ALLOCATION
FUND, THE "PORTFOLIOS") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF EACH OF
THE INTERMEDIATE BOND AND BLUE CHIP FUNDS, RESPECTIVELY. THE INTERMEDIATE BOND
AND BLUE CHIP FUNDS WILL PURCHASE SHARES OF THE RESPECTIVE MASTER PORTFOLIOS AT
NET ASSET VALUE. THE NET ASSET VALUES OF THE INTERMEDIATE BOND AND BLUE CHIP
FUNDS WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF EACH RESPECTIVE
MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS
INVESTMENT APPROACH. SEE "FUND INVESTMENTS -- INVESTMENT OBJECTIVES AND
POLICIES -- SPECIAL CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON PAGE 13 FOR
ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference. More information about the Funds is contained in
a Statement of Additional Information that has been filed with the Securities
and Exchange Commission. To obtain a free copy, call 800-323-9919. The Statement
of Additional Information, as it may be revised from time to time, is dated June
24, 1997 and is incorporated by reference into this Prospectus. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any governmental agency. Investment in the Funds involves investment risk,
including the possible loss of principal.
- --------------------------------------------------------------------------------
<PAGE> 314
SRF Shares are sold without a sales charge and are available for the investment
of retirement funds held in Eligible Retirement Accounts (as defined in "How to
Invest in SRF Shares -- Eligibility for Admission" on page 19 of this
Prospectus). An individual for whose benefit an Eligible Retirement Account is
maintained, or who may be entitled to receive benefits from an Eligible
Retirement Account, is referred to as a "Participant."
SRF Shares of a Fund will automatically convert to A Shares of the same Fund on
the third anniversary of the consummation of the reorganization of the Bond,
Blue Chip and Asset Allocation Funds of the Seafirst Retirement Funds into the
SRF Shares of the Company's Intermediate Bond, Blue Chip and Asset Allocation
Funds, respectively, on June 23, 1997 ("Reorganization Date"). Prior to such
conversion, holders of SRF shares in Eligible Retirement Accounts will be
eligible to purchase A Shares in any taxable non-money market investment
portfolio offered by the Company without incurring the front-end sales charge
otherwise applicable on sales of A Shares. A Shares of the Funds are offered
through separate prospectuses available from Retirement Services by calling the
phone number on the cover page of this Prospectus.
SRF Shares held in any Fund by an Eligible Retirement Account may be exchanged
for: 1) SRF Shares of any other Fund, 2) A Shares of any other taxable non-money
market investment portfolio offered by the Company or Time Horizon Funds (a
"Time Horizon Fund") without incurring the front-end sales charge otherwise
applicable on sales of A Shares, or 3) Pacific Horizon Shares of the Pacific
Horizon Prime Fund. See "How To Invest in SRF Shares -- Exchange Privileges" on
page 21 of this Prospectus for additional exchange privileges and information.
The Funds are offered by the Company. Both the Company and Time Horizon Funds
are open-end, series management investment companies advised by Bank of America
National Trust and Savings Association ("Bank of America" or the "investment
adviser"). Based in San Francisco, California, Bank of America and its
affiliates have over $50 billion under management, including over $14 billion in
mutual funds.
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission ("SEC") 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 in the Funds' official sales literature, in
connection with the offering of the Funds' shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or Concord Financial Group, Inc. ("CFG" or the "Distributor").
This Prospectus does not constitute an offer by the Funds or by the Distributor
to sell, or a solicitation of any offer to buy, any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Funds or
the Distributor to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 315
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 6
FUND INVESTMENTS 10 INVESTMENT OBJECTIVES AND POLICIES
13 SPECIAL CONSIDERATIONS
15 OTHER INVESTMENT PRACTICES
18 FUNDAMENTAL LIMITATIONS
HOW TO INVEST IN SRF SHARES 19 ELIGIBILITY FOR ADMISSION
19 ADDITIONAL CONTRIBUTIONS OR TRANSFERS INTO ELIGIBLE
RETIREMENT ACCOUNTS
20 DIVIDEND AND DISTRIBUTION POLICIES
REDEMPTION OF SRF SHARES 20
EXCHANGE PRIVILEGES 21
AUTOMATIC CONVERSION 22
VALUATION OF SRF SHARES 22
THE BUSINESS OF THE FUNDS 23 FUND MANAGEMENT
23 Service Providers
TAX INFORMATION 25
MEASURING PERFORMANCE 26
DESCRIPTION OF SHARES 27
PLAN PAYMENTS 29
APPENDIX A 31
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
</TABLE>
<PAGE> 316
EXPENSE SUMMARY
SRF Shares of the Funds are offered through this Prospectus. SRF Shares of a
Fund will automatically convert to A Shares of the same Fund on the third
anniversary of the Reorganization Date. Because of this conversion feature,
certain information is provided in the Prospectus as to A Shares of the Funds.
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. SRF Shares are offered at net asset value without the
payment of any sales charge (see page 22 of the Prospectus for an explanation of
net asset value per share). SRF Shares of a Fund will automatically convert to A
Shares of the same Fund on the third anniversary of the Reorganization Date. A
Shares of the Funds are offered at net asset value plus a front-end sales charge
and are subject to a shareholder servicing fee. However, the front-end sales
charge is not applicable to A Shares purchased by Eligible Retirement Accounts.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
respective Master Portfolios which are allocable to the Intermediate Bond Fund
and Blue Chip Fund. Operating expenses include fees for portfolio management,
maintenance of shareholder accounts, general administration, shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for SRF Shares and A Shares and the operating expenses (including the operating
expenses of the respective Master Portfolios which are allocable to the
Intermediate Bond Fund and Blue Chip Fund) expected to be incurred by SRF Shares
and A Shares of each Fund during the current fiscal year. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
SRF SHARES A SHARES
--------- ---------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage
of offering price) None 4.50%(1)
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a percentage
of offering price) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees (After Fee
Waivers)(2) 0.16% 0.16%
Shareholder Services Fee
(After Fee Waivers)(2) 0.16% 0.16%
Other Expenses 0.63% 0.63%
------ ------
Total Fund Operating Expenses
(After Fee Waivers)(2)(3) 0.95% 0.95%
====== ======
</TABLE>
(1) There will be no sales load imposed on conversion of SRF Shares to A Shares,
and there is no sales load imposed on subsequent purchases of A Shares in an
Eligible Retirement Account.
(2) Absent fee waivers, Management Fees for each class of shares of the Fund
would be 0.50% of the average daily net assets (annualized) and Total
Operating Expenses for the Fund's SRF and A Shares would be 1.38% and 1.38%,
respectively, of average net assets (annualized). Absent fee waivers,
Shareholder Services Fees for SRF Shares and A Shares would be 0.25%
(annualized) of average daily net assets.
(3) Bank of America and The BISYS Group, Inc. ("BISYS") have agreed to waive
fees and reimburse expenses in such amounts as are necessary to limit the
expenses of the SRF Shares (including the pro rata share of the expenses
incurred by the Master Portfolio in which the Intermediate Bond Fund
invests) for the first two years and the third year after the Reorganization
Date to 0.95% and 1.05%, respectively, of the average daily net assets of
the Fund. This limitation on expenses of the SRF Shares will continue until
such shares convert into A Shares. Expense ratios for A Shares of the Fund
are market driven, and may be higher than those of SRF Shares.
2
<PAGE> 317
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
SRF Shares $ 10 $30(1) N/A N/A
A Shares(2) $ 54 $74 $95 $156
</TABLE>
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge which does not apply to Eligible Retirement Accounts. Such amounts
would be $10, $30, $53 and $117 without deducting the front-end sales
charge.
- --------------------------------------------------------------------------------
BLUE CHIP FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
SRF SHARES A SHARES
--------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) None 4.50%(1)
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a percentage of
offering price) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees 0.70% 0.70%
Shareholder Services Fees
(After Fee Waivers)(5) 0.02% 0.25%
Other Expenses 0.23% 0.23%
----- ----
Total Fund Operating Expenses
(After Fee Waivers)(2)(3) 0.95% 1.18%
===== ====
</TABLE>
--------------------------------------------
(1) There will be no sales load imposed on conversion of SRF Shares to A Shares
and there is no sales load imposed on subsequent purchases of A Shares in an
Eligible Retirement Account.
(2) Absent fee waivers, Total Operating Expenses for the Fund's SRF Shares would
be 1.18% of its average net assets (annualized). Absent fee waivers,
Shareholder Services Fees for SRF Shares would be 0.25% (annualized) of
average daily net assets.
(3) Bank of America and BISYS have agreed to waive fees and reimburse expenses
in such amounts as are necessary to limit the expenses of the SRF Shares
(including the pro rata share of the expenses incurred by the Master
Portfolio in which the Blue Chip Fund invests) for the first two years and
the third year after the Reorganization Date to 0.95% and 1.05%,
respectively, of the average daily net assets of the Fund. This limitation
on expenses of the SRF Shares will continue until such shares convert into A
Shares. Expense ratios for A Shares of the Fund are market driven, and may
be higher than those of SRF Shares.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
SRF Shares $ 10 $30(1) N/A N/A
A Shares(2) $ 56 $81 $107 $182
</TABLE>
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge which does not apply to Eligible Retirement Accounts. Such amounts
would be $12, $37, $64 and $142 without deducting the front-end sales
charge.
- --------------------------------------------------------------------------------
3
<PAGE> 318
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
SRF SHARES A SHARES
--------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) None 4.50%(1)
Maximum Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a percentage of
offering price) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees 0.55% 0.55%
Shareholder Services Fee 0.25% 0.25%
Other Expenses 0.15% 0.15%
------ -----
Total Fund Operating
Expenses(2) 0.95% 0.95%
====== =====
</TABLE>
(1) There will be no sales load imposed on conversion of SRF Shares to A Shares
and there is no sales load imposed on subsequent purchases of A Shares in an
Eligible Retirement Account.
(2) Bank of America and BISYS have agreed to waive fees and reimburse expenses
in such amounts as are necessary to limit the expenses of the SRF Shares for
the first two years and the third year after the Reorganization Date to
0.95% and 1.05%, respectively, of the average daily net assets of the Fund.
This limitation on expenses of the SRF Shares will continue until such
shares convert into A Shares. Expense ratios for A Shares of the Fund are
market driven, and may be higher than those of SRF Shares.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
SRF Shares $ 10 $30(1) N/A N/A
A Shares(2) $ 54 $74 $95 $156
</TABLE>
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge which does not apply to Eligible Retirement Accounts. Such amounts
would be $10, $32, $55 and $122 without deducting the front-end sales
charge.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
4
<PAGE> 319
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.30%, 0.50% and
0.40% of the Intermediate Bond Master Portfolio's, Blue Chip Master
Portfolio's and Asset Allocation Fund's respective average daily net assets;
and
- - an administration fee payable at the annual rate of 0.15% and 0.05% of the
Intermediate Bond Fund's and the Intermediate Bond Master Portfolio's
respective average daily net assets, 0.15% and 0.05% of the Blue Chip Fund's
and the Blue Chip Master Portfolio's respective average daily net assets, and
0.15% of the Asset Allocation Fund's average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Intermediate Bond and Blue Chip Funds and the respective Master
Portfolios in which each Fund's assets are invested will be approximately the
same as the expenses which the particular Fund would incur if the Company
retained the services of an investment adviser for that Fund and the assets of
that Fund were invested directly in the type of securities held by its Master
Portfolio. Further, the Directors believe that the shareholders of the
Intermediate Bond and Blue Chip Funds may participate in the ownership of a
larger portfolio of securities than could be achieved directly by the
Intermediate Bond and Blue Chip Funds. There can be no assurance, however, that
such will be the case or that any economies of scale that might occur if other
investors acquire shares of the Intermediate Bond and Blue Chip Master
Portfolios will be realized.
5
<PAGE> 320
================================================================================
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results of A
Shares of the Funds for the years and period indicated. During the years and
periods shown, the Funds did not offer SRF Shares. Actual investment results of
the SRF Shares may be different. The information for the years and periods
indicated was audited by Price Waterhouse LLP, the independent accountants for
the Funds, whose unqualified reports on the financial statements containing such
information are incorporated by reference into the Statement of Additional
Information.
For the years and period shown, the Asset Allocation Fund operated as part of a
master feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company (the "Asset
Allocation Master Portfolio") which had an identical investment objective as
that of the Asset Allocation Fund. On the Reorganization Date, the Asset
Allocation Fund withdrew its investment in the Asset Allocation Master Portfolio
and began investing its assets directly in portfolio securities.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual reports to shareholders. The Statement of Additional
Information and the annual reports to shareholders may be obtained free of
charge by calling 800-323-9919.
6
<PAGE> 321
INTERMEDIATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
years and period indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 24,
1994
FOR THE YEAR FOR THE YEAR FOR THE YEAR (INCEPTION DATE)
ENDED ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997* 1996 1995 1994
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of
period...................................... $ 9.75 $ 9.44 $ 9.81 $ 10.00
------- ------- ------- ----------
Income from Investment Operations:
Net investment income....................... 0.52 0.59 0.59 0.08
Net realized and unrealized gains (losses)
on investment transactions............... (0.15) 0.33 (0.37) (0.19)
------- ------- ------- ----------
Total income (loss) from investment
operations............................... 0.37 0.92 0.22 (0.11)
------- ------- ------- ----------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income...................... (0.52) (0.59) (0.59) (0.08)
Distributions to shareholders from net
realized gains on investment
transactions........................... (0.06) (0.02) -- --
------- ------- ------- ----------
Total dividends and distributions............. (0.58) (0.61) (0.59) (0.08)
------- ------- ------- ----------
Net change in net asset value per share....... (0.21) 0.31 (0.37) (0.19)
------- ------- ------- ----------
Net asset value per share, end of period...... $ 9.54 $ 9.75 $ 9.44 $ 9.81
======= ======= ======= ==========
Total Return**................................ 3.92% 10.45% 2.27% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000).......... $ 22,937 $ 13,179 $ 1,964 $ 356
Ratio of expenses to average net
assets................................. 0.75% 0.27% 0.00% 0.00%+
Ratio of net investment income to average
net assets............................. 5.45% 6.13% 6.43% 5.70%+
Ratio of expenses to average net
assets***.............................. 2.26% 5.00% 17.95% 160.20%+
Ratio of net investment income (loss) to
average net assets***.................. 3.94% 1.40% (11.52)% (154.50)%+
</TABLE>
- ---------------
* As of July 22, 1996, the Fund designated the existing series of shares as
"A" shares.
** The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
7
<PAGE> 322
BLUE CHIP FUND
Selected data for an A Share of common stock outstanding throughout each of the
years and period indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 13,
1994
FOR THE YEAR FOR THE YEAR FOR THE YEAR (INCEPTION DATE)
ENDED ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997* 1996 1995 1994
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of
period...................................... $ 20.53 $ 15.81 $ 14.97 $ 15.00
-------- ------- ------ --------
Income from Investment Operations:
Net investment income....................... 0.23 0.26 0.31 0.02
Net realized and unrealized gains (losses)
on investment transactions............... 5.21 4.96 0.80 (0.05)
-------- ------- ------ --------
Total gain (loss) from investment
operations............................... 5.44 5.22 1.11 (0.03)
-------- ------- ------ --------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income...................... (0.22) (0.28) (0.27) --
Distributions to shareholders from net
realized gains on investment
transactions........................... (0.53) (0.22) -- --
-------- ------- ------ --------
Total dividends and distributions............. (0.75) (0.50) (0.27) --
-------- ------- ------ --------
Net change in net asset value per share....... 4.69 4.72 0.84 (0.03)
-------- ------- ------ --------
Net asset value per share, end of period...... $ 25.22 $ 20.53 $ 15.81 $ 14.97
======== ======= ====== ========
Total Return**................................ 27.01% 33.39% 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period (000).......... $152,748 $ 66,933 $ 6,002 $ 1,180
Ratio of expenses to average net
assets................................. 1.28% 0.83% 0.00% 0.00%+
Ratio of net investment income to average
net assets............................. 0.99% 1.63% 2.46% 2.92%+
Ratio of expenses to average net
assets***.............................. 1.71% 2.28% 6.32% 55.00%+
Ratio of net investment income to average
net assets***.......................... 0.56% 0.18% (3.86)% (52.08)%+
</TABLE>
- ---------------
* As of July 22, 1996, the Fund designated the existing series of shares as
"A" shares.
** The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
8
<PAGE> 323
ASSET ALLOCATION FUND
Selected data for an A Share of common stock outstanding throughout each of the
years and period indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 18,
1994
FOR THE YEAR FOR THE YEAR FOR THE YEAR (INCEPTION DATE)
ENDED ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997* 1996 1995 1994
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of
period..................................... $ 17.52 $ 15.15 $ 14.84 $ 15.00
------- ------- ------ --------
Income from Investment Operations:
Net investment income...................... 0.48 0.52 0.48 0.03
Net realized and unrealized gains (losses)
on investment transactions.............. 2.50 2.86 0.24 (0.19)
------- ------- ------ --------
Total gain (loss) from investment
operations.............................. 2.98 3.38 0.72 (0.16)
------- ------- ------ --------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income..................... (0.46) (0.53) (0.41) --
Distributions to shareholders from net
realized gains on investment
transactions.......................... (0.64) (0.48) -- --
------- ------- ------ --------
Total dividends and distributions............ (1.10) (1.01) (0.41) --
------- ------- ------ --------
Net change in net asset value per share...... 1.88 2.37 0.31 (0.16)
------- ------- ------ --------
Net asset value per share, end of period..... $ 19.40 $ 17.52 $ 15.15 $ 14.84
======= ======= ====== ========
Total Return**............................... 17.64% 22.80% 5.03% (1.07)%
Ratios/Supplemental data:
Net assets, end of period (000)......... $ 34,838 $ 22,355 $ 5,694 $ 666
Ratio of expenses to average net
assets................................ 1.25% 0.62% 0.00% 0.00%+
Ratio of net investment income to
average net assets.................... 2.59% 3.49% 4.25% 4.20%+
Ratio of expenses to average net
assets***............................. 1.94% 2.92% 7.89% 83.95%+
Ratio of net investment income to
average net assets***................. 1.90% 1.19% (3.64)% (79.75)%+
</TABLE>
- ---------------
* As of July 22, 1996, the Fund designated the existing series of shares as
"A" shares.
** The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
9
<PAGE> 324
================================================================================
FUND INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Intermediate Bond and Blue Chip Funds seek to achieve their respective
investment objectives by investing all of their investable assets in their
respective Master Portfolios.
Because the investment characteristics of the Intermediate Bond and Blue Chip
Funds will correspond to those of the respective Intermediate Bond and Blue Chip
Master Portfolios, the following is a discussion of the various investments of
and techniques employed by the Intermediate Bond and Blue Chip Master Portfolios
and the Asset Allocation Fund.
While each Master Portfolio and the Asset Allocation Fund strives to attain its
respective investment objective, there can be no assurance that it will be able
to do so.
THE INTERMEDIATE BOND FUND
The investment objective of the Intermediate Bond Fund is to obtain interest
income and capital appreciation. The Fund seeks its objective by investing in
investment grade intermediate and longer-term bonds, including corporate and
governmental fixed-income obligations, mortgage-backed securities, municipal
securities and cash equivalents. Assets of the Intermediate Bond Fund are
invested in the Intermediate Bond Master Portfolio, which has the same
investment objective as the Intermediate Bond Fund. Under normal circumstances,
at least 65% of the Intermediate Bond Master Portfolio's net assets will be
invested in bonds.
Investment grade bonds are bonds that are rated within the four highest ratings
categories by a nationally recognized statistical rating organization, i.e., BBB
or better by Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating Co.
("Duff & Phelps") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). (A description of applicable ratings is attached to the Statement
of Additional Information as Appendix A.) While bonds rated BBB or Baa are
regarded as having adequate capacity to pay interest and repay principal,
adverse economic conditions or changing circumstances could lead to a weakened
capacity to pay interest and repay principal. Bonds with the lowest investment
grade rating (i.e., BBB or Baa) do not have outstanding investment
characteristics and may have speculative characteristics as well. Unrated
securities will be purchased only if Bank of America determines that they are of
comparable quality to the rated securities in which the Intermediate Bond Master
Portfolio may invest. Corporate bonds will be diversified by investment in bonds
issued by different companies in different industries.
Under normal market and interest rate conditions, the investment adviser expects
that the Intermediate Bond Master Portfolio's average portfolio duration
generally will be approximately the same as the Lehman Brothers Intermediate
Government/Corporate Bond Index. This means that the Intermediate Bond Fund's
net asset value fluctuation is expected to be similar to the price fluctuation
of the Lehman Brothers Intermediate Government/Corporate Bond Index. Unlike
maturity, which indicates when the security repays principal, "duration"
incorporates the cash flows of all interest and principal payments and the
proceeds from calls and redemptions over the life of the security. These
payments are multiplied by the number of years over which they are received to
produce a value that is expressed in years (i.e., duration). In addition, under
normal market and interest rate conditions, the investment adviser expects that
the Fund's average portfolio maturity will be between three and six years.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Fed-
10
<PAGE> 325
eral National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMAC") securities, will be guaranteed as to principal and
interest, but not market value, by the U.S. Government or one of its agencies or
instrumentalities. The Intermediate Bond Master Portfolio will not invest more
than 35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if the bond interest rate is
higher than currently prevailing interest rates. Similarly, a risk associated
with mortgage-backed securities is early paydown of principal resulting from
refinancing of the underlying mortgages. The rate of such prepayments, and hence
the life of the security, will primarily be a function of current market rates.
In periods of falling interest rates, the rate of prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds will generally be
at lower rates than the rates on the prepaid obligations.
The Intermediate Bond Master Portfolio may invest in GNMA Certificates. These
are mortgage-backed debt securities representing fractional ownership of a pool
of mortgage loans. They are issued by lenders (such as savings and loan
associations, commercial banks and mortgage bankers) approved by the Federal
Housing Administration which meet criteria imposed by GNMA. The lender assembles
a specified pool of mortgage loans, all of which are insured by the Federal
Housing Administration or the Farmers' Home Administration, and applies to GNMA
for approval of the pool. Upon approval, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA certificates
secured by the mortgage loans in the pool.
GNMA Certificates usually bear a nominal rate of interest equal to the effective
rate on the mortgage loans in the pool less .5%, which is the fee charged by the
issuer and GNMA. The actual yield on the Intermediate Bond Master Portfolio's
investments, calculated by dividing the interest payments by the purchase price
for the GNMA Certificate, may differ significantly from the nominal interest
rate. This difference is due to variations in the lives of the mortgages in the
pool and to the impossibility of anticipating the effective interest rate at
which future principal payments might be reinvested.
GNMA Certificates have in the past provided higher yields than direct
investments in U.S. Treasury obligations, although there is no assurance they
will continue to do so in the future.
If mortgage loans in the pool are prepaid (because of either voluntary
prepayments, which are more likely during periods of falling interest rates, or
because of foreclosure), the principal payments are passed through to the
Certificate holders. Because of these prepayments, the life of a GNMA
Certificate may be substantially shorter than the time remaining until maturity
of the mortgages in the pool.
As opposed to bonds, where principal is normally returned in a lump sum at
maturity, the principal underlying a GNMA Certificate is paid back over the life
of the loan. The Intermediate Bond Master Portfolio will purchase GNMA
Certificates known as "modified pass-through" certificates, on which timely
payment of principal and interest is guaranteed. The Intermediate Bond Master
Portfolio may also purchase "variable rate" GNMA Certificates, which are backed
by pools of variable rate mortgages, as well as other types of Certificates that
are backed by GNMA's guarantee.
The Intermediate Bond Master Portfolio may also invest, from time to time, in
obligations issued by state and local governmental issuers ("Municipal
Securities"). The purchase of such securities may be advantageous when, as a
result of prevailing economic, regulatory or other circumstances, the
performance of such securities, on a pre-tax basis, is comparable to that of
corporate or U.S. Government obligations. Dividends received by shareholders
which are attributable to interest income received from Municipal Securities
generally will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Intermedi-
11
<PAGE> 326
ate Bond Master Portfolio are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Intermediate Bond
Master Portfolio are in most cases revenue securities and are not payable from
the unrestricted revenues of the issuer. Consequently, the credit quality of
such private activity bonds is usually directly related to the credit standing
of the corporate user of the facility involved.
The Intermediate Bond Master Portfolio may also include "moral obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Interest income is expected to be the primary basis for investment return from
an investment in the Intermediate Bond Master Portfolio and capital appreciation
the secondary basis. The Intermediate Bond Master Portfolio will attempt to
achieve capital appreciation by moderate market timing in response to
anticipated interest rate changes. The Intermediate Bond Master Portfolio will
also attempt to take advantage of undervalued sectors while selling bonds in
overvalued sectors. However, since investments will normally consist of bonds
and mortgage-backed securities, the ability to achieve capital appreciation is
limited.
The value of the securities held in the Intermediate Bond Master Portfolio will
tend to vary inversely with changes in prevailing interest rates. When, in the
evaluation of Bank of America, there is a high probability that there will be a
decline in the bond market, up to 75% of the net assets of the Intermediate Bond
Master Portfolio may be held in cash equivalents as a temporary defensive
strategy. To the extent that the Intermediate Bond Master Portfolio invests in
cash equivalents, it will not be invested in accordance with the investment
policies designed for it to realize its investment objective. Cash equivalents
include the following short-term, interest-bearing instruments: obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
certificates of deposit, bankers' acceptances, time deposits and other interest-
bearing deposits issued by domestic and foreign banks and foreign branches of
U.S. banks, asset-backed securities, foreign government securities and
commercial paper issued by U.S. and foreign issuers which is rated at the time
of purchase at least Prime-2 by Moody's or A-2 by S&P.
THE BLUE CHIP FUND
The investment objective of the Blue Chip Fund is long-term capital appreciation
through investment in blue chip stocks. Assets of the Blue Chip Fund are
invested in the Blue Chip Master Portfolio, which has the same investment
objective as the Blue Chip Fund. The Blue Chip Master Portfolio invests
substantially all of its assets in stocks included in either the Dow Jones
Industrial Average or the Standard & Poor's 500 Index. The Blue Chip Master
Portfolio will hold approximately 100 stocks. The Blue Chip Master Portfolio
expects that under normal market conditions at least 80% of its net assets will
be invested in blue chip stocks and the other 20% may be invested in cash
equivalent securities of the type permitted to be held by the Intermediate Bond
Master Portfolio (other than asset-backed securities). The Blue Chip Master
Portfolio may make other investments as described more fully below under "Other
Investment Practices."
THE ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to obtain long-term
growth from capital
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appreciation and dividend and interest income. The Asset Allocation Fund seeks
to achieve its objective by actively allocating investments among the three
major asset categories: bonds, equity securities and cash equivalents.
Investments in equity securities will generally be limited to common stocks of
the same type in which the Blue Chip Master Portfolio invests. Bonds acquired by
the Asset Allocation Fund will be the same type of investment grade corporate
and governmental obligations, mortgage-backed securities and Municipal
Securities acquired by the Intermediate Bond Master Portfolio. Unrated
securities will be purchased only if Bank of America determines they are of
comparable quality to the rated securities in which the Asset Allocation Fund
may invest. Cash equivalents are short-term, interest-bearing instruments of the
type permitted to be held by the Intermediate Bond Master Portfolio. Under
normal market conditions at least 25% of the Asset Allocation Fund's total
assets will be invested in fixed-income senior securities and no more than 35%
of the Asset Allocation Fund's net assets will be invested in mortgaged-backed
securities. The Asset Allocation Fund may make other investments as described
more fully below under "Other Investment Practices."
SPECIAL CONSIDERATIONS
IN GENERAL. Monies invested in the Funds are not insured deposits and are
subject to certain risks. Since each of the Portfolios will invest in different
types of investments, investment risks will vary depending on the Fund or Funds
chosen by a Participant. Before investing, a Participant should assess the risks
associated with the types of investments made by the Intermediate Bond and Blue
Chip Master Portfolios and the Asset Allocation Fund.
MASTER-FEEDER STRUCTURE. The Intermediate Bond and Blue Chip Funds are open-end
investment portfolios that seek to achieve their respective investment
objectives by investing all of their investable assets in each Fund's respective
Master Portfolio which has the same investment objective. Such Funds may
withdraw their investment in the particular Master Portfolio at any time if the
Board of Directors of the Company determines that it is in the best interest of
a Fund to do so. Upon such withdrawal, the Board of Directors would consider
what action might be taken, including the investment of all of the assets of
that Fund in another pooled investment entity having the same investment
objective as the Fund or the hiring of an investment adviser to manage the
Fund's assets in accordance with the investment policies described above with
respect to its Master Portfolio. See "Expense Summary," "Fund Investments" and
"The Business of Funds -- Fund Management" for a description of this investment
objective and the investment policies, restrictions, management and expenses of
the Intermediate Bond and Blue Chip Funds and their respective Master
Portfolios.
The Master Portfolios are separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Intermediate Bond and Blue Chip Funds and other entities that may
invest in the Master Portfolios from time to time (e.g., other investment
companies and commingled trust funds) will each be liable for all obligations of
their respective Master Portfolios. However, the risk of a Fund's incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and a Master Portfolio itself is unable to meet
its obligations. Accordingly, the Company's Board of Directors believes that
neither a Fund nor its shareholders will be adversely affected by reason of that
Fund's investing in the corresponding Master Portfolio. As stated below, the
investment objective of a Fund and the corresponding Master Portfolio is a
fundamental policy and may not be changed, in the case of a Fund, without the
vote of its shareholders or, in the case of the Master Portfolio, without the
vote of its interestholders. As with any mutual fund, other investors in the
Master Portfolio could control the results of
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voting at the Master Portfolio level in certain instances (e.g., a change in
fundamental policies by the Master Portfolio which was not approved by the
Fund's shareholders). This could result in a Fund's withdrawal of its investment
in the Master Portfolio, and in increased costs and expenses for the Fund.
Further, the withdrawal of other entities that may from time to time invest in
the Master Portfolio could have an adverse effect on the performance of the
Master Portfolio and its corresponding Fund, such as decreased economies of
scale and increased per share operating expenses. In addition, the total
withdrawal by another investment company as an investor in a Master Portfolio
will cause the Master Portfolio to terminate automatically in 120 days unless a
Fund and any other investors in that Master Portfolio unanimously agree to
continue the business of the Master Portfolio. If unanimous agreement is not
reached to continue the Master Portfolio, the Board of Directors of the Company
would need to consider alternative arrangements for that Fund, such as those
described above. When a Fund is required to vote as a shareholder of a Master
Portfolio, current regulations provide that in those circumstances a Fund may
either seek instructions from its security holders with regard to the voting of
such proxies and vote such proxies in accordance with such instructions, or the
Fund may vote its shares in the Master Portfolio in the same proportion of all
other security holders in the Master Portfolio. The policy of the Intermediate
Bond and Blue Chip Funds, and other similar investment companies, to invest
their investable assets in trusts such as the Master Portfolios is a relatively
recent development in the mutual fund industry and, consequently, there is a
lack of substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest in a
Master Portfolio which may have higher or lower fees and expenses than those of
its corresponding Fund and which may therefore have different performance
results than that Fund. Information concerning whether an investment in a Master
Portfolio may be available through another entity investing in a Master
Portfolio may be obtained by calling 800-323-9919.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Portfolio. When a purchase
or sale of the same security is made at substantially the same time on behalf of
a Portfolio and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Portfolio or the size of the position
obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of shares of the Funds by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds' distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Portfolio are not less favorable
than what they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Intermediate Bond Master Portfolio's and the Asset
Allocation Fund's investment practices may result in portfolio turnover greater
than that of other mutual fund portfolios. Although no commissions are paid on
bond transactions, purchases and sales are at net prices which reflect dealers'
mark-ups and mark-downs, and a higher portfolio turnover rate for bond
investments will result in payment of more dealer mark-ups and mark-downs than
would otherwise be the case. Higher portfolio turnover rates can also result in
corresponding increases in brokerage commissions and other transaction costs.
The investment adviser will not consider portfolio turnover a limiting factor in
making
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investment decisions for the Portfolios consistent with its investment objective
and policies. For further information concerning portfolio turnover, see the
Statement of Additional Information.
Since all SRF shareholders are tax exempt, no significant tax consequences
result from portfolio turnover.
OTHER INVESTMENT PRACTICES
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. A Portfolio may not invest
in instruments or securities issued by Bank of America or any of its affiliates.
OPTIONS. A Portfolio may purchase put and call options on listed securities and
stock indexes so long as the aggregate premiums paid for options does not exceed
2% of the net assets of the Portfolio (this restriction does not apply to
options on futures contracts). Put options may be purchased in order to protect
a Portfolio's securities in expectation of a declining market and call options
may be purchased to benefit from anticipated price increases in the underlying
securities or index. A Portfolio may not write put options but may write fully
covered call options as long as the Portfolio remains fully covered throughout
the life of the option, either by owning the optioned securities or possessing a
call issued by another writer that is identical in all respects to the call
written by the Portfolio.
FUTURES. The Asset Allocation Fund may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options) as a hedge
against anticipated fluctuations or changes resulting from relevant market
conditions in the values of the securities held by the Fund or which it intends
to purchase and where the transactions are economically appropriate for the
reduction of risks inherent in the ongoing management of the Fund. Similarly,
the Intermediate Bond Master Portfolio may purchase and sell interest rate
futures contracts (as well as purchase related options) and the Blue Chip Master
Portfolio may purchase and sell stock index futures contracts (as well as
purchase related options).
A futures contract is a bilateral agreement pursuant to which two parties agree
to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the value of a specified obligation or stock index
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities is normally made. A Portfolio may not purchase or sell a futures
contract and purchase related options unless immediately after any such
transaction the aggregate amount of margin deposits on its existing futures
positions and the amount of premiums paid for related options does not exceed 5%
of the Portfolio's total assets (after taking into account certain technical
adjustments).
VARIABLE RATE INSTRUMENTS. A Portfolio may invest in variable and floating rate
instruments, which may include master demand notes. Although payable on demand
of the investing Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes depends on the borrower's ability
to pay, which will be continuously monitored by Bank of America. Such notes will
be purchased only from domestic corporations that either: (a) are rated Aa or
better by Moody's or AA or better by S&P; (b) have commercial paper rated at
least Prime-2 by Moody's or A-2 by S&P or the equivalent by another nationally
recognized statistical rating organization ("NRSRO"); (c) are backed by a bank
letter of credit; or (d) are determined by Bank of America to be of a quality
comparable to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, a Portfolio may invest in securities issued by other investment
companies whose investment objectives are consistent with those of the Portfolio
and money market funds advised by Bank of
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America. No more than 10% of the value of each Portfolio's total assets will be
invested in securities of other investment companies, with no more than 5%
invested in the securities of any one investment company; except that, with
respect to the investment in a money market mutual fund advised by Bank of
America, a Portfolio is permitted to invest the greater of 5% of its net assets
or $2.5 million. In addition, the Portfolios may each hold no more than 3% of
the outstanding voting stock of any other investment company. As a shareholder
of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees.
REPURCHASE AGREEMENTS. A Portfolio may enter into repurchase agreements. Under
these agreements, the Portfolio will acquire securities from either a bank which
has a commercial paper rating of A-2 or better by S&P or Prime-2 or better by
Moody's, or the equivalent by another NRSRO, or a registered broker-dealer, and
the seller will agree to repurchase such securities within a specified time at a
fixed price (equal to the purchase price plus interest). Repurchase agreements
are considered to be loans under the Investment Company Act of 1940 (the "1940
Act"). Repurchase agreements maturing in more than seven days are considered to
be illiquid investments and investment in such repurchase agreements along with
any other illiquid securities will not exceed 10% of the value of the net assets
of a Portfolio. Repurchase agreements will be entered into only for debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances or commercial
paper, and either the particular Portfolio's custodian or its agent will have
physical possession of the securities or the securities will be transferred to
such Portfolio's custodian, by appropriate entry in the Federal Reserve Bank's
records and, in either case, will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, a Portfolio may incur a loss if the value of
the securities securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the securities. In addition, if
bankruptcy proceedings are commenced with respect to the seller, realization
upon the securities collateralizing the repurchase agreement by the Portfolio
may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into reverse repurchase
agreements. Under these arrangements, the Portfolio will sell a security held by
the Portfolio to either a bank which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's, or the equivalent by another
NRSRO, or a registered broker-dealer, with an agreement to repurchase the
security at an agreed date, price and interest payment. Reverse repurchase
agreements involve the possible risk that the value of portfolio securities a
Portfolio relinquishes may decline below the price the Portfolio must pay when
the transaction closes. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Borrowings may magnify the potential for gain or
loss on amounts invested resulting in an increase in the speculative character
of a Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, a Portfolio may lend its
portfolio securities to broker-dealers that Bank of America considers to be of
good standing. Borrowers of portfolio securities may not be affiliated directly
or indirectly with the Company or the particular Portfolio. If the broker-dealer
should become bankrupt, however, the Portfolio could experience delays in
recovering its securities. A securities loan will be made only when, in Bank of
America's judgment, the possible reward from the loan justifies the possible
risks. In addition, such loans will not be made if, as a result, the value of
securities loaned by a Portfolio exceeds
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10% of its total assets. Securities loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Intermediate Bond Master Portfolio and the Asset
Allocation Fund may purchase asset-backed securities. Asset-backed securities
consist of undivided fractional interests in pools of consumer loans (unrelated
to mortgage loans) or receivables held in a trust. Examples include certificates
for automobile receivables (CARS) and credit card receivables (CARDS). Payments
of principal and interest on the loans or receivables are passed through to
certificate holders. Asset-backed securities may be issued by either
governmental or non-governmental entities. Payment on asset-backed securities of
private issuers is typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guaranty, or subordination. The
extent of credit enhancement varies, but usually amounts to only a fraction of
the asset-backed security's par value until exhausted. Ultimately, asset-backed
securities are dependent upon payment of consumer loans or receivables by
individuals, and the certificate holder generally has no recourse to the entity
that originated the loan or receivables. The underlying loans or receivables may
be prepaid with the result of shortening the certificates' weighted average
life. Prepayment rates vary widely and may be affected by changes in market
interest rates. It is not possible to accurately predict the average life of a
particular pool of loans or receivables. The proceeds of prepayments received by
a Portfolio must be reinvested in securities whose yields reflect interest rates
prevailing at the time. Thus, the Portfolio's ability to maintain a portfolio
which includes high-yielding asset-backed securities will be adversely affected
to the extent reinvestments are in lower yielding securities. The actual
maturity and realized yield will therefore vary based upon the prepayment
experience of the underlying pool of loans or receivables and prevailing
interest rates at the time of prepayment. Asset-backed securities may be subject
to greater risk of default during periods of economic downturn than other
instruments. Also, while the secondary market for asset-backed securities is
ordinarily quite liquid, in times of financial stress the secondary market may
not be as liquid as the market for other types of securities, which could result
in a Portfolio experiencing difficulty in valuing or liquidating such
securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Intermediate Bond Master
Portfolio and Asset Allocation Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock in a price or
yield on a security, regardless of future changes in interest rates. When-issued
and forward commitment transactions involve the risk that the price or yield
obtained may be less favorable than the price or yield available when the
delivery takes place. The Intermediate Bond Master Portfolio and Asset
Allocation Fund will set aside in a segregated account cash or liquid securities
equal to the purchase price of any when-issued or forward commitment
transactions. A Portfolio's when-issued purchases and forward commitments will
not exceed 25% of the value of such Portfolio's total assets absent unusual
market conditions. The Intermediate Bond Master Portfolio and Asset Allocation
Fund intend to engage in when-issued purchases and forward commitments only in
furtherance of their respective investment objectives and not for speculative
purposes.
FOREIGN SECURITIES. Subject to its investment objective and policies, a
Portfolio may invest up to 25% of its net assets (at the time of purchase) in
securities of foreign issuers that may or may not be publicly traded in the
United States, such as Yankee bonds (dollar-denominated bonds sold in the United
States by non-U.S. issuers) and Eurobonds (bonds issued in a country and
sometimes a currency other than the country of the issuer). The Portfolios
purchasing these secu-
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rities may be subjected to additional risks associated with the holding of
property abroad, such as future political and economic developments, currency
fluctuations, possible withholding of tax payments, possible seizure or
nationalization of foreign assets, possible establishment of currency exchange
control regulations or the adoption of other foreign government restrictions
that might adversely affect the payment of principal or interest on foreign
securities in a Portfolio. In addition, securities of some foreign companies are
less liquid, and their prices more volatile than domestic companies, there may
be less publicly available information about foreign companies, and foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies.
FUNDAMENTAL LIMITATIONS
The investment objective of each Fund and Master Portfolio may not be changed
without a vote by the holders of a majority of the outstanding shares of the
Fund or of the outstanding interests of the Master Portfolio, respectively, as
defined in the 1940 Act. Policies requiring such a vote to effect a change are
known as "fundamental." A number of the other fundamental investment limitations
are summarized below.
Neither the Funds nor the Master Portfolios may:
1. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to 25%
of its total assets may be invested without regard to these limitations; and
provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the
same investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons, except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value in
excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its total assets, and may
enter into repurchase agreements as long as repurchase agreements maturing in
more than seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock indexes
and options on any such futures if such options are written by other persons
and if (i) the futures or options are listed on a national securities or
commodities exchange, (ii) the aggregate premiums paid on all such options
that are held at any time do not exceed 20% of its total net assets, and
(iii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental investment limitations is set out in full in the
Statement of Additional Information.
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HOW TO INVEST IN SRF SHARES
ELIGIBILITY FOR ADMISSION
Only Eligible Retirement Accounts are qualified to invest in SRF Shares.
Eligible Retirement Accounts are accounts which were open prior to the
Reorganization Date, have remained open continuously since that date and meet
one of the following descriptions:
- - Individual Retirement Accounts ("IRAs") that are exempt under Section 408(e)
and are maintained in conformity with Section 408(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), including a) rollover accounts and
Simplified Employee Pension Plans ("SEP Plans") for which Bank of America's
Northwest Division or one of its affiliates, serves as custodian , b) IRAs
opened after the Reorganization Date under a SEP Plan that was open as of the
Reorganization Date and has remained open continuously since that date
("Eligible IRAs") or c) IRAs opened prior to the Reorganization Date via a
signed transfer or rollover notification indicating a pending purchase of SRF
Shares of the Intermediate Bond, Blue Chip or Asset Allocation Fund of the
Company, and
- - Qualified pension or profit sharing trusts that are exempt under Section
501(a) and that are maintained in conformity with Section 401(a) of the Code,
including a) corporate pension or profit-sharing trusts, b) pension or profit
sharing trusts benefiting one or more self-employed individuals (generally
referred to as H.R. 10 or Keogh plans), or c) accounts opened for new
participants in a qualified pension or profit-sharing trust that was open as
of the Reorganization Date and has remained open continuously since that date
("Eligible Pension or Profit Sharing Trusts").
Maintenance of Eligible Retirement Account status is a prerequisite to all
transactions with the Company described below with respect to SRF Shares.
ADDITIONAL CONTRIBUTIONS OR TRANSFERS INTO
ELIGIBLE RETIREMENT ACCOUNTS
Additional contributions or transfers into an Eligible Retirement Account can be
made by using a form available from any Bank of America or Bank of America,
Northwest Division branch or by calling 1-800-323-9919 in Washington and Alaska,
or 1-800-441-8379 in Idaho. The completed form can be returned in person at any
branch or be mailed in Washington to Retirement Services, P.O. Box 84248,
Seattle, Washington 98124, in Idaho to Retirement Services, P.O. Box 6900, Coeur
d'Alene, Idaho 83814-2002, or in Alaska to Retirement Services, P.O. Box 107007,
Anchorage, Alaska 99510-7007.
There is no minimum requirement for additional contributions or transfers. All
assets will be invested in full and fractional SRF Shares at a purchase price
equal to the net asset value per share determined at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently, 4:00 p.m.
Eastern time) following receipt by the Company of a shareholder's satisfactorily
completed investment instructions and payment. See "Valuation of Shares."
Investments are subject to determination by the Company that the investment
instruction form has been properly completed.
Certificates representing shares will not be issued. All SRF Shares purchased
are confirmed by mail to the shareholder and are credited to the account of the
shareholder on the Company's books. The Company reserves the right in its sole
discretion to (i) suspend the availability of its SRF Shares and (ii) reject
investment instructions when, in the judgment of the Board
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of Directors, such suspension or rejection is in the best interest of the
Company.
Each Fund's SRF Shares are sold on a continuous basis by the Distributor. The
Distributor is an indirect wholly owned subsidiary of BISYS, and is located at
3435 Stelzer Road, Columbus, OH 43219.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Intermediate Bond Fund and Blue Chip Fund are entitled to
dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments in the corresponding Master
Portfolio that are allocable to each Fund. Dividends from the Intermediate Bond
Fund's net investment income are declared monthly and paid within five business
days after the end of each month. Dividends from the Blue Chip Fund's and Asset
Allocation Fund's net investment income are declared quarterly and paid within
five business days after the quarter end. A Fund's net realized capital gains
(if any) are distributed at least annually. Dividends and capital gain
distributions are automatically reinvested in additional SRF Shares of the Fund
for which the dividend or distribution was declared.
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REDEMPTION OF SRF SHARES
All or a portion of the SRF Shares held in a Fund can be redeemed (sold) at any
time. Redemptions may be effected by writing in Washington to Retirement
Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to Retirement
Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002 or in Alaska to
Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007.
The redemption price will be the net asset value per share next determined
following receipt by the Company of a shareholder's satisfactorily completed
instructions. See "Valuation of SRF Shares." The value of an SRF Share upon
redemption may be more or less than the value when purchased, depending upon the
net asset value of an SRF Share of the Fund at the time of the redemption.
Redemptions are subject to determination by the Company that the investment
instruction form or the redemption request and other distribution documents, if
any, are complete. While payment for SRF Shares redeemed normally will be made
in cash, if conditions exist making payment in cash undesirable, the Company may
make payment for the SRF Shares redeemed wholly or partly in securities or other
property of the Fund.
Payment for SRF Shares redeemed will normally be made to the custodian of the
shareholder within one business day of receipt by the Company of redemption
instructions, but in no event will payment be made more than seven days after
receipt of redemption instructions except in the circumstances described below.
The payment may be delayed or the right of redemption suspended at a time when
(a) trading on the Exchange is restricted or the Exchange is closed, for other
than customary weekends and holidays, (b) an emergency, as defined by rules of
the Securities and Exchange Commission, exists making disposal of portfolio
securities or determination of the value of the net assets of the Fund not
reasonably practicable, or (c) the Securities and Exchange Commission has by
order permitted such suspension.
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EXCHANGE PRIVILEGES
The following exchange privileges are available for Eligible Retirement
Accounts:
1. SRF Shares held in any Fund may be exchanged for SRF Shares of any other
Fund;
2. SRF Shares held in any Fund may be exchanged for A Shares in any other
taxable, non-money market fund offered by the Company or a Time Horizon Fund
without incurring the front-end sales charge otherwise applicable on sales of
A Shares ("Eligible Exchange Shares");
3. SRF Shares or Eligible Exchange Shares may be exchanged for Pacific Horizon
Shares of the Pacific Horizon Prime Fund;
4. Eligible Exchange Shares may be further exchanged for A Shares in any
taxable, non-money market fund offered by the Company or a Time Horizon Fund
without incurring the front-end sales charges otherwise applicable, or for
SRF Shares offered by a Fund; and
5. SRF Shares or Eligible Exchange Shares held in an IRA account for which a
Participant's surviving spouse is the beneficiary may continue to be
exchanged for SRF Shares or A Shares as described above.
The following transactions are examples of transactions that will interrupt the
maintenance of Eligible Retirement Account status for a Participant's account
and will terminate the account's ability to engage in the exchange privileges
described above.
1. SRF Shares or Eligible Exchange Shares held in an Eligible Pension or Profit
Sharing Trust or a SEP IRA, which are transferred by the Participant into a
personal rollover IRA, will no longer be eligible to exchange such shares for
A Shares without incurring the front-end sales load applicable to A Shares;
2. SRF Shares or Eligible Exchange Shares held in an IRA account for which a
Participant's surviving beneficiary upon transfer out of the decedent's
account is other than the Participant's spouse will no longer be eligible to
exchange such shares for A Shares without incurring the front-end sales load
applicable to A Shares; and
3. SRF Shares or Eligible Exchange Shares which are liquidated in their entirety
by the Participant into a Certificate of Deposit will no longer be eligible
to exchange such shares for A Shares without incurring the front-end sales
load applicable to A Shares.
Exchanges may be effected by phone or by writing in Washington to Retirement
Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to Retirement
Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002, or in Alaska to
Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007. To make an
exchange by phone, call 1-800-323-9919 in Washington and Alaska, or
1-800-441-8379 in Idaho.
The Company may act upon the instruction of any person, by telephone,
representing himself or herself to be a shareholder and reasonably believed by
the Company 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 a
Shareholder should experience difficulty in contacting the Company to place
telephone exchanges, for example, because of unusual market activity,
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shareholders are urged to consider sending exchange requests in writing. Calls
may be recorded for the shareholder's protection. As a result of this telephone
exchange policy, the shareholder will bear the risk of loss, if any, resulting
from telephone instructions of a person reasonably believed to be a shareholder.
During times of severe market or economic changes, telephone exchanges may be
difficult to implement. Therefore, it is recommended that you send your exchange
requests in writing.
Any exchange will be based on the respective net asset values of the shares
involved next determined after receipt by the Company of a shareholder's
instructions for an exchange, subject to any applicable front-end sales load as
discussed above.
The Company reserves the right to reject any exchange request, and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
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AUTOMATIC CONVERSION
SRF shares of a Fund will automatically convert
to A Shares of the same Fund on the third anniversary of the Reorganization
Date. The conversion from SRF Shares to A Shares will take place at net asset
value, as a result of which a shareholder will receive the same value of A
Shares of a Fund as the shareholder had of SRF Shares.
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VALUATION OF SRF SHARES
Net asset value per share is determined separately for each class of shares of a
Fund by dividing the total value of the assets of the Fund attributable to a
particular class of shares, less any liabilities of the Fund attributable to
such class, by the number of outstanding shares of the class. Net asset value is
determined as of the end of regular trading hours on the Exchange (currently
4:00 p.m., Eastern time) on days the Exchange is open, or at such other time as
may be determined by the Board of Directors each day on which such value must be
determined in accordance with the 1940 Act.
The Master Portfolios' and the Asset Allocation Fund's investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined in good faith by the Master Portfolios or Asset Allocation
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolios'
Board of Trustees or the Asset Allocation Fund's Board of Directors. Short-term
debt securities are valued at amortized cost, which approximates market value.
For further information about valuing securities, see the Statement of
Additional Information.
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THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolios. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
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 eleven U.S. states as well as corporate banking offices in
major U.S. cities and branches, corporate offices and representative offices in
37 foreign countries and territories.
In separate advisory agreements with the Master Trust and the Company
(collectively, the "Advisory Agreements"), Bank of America has agreed to manage
the Portfolios' investments and to be responsible for, place orders for, and
make decisions with respect to, all purchases and sales of the Portfolios'
securities. The Advisory Agreements also provide that Bank of America may: 1) in
its discretion, provide advisory services through its own employees or employees
of one or more of its affiliates that are under the common control of Bank of
America's parent, BankAmerica Corporation, provided such employees are under the
management of Bank of America and 2) employ a sub-adviser provided that Bank of
America remains fully responsible to the Portfolios for the acts and omissions
of the sub-adviser.
Since March 1996, portfolio management services for the Intermediate Bond Master
Portfolio have been conducted by an investment committee of the Fixed Income
Division of the Investment Management Services Group of Bank of America, and no
one person is primarily responsible for making recommendations to that
committee.
Bank of America Illinois' Investment Advisors Division is responsible for the
day-to-day investment activities of the Blue Chip Master Portfolio. The
investment management team is headed by James Miller, Executive Vice President
and Chief Investment Officer of BofA Illinois (a wholly owned subsidiary of
BankAmerica Corporation). Mr. Miller has been the Blue Chip Master Portfolio's
manager since May 1995 and has been associated with BofA Illinois Investment
Management (and its predecessor Continental Bank) since 1988. Mr. Miller is a
Chartered Financial Analyst, a member of the Association of Investment
Management and Research, and a former Director of the Investment Analysts
Society of Chicago.
The Asset Allocation Committee of Bank of America's Global Investment Management
Division establishes general parameters for the selection of securities for the
Asset Allocation Fund. Robert Pyles, Senior Vice President and Director of
Equity, and Steven L. Vielhaber are primarily responsible for the selection of
particular securities for the equity and fixed-income portions, respectively, of
the Asset Allocation Fund. Mr. Pyles has been the Asset Allocation Fund's
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manager since November 1994 and has been associated with Bank of America's
Northwest Division and its predecessor since 1976. Mr. Pyles also manages mutual
fund managers for the Pacific Horizon Capital Income Fund and currently manages
various common trust, employee benefit and individual accounts for Bank of
America. Mr. Vielhaber has been the Asset Allocation Fund's manager since April
1994 and has been employed by Bank of America since 1993. Prior thereto, Mr.
Vielhaber had been Director of Fixed Income Marketing at Dimensional Fund
Advisers since 1990, and Vice President and Manager of Investments at Gibraltar
Savings from 1986 to 1990.
Effective upon the Reorganization Date, Bank of America is entitled to receive a
fee at the annual rate of 0.30%, 0.50% and 0.40% of each of the Intermediate
Bond Master Portfolio's, Blue Chip Master Portfolio's and Asset Allocation
Fund's respective average daily net assets for the services provided and
expenses assumed under the Advisory Agreements. These amounts may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers.") Prior to the Reorganization Date, Bank of America was entitled
to receive an investment advisory fee at the annual rate of 0.45%, 0.75% and
0.55% of each of the Intermediate Bond Master Portfolio's, Blue Chip Master
Portfolio's and Asset Allocation Master Portfolio's respective average daily net
assets. During the fiscal year ended February 28, 1997, the Intermediate Bond ,
Blue Chip and Asset Allocation Master Portfolios paid Bank of America advisory
fees at an effective annual rate of 0.17%, 0.48%, and 0.16% of such Master
Portfolios' respective average daily net assets, and Bank of America waived a
portion of its fee at an effective annual rate of 0.28%, 0.27% and 0.39% of such
Master Portfolios' respective average daily net assets. For the same period,
Bank of America also reimbursed a portion of the operating expenses with respect
to the Intermediate Bond Fund. During the fiscal year ended February 28, 1997,
the Asset Allocation Fund invested all of its assets in the Asset Allocation
Master Portfolio.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, as described under "Plan Payments," and may
receive fees charged directly to their accounts in connection with investments
in shares of the Funds.
ADMINISTRATOR
BISYS, through its wholly-owned subsidiary BISYS Fund Services, L.P., serves as
Administrator of the Funds and the Master Portfolios. Their offices are located
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly owned subsidiary of BISYS,
served as Administrator of the Funds and the Master Portfolios.
Under its administration agreements with the Company and the Master Trust, BISYS
has agreed to: pay the costs of maintaining the offices of the Company and the
Master Portfolios; provide a facility to receive purchase and redemption orders;
provide statistical and research data, data processing services and clerical
services; coordinate the preparation of reports to shareholders of the Funds,
interestholders of the Master Portfolios and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolios; calculate the net asset value of
the Funds and the Master Portfolios; calculate the dividends and capital gains
distributions paid to shareholders; and generally assist in all aspects of the
operations of the Funds and the Master Portfolios.
For its services as administrator, BISYS is entitled to receive administration
fees at the annual rate of 0.15% of each of the Intermediate Bond, Blue Chip and
Asset Allocation Fund's respective average daily net assets. BISYS is entitled
to receive an administration fee from the Intermedi-ate Bond Master Portfolio's
and Blue Chip Master Portfolio's net assets, at an annual rate of 0.05%
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<PAGE> 339
of each such Master Portfolio's average daily net assets. These amounts may be
reduced pursuant to undertakings by BISYS. (See the information below under "Fee
Waivers.") Prior to the Reorganization Date, Concord or BISYS was entitled to
receive an administration fee payable at the annual rate of 0.15% of the Asset
Allocation Fund's average daily net assets and 0.05% of the Asset Allocation
Master Portfolio's average daily net assets. For the fiscal year ended February
28, 1997, the Intermediate Bond Master Portfolio, Blue Chip Master Portfolio and
Asset Allocation Master Portfolio paid Concord and BISYS administration fees at
an effective annual rate of 0.02%, 0.03% and 0.01% of such Master Portfolios'
respective average daily net assets, and Concord and BISYS waived a portion of
its fee at an effective annual rate of 0.03%, 0.02% and 0.04% of such Master
Portfolios' respective average daily net assets. For the same period, Concord
and BISYS waived their entire administration fee payable by the Intermediate
Bond Fund, Blue Chip Fund and Asset Allocation Fund. During the fiscal year
ended February 28, 1997, Concord and/or BISYS also reimbursed a portion of the
operating expenses with respect to the Intermediate Bond Fund, Blue Chip Fund
and Asset Allocation Fund.
Pursuant to the authority granted in the administration agreements, BISYS or a
subcontractor has entered into agreements with PFPC, Inc. ("PFPC") under which
PFPC (and an offshore affiliate of PFPC) provide certain accounting,
bookkeeping, pricing and dividend and distribution calculation services to the
Funds and the Master Portfolios. The Funds and the Master Portfolios bear all
fees and expenses charged by PFPC for these services.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. The Distributor is an indirect, wholly-owned subsidiary of BISYS and is
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Funds and the Master
Portfolios. BISYS Fund Services, Inc., a wholly-owned subsidiary of BISYS, is
the transfer and dividend disbursing agent for each of the Funds and is located
at 3435 Stelzer Road, Columbus, Ohio 43219-3035. BISYS has entered into a
sub-transfer agent agreement with Bank of America's Northwest Division under
which Bank of America's Northwest Division provides certain transfer agency
services to SRF Shares of the Funds.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Bank of America and other service providers. Periodically, during the course of
each Fund's fiscal year, Bank of America and other service providers may
prospectively choose not to receive fee payments and/or may assume certain
expenses of the Funds or Master Portfolios as a result of competitive pressures
and in order to preserve and protect the business and reputation of these
entities. However, the service providers retain the ability to discontinue such
fee waivers and/or expense reimbursements at any time.
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TAX INFORMATION
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Code, and each Fund intends that it
will so qualify in future years as long as such qualification is in the best
interests of its shareholders. As a result of this qualifica-
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tion, each Fund generally is not required to pay federal income taxes to the
extent its earnings are distributed in accordance with the Code. It is expected
that the Master Portfolios will not be subject to federal income taxes. Each
Master Portfolio intends to qualify as a partnership (or other pass-through
entity) for federal income tax purposes. As such, the Master Portfolios are not
subject to tax, and the Intermediate Bond Fund and Blue Chip Fund will be
treated for federal income tax purposes as recognizing a pro rata share of their
corresponding Master Portfolio's income and deductions and owning a pro rata
share of their corresponding Master Portfolio's assets. The Intermediate Bond
Fund's and Blue Chip Fund's status as regulated investment companies is
dependent on, among other things, their corresponding Master Portfolio's
continued qualification as a partnership (or other pass-through entity) for
federal income tax purposes.
For federal income tax purposes, income earned by each Fund will not be taxable
to the Eligible Retirement Accounts that are its shareholders or to Participants
until a Participant receives, or is deemed under federal tax law to have
received, a distribution from the Participant's Eligible Retirement Account. A
distribution from the Participant's Eligible Retirement Account is a payment or
a deemed payment from the Eligible Retirement Account to the Participant. A
withdrawal by an Eligible Retirement Account from a Fund is a payment by the
Fund to a shareholder in redemption of shares of the Company. Therefore,
withdrawals from a Fund can be made at any time by an Eligible Retirement
Account without penalty and without the amount withdrawn being subject to
federal income tax.
================================================================================
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND
IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30-day
period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to stock, bond and other relevant indices
or to rankings prepared by
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<PAGE> 341
independent services or other financial or industry publications that monitor
mutual fund performance. For example, a Fund's total return may be compared to
data prepared by: Lipper Analytical Services, Inc.; IBC Financial Data, Inc.;
Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies
Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
================================================================================
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 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of : 100 million shares of
Class M Common Stock, 100 million shares of Class M--Special Series 3 Common
Stock, 100 million shares of Class M--Special Series 5 Common Stock and 100
million shares of Class M--Special Series 7 Common Stock, representing interests
in the Intermediate Bond Fund; 100 million shares of Class N Common Stock, 100
million shares of Class N--Special Series 3 Common Stock, 100 million shares of
Class N--Special Series 5 Common Stock and 100 million shares of Class
N--Special Series 7 Common Stock, representing interests in the Blue Chip Fund
and 100 million shares of Class O Common Stock, 100 million shares of Class
O--Special Series 3 Common Stock, 100 million shares of Class O-- Special Series
5 Common Stock and 100 million shares of Class O--Special Series 7 Common Stock,
representing interests in the Asset Allocation Fund; and additional classes of
shares representing interests in other investment portfolios of the Company.
Class M, N and O Common Stock represent the "A" Shares, Class M, N and O--
Special Series 3 Common Stock represent "M" Shares, Class M, N and O--Special
Series 5 Common Stock represent the "K" Shares and Class M, N and O--Special
Series 7 Common Stock represent the "SRF" Shares. As of the date of this
Prospectus, M Shares have not been offered to the public. The Board of Directors
may similarly classify or reclassify any class of shares (including unissued
Class M Common Stock, Class M--Special Series 3 Common Stock, Class M--Special
Series 5 Common Stock, Class M--Special Series 7 Common Stock, Class N Common
Stock, Class N--Special Series 3 Common Stock, Class N--Special
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Series 5 Common Stock, Class N--Special Series 7 Common Stock, Class O Common
Stock, Class O--Special Series 3 Common Stock, Class O--Special Series 5 Common
Stock or Class O--Special Series 7 Common Stock) into one or more series. This
Prospectus relates primarily to the Funds' SRF Shares. For more information
about the Funds' A and K Shares or about the Company's other portfolios, contact
the Company at the telephone number listed on the cover page of this Prospectus.
SRF Shares are offered for investment by Eligible Retirement Accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the Reorganization Date. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available, which is the case for Eligible Retirement Accounts. A
Shares may be purchased directly by the public, by clients of Bank of America
through their qualified trust and agency accounts, or by clients of securities
dealers, financial institutions (including banks) and other industry
professionals, such as investment advisers, accountants and estate planning
firms that have entered into service and/or selling agreements with the
Distributor. K Shares are neither subject to a front-end sales charge nor a
contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Fund of the
Company or a Time Horizon Fund and subsequent purchases into an IRA rollover
account, so long as the original IRA rollover account remains open on the
Company's books; (d) accounts under Section 403 (b)(7) of the Code, (e) deferred
compensation plans under Section 457 of the Code and (f) certain other
retirement plans.
A Shares, K Shares and SRF Shares each have certain purchase, redemption and
exchange privileges. Additionally, A Shares and K Shares have certain
shareholder services, such as TeleTrade, an automatic investment program, an
automatic withdrawal plan, a directed distribution plan and a direct deposit
program.
The three class of shares in the Funds which are publicly offered represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except (a) SRF Shares and A Shares
bear the expenses of their respective Shareholder Services Plans; and (b) K
Shares bear the expenses of a Distribution Plan and/or Administrative and
Shareholder Services Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution Plan fees and/or Administrative and Shareholder
Services Plan fees attributable to K Shares, respectively, and (c) the
incremental expenses associated with such Plans. SRF, A and K Shares may have
different performance results due to sales charges and other expenses
attributable to distribution and/or shareholder servicing plans applicable with
respect to a particular share class.
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
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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 holders of
SRF Shares will be entitled to vote on matters submitted to a vote of
shareholders relating to the Shareholder Services Plan attributable to SRF
Shares; only holders of A Shares will be entitled to vote on matters submitted
to a vote of shareholders relating to the Shareholder Services Plan attributable
to A Shares and only holders of K Shares will be entitled to vote on matters
submitted to a vote of shareholders relating to the Distribution Plan and
Administrative and Shareholder Services Plan attributable to K Shares. 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.
The Funds do not presently intend to hold annual meetings of shareholders to
elect directors or for other business unless and until such time as less than a
majority of the directors holding office have been elected by the shareholders.
At that time, the directors then in office will call a shareholders' meeting for
the election of directors. Under certain circumstances, however, shareholders
have the right to call a shareholder meeting to consider the removal of one or
more directors. Such meetings will be held when requested by the shareholders of
10% or more of the Company's outstanding shares of common stock. The Funds will
assist in shareholder communications in such matters to the extent required by
law and the Company's undertaking with the Securities and Exchange Commission.
================================================================================
PLAN PAYMENTS
THE COMPANY HAS ADOPTED SEPARATE SHAREHOLDER SERVICES PLANS (THE "PLANS")
FOR SRF SHARES AND A SHARES
The Company has adopted separate Shareholder Services Plans for SRF Shares and A
Shares, under which SRF Shares and A Shares of each Fund reimburse the
Distributor for shareholder servicing fees the Distributor pays to Service
Organizations.
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 a particular Plan, payments by a Fund for shareholder servicing expenses
may not exceed 0.25% (annualized) of the respective average daily net assets of
such Fund's SRF Shares or A Shares, as appropriate. Excluded from this
calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1997, the Intermediate Bond, Blue Chip and Asset Allocation Funds
paid the Distributor shareholder servicing fees under the Shareholder Services
Plan with respect to the Funds' A Shares at an effective annual rate of 0.16%,
0.25% and 0.25% of such Funds' respective average daily net assets, and the
Distributor waived a portion of its fee with respect to the Intermediate Bond
Fund at an effective annual rate of 0.09% of such
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Fund's average daily net assets. During the same period, no SRF Shares were
offered by the Company.
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 particular Plan is in effect
until such time when it may be paid. However, any "carried forward" amounts will
not be payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
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================================================================================
APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa -- judged to be of high quality by all
standards; A -- deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa -- considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of desirable investment, Caa represents bonds which are in poor
standing, Ca represents a high degree of speculation and C represents the lowest
rated class of bonds); Caa, Ca and C bonds may be in default. Moody's applies
numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa to
B. The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic rating
category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and to repay
principal for debt in this category than for higher rated categories. Debt rated
"BB," "B," "CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. Debt rated
"CI" is reserved for income bonds on which no interest is being paid. Debt rated
"D" is in default. This rating is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. The ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Excerpts from Fitch's description of its corporate bond ratings:
"AAA" -- considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA" -- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A" -- deemed investment grade and of high credit quality,
although the capacity to pay interest and repay principal may be more
susceptible to the adverse changes in economic conditions and circumstances than
31
<PAGE> 346
bonds with higher ratings; "BBB" is considered to be investment grade and is
regarded as having satisfactory credit quality with an adequate capacity to pay
interest and repay principal although adverse changes in economic conditions and
circumstances are more likely to impair timely payment than for higher rated
categories; "BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D"--regarded as
speculative investments. The ratings "BB" to "C" represent the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating "DDD"
to "D" is an assessment of the ultimate recovery value through reorganization or
liquidation. The ratings from "AA" to "BBB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch short-term ratings apply to debt obligations that are payable on demand or
have original maturities of generally up to three years. The designation "F-1"
indicates that the securities possess very strong credit quality. Those
securities determined to possess exceptionally strong credit quality are denoted
with a plus (+) sign designation. Securities rated "F-2" are considered to
possess good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
32
<PAGE> 347
52-9160REV697
SEA-0012
PACIFIC HORIZON MUTUAL FUNDS
SRF SHARES OF THE
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
PROSPECTUS
June 24, 1997
NOT FDIC INSURED
<PAGE> 348
PACIFIC HORIZON FUNDS, INC.
Class A Shares of the Short-Term Government Fund
Class A and K shares of the
National Municipal Bond Fund,
California Tax-Exempt Bond Fund,
Aggressive Growth Fund,
U.S. Government Securities Fund,
Capital Income Fund,
Intermediate Bond Fund,
Blue Chip Fund,
Asset Allocation Fund,
Corporate Bond Fund, and
International Equity Fund
Class SRF Shares of the
Intermediate Bond (formerly, Flexible Bond) Fund,
Blue Chip Fund and Asset Allocation Fund
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C> <C>
10. Cover Page..................................................... Cover Page
11. Table of Contents.............................................. Table of Contents
12. General Information and History................................ The Company
13. Investment Objectives and Policies............................. Investment Objectives and
Policies
14. Management of the Fund......................................... Management
15. Control Persons and Principal Holders of
Securities..................................................... Management; Miscellaneous
16. Investment Advisory and Other Services ........................ Management-Investment Adviser;
Management-Administrator;
Management-Distributor and Plan
Payments; General Information-
Custodian, Accounting Agent and
Transfer Agent; General
Description-Independent
Accountants
17. Brokerage Allocation and Other Practices....................... Portfolio Transactions
18. Capital Stock and Other Securities............................. General Information-
Description of Shares
19. Purchase, Redemption and Pricing of ........................... Additional Purchase and
Securities Being Offered Redemption Information
20. Tax Status..................................................... Additional Information
Concerning Taxes
21. Underwriters................................................... Management-Distributor and Plan
Payments
22. Calculation of Performance Data................................ Yield and Total Return
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate Item, so
numbered in Part C to this Registration Statement.
<PAGE> 349
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
STATEMENT OF ADDITIONAL INFORMATION
FOR
NATIONAL MUNICIPAL BOND FUND
CALIFORNIA TAX-EXEMPT BOND FUND
AGGRESSIVE GROWTH FUND
U.S. GOVERNMENT SECURITIES FUND
CAPITAL INCOME FUND
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
CORPORATE BOND FUND
INTERNATIONAL EQUITY FUND
SHORT-TERM GOVERNMENT FUND
June 24, 1997
TABLE OF CONTENTS
Page
----
THE COMPANY................................................................ 3
INVESTMENT OBJECTIVES AND POLICIES......................................... 4
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................. 67
ADDITIONAL INFORMATION CONCERNING TAXES.................................... 78
MANAGEMENT................................................................. 85
GENERAL INFORMATION....................................................... 142
Appendix A.................................................................A-1
Appendix B.................................................................B-1
This Statement of Additional Information applies to A Shares of the
Pacific Horizon Short-Term Government Fund, A and K Shares of the Pacific
Horizon Aggressive Growth Fund, Pacific Horizon U.S. Government Securities Fund,
Pacific Horizon Capital Income Fund, Pacific Horizon National Municipal Bond
Fund, Pacific Horizon California Tax-Exempt Bond Fund, Pacific Horizon
Corporate Bond Fund, Pacific Horizon Asset Allocation Fund, Pacific Horizon
International Equity Fund (collectively, the "Non-Feeder Funds"), Pacific
Horizon Intermediate Bond Fund, and Pacific Horizon Blue Chip Fund,
(collectively, the "Feeder Funds" and, collectively with the Non-Feeder Funds,
the "Funds") of Pacific Horizon Funds, Inc. This Statement of Additional
Information also applies to SRF Shares of the Pacific Horizon Intermediate Bond
Fund, Pacific Horizon Blue Chip Fund and Pacific Horizon Asset Allocation Fund.
The Master Portfolios corresponding to the Intermediate Bond Fund and Blue Chip
Fund, are referred to individually as the "Intermediate Bond Master Portfolio"
and "Blue Chip Master Portfolio," respectively, and collectively as the
"Master Portfolios," and collectively with the Non-Feeder Funds, the
"Portfolios." The Company and Master Investment Trust, Series I ("Master Trust
I"), are collectively
<PAGE> 350
referred to herein as the "Companies." This Statement of Additional Information
is meant to be read in conjunction with the Prospectuses dated June 24, 1997,
as they may from time to time be revised (individually, a "Prospectus" and
collectively, the "Prospectuses"), which describe the particular Fund of the
Company in which the investor is interested. This Statement of Additional
Information is incorporated by reference in its entirety into each such
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, no investment in A, K or SRF Shares of any Fund should be made
solely upon the information contained herein. Copies of the Prospectuses
relating to Pacific Horizon's Funds to which this Statement of Additional
Information relates may be obtained by calling Concord Financial Group, Inc. at
800-332-3863. Capitalized terms used but not defined herein have the same
meaning as in the Prospectuses.
-2-
<PAGE> 351
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The National Municipal Bond Fund, Aggressive Growth Fund,
Intermediate Bond Fund (formerly, Flexible Bond Fund), Blue Chip Fund, Asset
Allocation Fund, International Equity Fund and Short-Term Government Fund
commenced operations on January 28, 1994, March 31, 1984, January 24, 1994,
January 13, 1994, January 18, 1994, May 13, 1996, and August 2, 1996,
respectively. The California Tax-Exempt Bond Fund originally commenced
operations on March 30, 1984 as a separate portfolio of Pacific Horizon
Tax-Exempt Funds, Inc., which subsequently changed its name to Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. (the "Predecessor California Tax-
Exempt Bond Fund"). The Capital Income Fund originally commenced operations on
September 25, 1987 as The Total Return Fund (the "Predecessor Capital Income
Fund"), a separate portfolio of a Massachusetts business trust named The Horizon
Capital Funds. The U.S. Government Securities Fund commenced operations on
January 7, 1988, also as a separate portfolio of The Horizon Capital Funds,
under the name GNMA Extra Fund (the "Predecessor GNMA Fund" or the "Predecessor
U.S. Government Securities Fund"). On January 1, 1989 the Predecessor Capital
Income Fund and the Predecessor GNMA Fund changed their names to the Pacific
Horizon Convertible Securities Fund and the Pacific Horizon GNMA Extra Fund. In
January 1990 these three Predecessor Funds were reorganized as portfolios of
Pacific Horizon. On June 28, 1991, the GNMA Extra Fund changed its name to the
U.S. Government Securities Fund and on September 16, 1991 the Convertible
Securities Fund changed its name to the Capital Income Fund. The Corporate Bond
Fund originally commenced operations in 1973 as a diversified, closed-end
management investment company (that is, as an investment company with
non-redeemable shares) known as Bunker Hill Income Securities, Inc. (the
"Corporate Predecessor Fund"). On April 25, 1994 the Corporate Predecessor Fund
was reorganized as a separate portfolio of the Company and all of the assets and
liabilities of the Corporate Predecessor Fund were transferred to the Corporate
Bond Fund.
The Feeder Funds seek to achieve their respective investment
objectives by investing substantially all of their assets in diversified
investment portfolios of an open-end, management investment company having the
same investment objective as these Funds. Prior to July 1, 1996, September 1,
1996, September 1, 1996 and June 23, 1997, the National Municipal Bond Fund ,
Corporate Bond Fund, International Equity Fund and Asset Allocation Fund,
respectively, invested all of their respective assets in the National Municipal
Bond Portfolio of Master Investment Trust, Series, II ("Municipal Master
Portfolio"); Corporate Bond Portfolio of Master Trust I ("Corporate Bond Master
Portfolio"); International Equity
-3-
<PAGE> 352
Portfolio of Master Trust I ("International Equity Master Portfolio") and Asset
Allocation Portfolio ("Asset Allocation Master Portfolio") of Master Trust I,
which had identical investment objectives. On July 1, 1996, September 1, 1996,
September 1, 1996, and June 23, 1997, the National Municipal Bond Fund,
Corporate Bond Fund, International Equity Fund and Asset Allocation Fund,
respectively, withdrew their respective assets from their respective master
portfolios and invested them directly in securities.
The Company also offers other investment portfolios which are
described in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment
objective of the Fund to which it applies. Because the investment
characteristics of each Feeder Fund will correspond with its respective Master
Portfolio, the following is a discussion of the various investments and
techniques employed by each Master Portfolio. The following information
supplements and should be read in conjunction with the descriptions of the
investment objective and policies in the Prospectus for each Fund.
PORTFOLIO TRANSACTIONS
- ----------------------
The portfolio turnover rate described in each Prospectus is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities at the time of acquisition
were one year or less. Portfolio turnover may vary greatly from year to year as
well as within a particular year, and may also be affected by cash requirements
for redemptions of shares and by requirements which enable the Company to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. The portfolio turnover rate for
the Aggressive Growth Fund, U.S. Government Securities Fund and Capital Income
Fund may be particularly high.
For the fiscal years or periods indicated, the portfolio
turnover rates for the National Municipal Bond Fund, U.S. Government Securities
Fund, California Tax-Exempt Bond Fund, Capital Income Fund, Aggressive Growth
Fund, Asset Allocation Fund, International Equity Fund, Short-Term Government
Fund, Corporate Bond Fund, Intermediate Bond Master Portfolio and Blue Chip
Master Portfolio, were as follows:
-4-
<PAGE> 353
<TABLE>
<CAPTION>
==========================================================================================
Year Ended Year or Period Ended
February 29, 1996 February 28, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
National Municipal Bond Fund(1) 37% 12%
- ------------------------------------------------------------------------------------------
U.S. Government Securities Fund 137% 94%
- ------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund 57% 34%
- ------------------------------------------------------------------------------------------
Capital Income Fund 57% 124%
- ------------------------------------------------------------------------------------------
Aggressive Growth Fund 93% 99%
- ------------------------------------------------------------------------------------------
Asset Allocation Fund(2) 157% 116%
- ------------------------------------------------------------------------------------------
International Equity Fund(3) N/A 114%
- ------------------------------------------------------------------------------------------
Short Term Government Fund(4) N/A 81%
- ------------------------------------------------------------------------------------------
Corporate Bond Fund(5) 96% 59%
- ------------------------------------------------------------------------------------------
Intermediate Bond Master Portfolio 172% 83%
- ------------------------------------------------------------------------------------------
Blue Chip Master Portfolio 108% 91%
==========================================================================================
</TABLE>
- --------------------
(1) Until July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. Information contained
in the chart above includes portfolio turnover of the Municipal
Master Portfolio.
(2) Until June 23, 1997, the Asset Allocation Fund invested all of its
assets in the Asset Allocation Master Portfolio. Information contained
in the above chart relates to the Asset Allocation Master Portfolio.
(3) Until September 1, 1996, the International Equity Fund invested all of
its assets in the International Equity Master Portfolio. Information
contained in the chart above includes the portfolio turnover of the
International Equity Master Portfolio. Not annualized for period from
May 13, 1996 (inception date) to February 28, 1997.
(4) Not annualized for period from August 2, 1996 (inception date) to
February 28, 1997.
(5) Until September 1, 1996, the Corporate Bond Fund invested all of its
assets in the Corporate Bond Master Portfolio. Information contained
in the chart above includes portfolio turnover of the Corporate Bond
Master Portfolio.
The increased portfolio turnover rate for the Capital Income
Fund and International Equity Fund is a attributed to new issue activity.
Subject to the general control of the Company's Board of Directors, and the
Master Portfolios' Trustees, Bank of America National Trust and Savings
Association ("Bank of America" or the "investment adviser") is responsible for,
makes decisions with respect to, and places orders for all purchases and sales
of portfolio securities for each Portfolio. Wellington Management Company
("Wellington Management" or the "sub-adviser") serves as the International
Equity Fund's sub-adviser. References in this Statement of Additional
Information to Bank of America's action
-5-
<PAGE> 354
and responsibilities with respect to the International Equity Fund shall be
deemed to include Wellington Management unless the context clearly indicates
otherwise.
Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market, but the price includes
an undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of fixed income securities are
normally principal transactions without brokerage commissions.
For the fiscal years or periods indicated, the Aggressive
Growth Fund, Capital Income Fund, Blue Chip Master Portfolio, Asset Allocation
Fund, California Tax-Exempt Bond Fund, U.S. Government Securities Fund,
Intermediate Bond Master Portfolio, National Municipal Bond Fund, International
Equity Fund, and Short-Term Government Fund paid the following brokerage
commissions:
<TABLE>
<CAPTION>
========================================================================================================================
Year or Period Ended Year Ended Year Ended
February 28, 1997 February 29, 1996 February 28, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $225,515 $369,002 $631,200
- ------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $184,327 $ 95,126 $207,310
- ------------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $637,281 $428,667 $202,817
- ------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund+ $152,270 $175,960 $152,778
- ------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master $0 $0 $0
Portfolio
- ------------------------------------------------------------------------------------------------------------------------
National Municipal Bond $0 $0 $0
Fund++
- ------------------------------------------------------------------------------------------------------------------------
International Equity Fund+++ $78,268 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Short-Term Government
Fund++++ $0 N/A N/A
========================================================================================================================
</TABLE>
-6-
<PAGE> 355
- --------------------
+ Until June 23, 1997, the Asset Allocation Fund invested all of its
assets in the Asset Allocation Master Portfolio. Information contained
in the chart above relates to the Asset Allocation Master Portfolio.
++ Until July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. Information contained in
the chart above includes brokerage expenses of the Municipal Master
Portfolio.
+++ The International Equity Fund commenced operations on May 13, 1996.
Until September 1, 1996 the International Equity Fund invested all of
its assets in the International Equity Master Portfolio. Information
contained in the chart above includes brokerage commissions paid by the
International Equity Master Portfolio.
++++ The Short-Term Government Fund commenced operations on August 2, 1996.
During the fiscal period ended February 28, 1995, the fiscal
years ended February 29, 1996 and February 28, 1997 either the Corporate Bond
Master Portfolio, Corporate Bond Fund nor its predecessor fund paid any
brokerage commissions. Until September 1, 1996, the Corporate Bond Fund invested
all of its assets in the Corporate Bond Master Portfolio.
In executing portfolio transactions and selecting brokers or
dealers, it is the Portfolios' policy to seek the best overall terms available.
The Investment Advisory Agreements between the particular Company and Bank of
America and the Sub-Advisory Agreement with Wellington Management on behalf of
the International Equity Fund provide that, in assessing the best overall terms
available for any transaction, Bank of America or Wellington Management 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 and Sub-Advisory Agreements authorize Bank of America and
Wellington Management (with respect to the International Equity Fund), subject
to the approval of the particular Board, to cause a Portfolio to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America or Wellington Management to the particular
Company or Portfolio. Brokerage and research services may include: (1) advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities and the availability of securities or purchasers or sellers
of securities; and (2) analyses and reports concerning industries,
-7-
<PAGE> 356
securities, economic factors and trends, portfolio strategy and the performance
of accounts.
It is possible that certain of the brokerage and research
services received will primarily benefit one or more other investment companies
or other accounts for which investment discretion is exercised. Conversely, a
particular Company or any given Portfolio may be the primary beneficiary of the
brokerage or research services received as a result of portfolio transactions
effected for such other accounts or investment companies.
Brokerage and research services so received are in addition to
and not in lieu of services required to be performed by Bank of America or
Wellington Management and do not reduce the advisory fee payable to Bank of
America or Wellington Management. Such services may be useful to Bank of America
or Wellington Management in serving both the Companies, the Portfolios and other
clients and, conversely, services obtained by the placement of business of other
clients may be useful to Bank of America or Wellington Management in carrying
out the obligations to the Companies and the Portfolios. In connection with
the investment management services with respect to the Portfolios, Bank of
America or Wellington Management will not acquire certificates of deposit or
other securities issued by them or their affiliates, and will give no
preference to certificates of deposit or other securities issued by Service
Organizations. In addition, portfolio securities in general will be purchased
from and sold to affiliates of the Companies, the Portfolios, Bank of America,
Wellington Management the Distributor and their affiliates acting as principal,
underwriter, syndicate member, market-maker, dealer, broker or in any similar
capacity, provided such purchase, sale or dealing is permitted under the
Investment Company Act of 1940 (the "1940 Act") and the rules thereunder.
A Portfolio may participate, if and when practicable, in
bidding for the purchase of securities of the U.S. Government and its agencies
and instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Portfolio will
engage in this practice only when Bank of America or Wellington Management, in
their sole discretion subject to guidelines adopted by the particular Board,
believes such practice to be in the interest of the Portfolio.
To the extent permitted by law, Bank of America or Wellington
Management may aggregate the securities to be sold or purchased on behalf of the
Portfolios with those to be sold or purchased for other investment companies or
common trust funds in order to obtain best execution.
The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act or their
parents held by Pacific Horizon as of the close of its most recent fiscal year.
As of February 28, 1997:
-8-
<PAGE> 357
(a) the Treasury Fund held the following securities: Repurchase Agreement with
Dean Witter, Reynolds, Inc. in the principal amount of $125,000,000; and
Repurchase Agreement with Goldman Sachs & Co. in the principal amount of
$453,423,000; (b) the Government Fund held the following security: Repurchase
Agreement with Dean Witter Reynolds, Inc. in the principal amount of
$50,000,000; (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. commercial paper in the principal amount of $25,000,000; Merrill
Lynch & Co., Inc. corporate debt in the principal amount of $25,000,000;
Merrill Lynch & Co., Inc. weekly variable rate obligation in the principal
amount of $50,000,000; Merrill Lynch & Co., Inc. weekly 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-Monthly Variable Rate Obligation in the principal amount of
$25,000,000; Dean Witter Discover & Co. corporate obligation in the principal
amount of $15,000,000; Goldman Sachs Group L.P. master note in the principal
amount of $300,000,000; Dean Witter Discover and Co., commercial paper in the
principal amount of $25,000,000, Dean Witter Discover and Co., commercial paper
in the principal amount of $50,000,000; Morgan Stanley Group, Inc. master note
in the principal amount of $250,000,000, Bear Stearns Companies, Inc. monthly
variable rate obligation in the principal amount of $18,000,000; Bear Stearns
Companies, Inc. monthly variable rate note in the principal amount of
$25,000,000; (d) the Corporate Bond Fund held the following securities: Goldman
Sachs Group corporate obligation in the principal amount of $1,500,000; Lehman
Brothers corporate obligation in the principal amount of $1,000,000; Merrill
Lynch & Co., Inc. corporate debt obligation in the principal amount of
$1,500,000; (e) the Intermediate Bond Master Portfolio held the following
security: Paine Webber Group medium term note in the amount of $3,000,000 (f)
the Asset Allocation Master Portfolio held the following securities: Dean
Witter common stock in the amount of $2,701,600, Lehman Brothers corporate
obligation in the principal amount of $1,000,000; Morgan Stanley corporate
obligation in the principal amount of $3,800,000; Paine Webber Group medium
term note in the principal amount of $2,500,000; (g) the Capital Income Fund
held the following security: Merrill Lynch & Co., Inc. Structured Yield
Product Exchangeable for Stock in the amount of $3,575,000; (h) the Blue Chip
Master Portfolio held the following security: Dean Witter common stock in the
amount of $6,220,588.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear
Stearns Co., Inc., Morgan Stanley & Co. Incorporated, Shearson
Lehman Brothers, Inc., Dean Witter Reynolds, Inc., Paine Webber,
are considered to be regular brokers and dealers of the
Company.
-9-
<PAGE> 358
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT
- ------------------------------------------------------------
INFORMATION
- -----------
The following discussion supplements the descriptions of such
investments in the Prospectuses.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME
DEPOSITS. Except for the U.S. Government Securities Fund and Short-Term
Government Fund, certificates of deposit, bankers' acceptances and time deposits
are eligible investments for each Portfolio as described in the Funds'
Prospectuses, except that the National Municipal Bond Fund and California
Tax-Exempt Bond Fund may not purchase time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' Acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Certificates of Deposit and Bankers Acceptances
may only be purchased from domestic or foreign banks and financial institutions
having total assets at the time of purchase in excess of $2.5 billion (including
assets of both domestic and foreign branches). Time deposits are non-negotiable
deposits maintained at a banking institution for a specified period of time at a
specified interest rate. Obligations issued by the International Bank for
Reconstruction and Development, the Asian Development Bank or the Inter-American
Development Bank are not permissible investments for the Intermediate Bond and
Blue Chip Master Portfolios and Asset Allocation Fund.
Instruments issued by foreign banks or financial institutions
may be subject to investment risks that are different in some respects than the
risks associated with instruments issued by those U.S. domestic issuers. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which may
be made and interest rates which may be charged. In addition, the profitability
of the banking industry is dependent largely upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General economic conditions as well as
-11-
<PAGE> 359
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels of
reserves, limited in the amount which they can loan to a single borrower, and
subject to other regulations designed to promote financial soundness. However,
such laws and regulations do not necessarily apply to foreign bank obligations.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The investment policies
of the Portfolios (except the Short-Term Government Fund) permit investment in
commercial paper and short-term notes. Commercial paper consists of unsecured
promissory notes issued by corporations. Except as noted below with respect to
variable and floating rate instruments, issues of commercial paper and
short-term notes will normally have maturities of less than 9 months and fixed
rates of return, although such instruments may have maturities of up to one
year.
Commercial paper and short-term notes will consist of issues
rated at the time of purchase A-2 or higher by Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors Service,
Inc. ("Moody's"), or similarly rated by another nationally recognized
statistical rating organization ("NRSRO") in the case of purchases by each
Portfolio other than the Capital Income and U.S. Government Securities Funds,
and A-1 or better by S&P, Prime-1 by Moody's or similarly rated by another NRSRO
in the case of purchases by the Capital Income and U.S. Government Securities
Funds; or if unrated, will be determined by Bank of America or Wellington
Management to be of comparable quality under procedures established by the
particular Board.
OTHER INVESTMENT COMPANIES. In connection with the management
of their daily cash position, the Aggressive Growth Fund, Capital Income Fund,
Corporate Bond Fund, Asset Allocation Fund, Blue Chip Master Portfolio,
Intermediate Bond Master Portfolio, International Equity Fund and U.S.
Government Securities Fund may each invest in the securities of other
investment companies (including money market mutual funds advised by Bank of
America). Such Funds are permitted to invest up to 5% of the value of their
respective total assets in the securities of another investment company;
except that with respect to the investment in a money market mutual fund advised
by Bank of America, such Funds are permitted to invest the greater of 5% of
their respective net assets or $2.5 million. However, no more than 10% of such
Fund's total assets may be invested in the securities of other investment
companies in the aggregate. Securities of other investment companies will be
acquired by the Aggressive Growth Fund, Capital Income Fund,
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Corporate Bond Fund, Asset Allocation Fund, Blue Chip Master Portfolio,
Intermediate Bond Master Portfolio, International Equity Fund and U.S.
Government Securities Fund within the limits prescribed by the Investment
Company Act of 1940 and each Portfolio's applicable fundamental investment
limitations. As a shareholder of another investment company, a Fund would bear
along with other shareholders, its pro-rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that the Fund bears directly in connection
with its own operations. The Aggressive Growth Fund may also acquire shares of
closed-end investment companies, including companies that invest in foreign
issuers, but only in furtherance of its investment objective. The International
Equity Fund may acquire shares of open and closed-end investment companies.
The 1940 Act generally prohibits each Portfolio from investing
more than 5% of the value of its total assets in any one investment company, or
more than 10% of the value of its total assets in investment companies as a
group, and also restricts its investment in any investment company to 3% of the
voting securities of such investment company. In addition, no more than 10% of
the outstanding voting stock of any one investment company may be owned in the
aggregate by the Portfolios and any other investment company advised by the
investment adviser or sub-adviser.
REPURCHASE AGREEMENTS. Each Portfolio is permitted to enter
into repurchase agreements with respect to its portfolio securities. Pursuant to
such agreements, a Portfolio acquires securities from financial institutions
such as banks and broker-dealers which are deemed to be creditworthy subject to
the seller's agreement to repurchase and the agreement of the Portfolio to
resell such securities at a mutually agreed upon date and price. Although
securities subject to a repurchase agreement may bear maturities exceeding ten
years, the Aggressive Growth, California Tax-Exempt Bond, U.S. Government
Securities Corporate Bond, International Equity, and Capital Income Funds and
Blue Chip and the Intermediate Bond Master Portfolios intend to only enter into
repurchase agreements having maturities not exceeding 60 days. Repurchase
agreements maturing in more than seven days are considered illiquid investments
and investments in such repurchase agreements along with any other illiquid
securities will not exceed 10% of the value of the net assets of the Aggressive
Growth, California Tax-Exempt Bond, U.S. Government Securities, Capital Income
and Asset Allocation Funds or the Intermediate Bond and Blue Chip Master
Portfolios, or 15% of the net assets of the International Equity, National
Municipal Bond or Corporate Bond Funds. The Portfolios are not permitted to
enter into repurchase agreements with Bank of America, Wellington Management
or their affiliates, and will give no preference to repurchase agreements
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with Service Organizations. The repurchase price generally equals the price paid
by a Portfolio plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by a custodian or
sub-custodian of the Portfolio or in the Federal Reserve/Treasury Book-Entry
System. The seller under a repurchase agreement will be required to deliver
instruments the value of which is 102% of the repurchase price (excluding
accrued interest), provided that notwithstanding such requirement, the adviser
or sub-adviser shall require that the value of the collateral, after transaction
costs (including loss of interest) reasonably expected to be incurred on a
default, shall be equal to or greater than the resale price (including interest)
provided in the agreement. If the seller defaulted on its repurchase obligation,
a Portfolio would suffer a loss because of adverse market action or to the
extent that the proceeds from a sale of the underlying securities were less than
the repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the particular Portfolio's rights with respect to
such securities to be delayed or limited. Repurchase agreements are considered
to be loans by a Portfolio under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio is permitted to
make investments in U.S. Government obligations. Such obligations include
Treasury bills, certificates of indebtedness, notes and bonds, and issues of
such entities as the Government National Mortgage Association, Export-Import
Bank of the United States, Tennessee Valley Authority, Resolution Funding
Corporation, Farmers Home Administration, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land Banks,
Federal Housing Administration, Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, and the Student Loan Marketing Association.
Treasury bills have maturities of one year or less, Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
more than ten years. Some of these obligations, such as those of the Government
National Mortgage Association, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government sponsored instrumentalities if it is not obligated to do so
by law.
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VARIABLE AND FLOATING RATE INSTRUMENTS. As described in their
Prospectuses, the Aggressive Growth Fund, National Municipal Bond Fund,
California Tax-Exempt Bond Fund, Intermediate Bond Master Portfolio, Blue Chip
Master Portfolio, Asset Allocation Fund, Corporate Bond Fund and
International Equity Fund may acquire variable and floating rate instruments
including with respect to the Asset Allocation Fund, Blue Chip Master Portfolio
and Intermediate Bond Master Portfolio, master demand notes. The U.S.
Government Securities Fund may invest in variable rate GNMA certificates, which
are backed by pools of variable rate mortgages and also in GNMA REMICs. The
actual yield on variable and floating rate instruments varies not only as a
result of variations in the lives of the underlying securities, but also as a
result of changes in prevailing interest rates. Such instruments are frequently
not rated by credit rating agencies. However, in determining the
creditworthiness of unrated variable and floating rate instruments and their
eligibility for purchase by a Portfolio, Bank of America or Wellington
Management will consider the earning power, cash flow and other liquidity ratios
of the issuers of such instruments (which include financial, merchandising, bank
holding and other companies) and will continuously monitor their financial
condition. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by a Portfolio. The absence of
such an active secondary market could make it difficult to dispose of a variable
or floating rate instrument in the event the issuer of the instrument defaulted
on its payment obligation or during periods that the Portfolio is not entitled
to exercise its demand rights, and the Portfolio could, for these or other
reasons, suffer a loss to the extent of the default. Investments in illiquid
variable and floating rate instruments (instruments which are not payable upon
seven days' notice and do not have active trading markets) are subject to a 15%
of net assets limitation on illiquid securities (10% with respect to the Capital
Income and Asset Allocation Funds and Blue Chip Master Portfolio and
Intermediate Bond Master Portfolio). Variable and floating rate instruments
may be secured by bank letters of credit.
MUNICIPAL SECURITIES. The California Tax-Exempt Bond Fund and
National Municipal Bond Fund currently intend that under ordinary market
conditions 65% and 80% of their respective total assets will be invested in
Municipal Securities. This is not, however, a fundamental investment policy. As
a matter of fundamental policy, under normal market conditions at least 80% of
the California Tax-Exempt Bond Fund's total assets will be invested in
California Municipal Securities. The California Tax-Exempt Bond Fund's average
weighted maturity will vary in response to variations in comparative yields of
differing maturities of instruments, in accordance with such Fund's investment
objective. The Intermediate Bond Master Portfolio and
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Asset Allocation Fund may also invest in Municipal Securities. The two
principal classifications of Municipal Securities are "general obligation"
securities and "revenue" securities. General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue securities are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
service such as the user of the facility being financed. Private activity bonds
held by the Portfolios are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of such private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Municipal Securities are debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular federal income tax.
The Intermediate Bond Master Portfolio and Asset Allocation
Fund may also invest in "moral obligation" securities, which are normally issued
by special purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund, the restoration of which is a moral commitment
but not a legal obligation of the state or municipality which created the
issuer.
The California Tax-Exempt Bond Fund, National Municipal Bond
Fund, Intermediate Bond Master Portfolio and Asset Allocation Fund may
purchase short-term Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes and other forms of short-term tax-exempt loans. Such notes
are issued with a short-term maturity in anticipation of the receipt of tax
funds, the proceeds of bond placements or other revenues. Those Portfolios may
also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular
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offering, the maturity of the obligation and the rating of the issue. The
ratings of Moody's, S&P, Fitch Investors Service, Inc. ("Fitch") and Duff &
Phelps Credit Rating Co. ("D&P") represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and Municipal Securities with the
same maturity, interest rate and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Portfolio, an
issue of Municipal Securities may cease to be rated or its rating may be
reduced. The investment adviser will consider such an event in determining
whether a Portfolio should continue to hold the obligation.
An issuer's obligations under its Municipal Securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the federal Bankruptcy Code, and laws,
if any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. The power or ability of an issuer to meet
its obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities issued after August 15, 1986 (August 31, 1986 in the case of certain
bonds), the issuer must comply with certain rules formerly applicable only to
"industrial development bonds" which, if the issuer fails to observe them, could
cause interest on the Municipal Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of
Municipal Securities may be less available than about corporations, a class of
whose securities is registered under the Securities Exchange Act of 1934.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to federal
tax legislation passed in 1986, interest on certain private activity bonds must
be included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the Fund's Prospectus under "Tax
Information.") Proposals to further restrict or eliminate the tax benefits of
municipal securities, while pending or if enacted, might materially adversely
affect the availability of Municipal Securities for investment by the particular
Portfolio and the liquidity and value of the Portfolio. In such an event, the
particular
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Portfolio would re-evaluate its investment objective and policies and consider
changes in its structure or possible dissolution. Moreover, with respect to
Municipal Securities issued by the State of California, Pacific Horizon cannot
predict what legislation, if any, may be proposed in California.
STAND-BY COMMITMENTS. The California Tax-Exempt Bond Fund and
National Municipal Bond Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in their respective portfolios. Under a "stand-by
commitment," a dealer agrees to purchase from the particular Portfolio, at the
Portfolio's option, specified Municipal Securities at a specified price.
"Stand-by commitments" acquired by a Portfolio may also be referred to in this
Statement of Additional Information as "put" options.
The amount payable to the particular Portfolio upon its
exercise of a "stand-by commitment" is normally (i) the Portfolio's acquisition
cost of the Municipal Securities (excluding any accrued interest which the
Portfolio paid on their acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Portfolio
owned the securities, plus (ii) all interest accrued on the securities since the
last interest payment date during that period. A "stand-by commitment" may be
sold, transferred or assigned by the Portfolio only with the instrument
involved.
The Portfolios expect that "stand-by commitments" will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Portfolios may pay for a
"stand-by commitment" either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus reducing
the yield to maturity otherwise available for the same securities). The total
amount paid in either manner for outstanding "stand-by commitments" held by a
Portfolio will not exceed 1/2 of 1% of the value of its total assets calculated
immediately after each "stand-by commitment" is acquired.
Each Portfolio intends to obtain "stand-by commitments" only
from dealers, banks and broker-dealers which, in the investment adviser's
opinion, present minimal credit risks. A Portfolio's reliance upon the credit of
these dealers, banks and broker-dealers is secured by the value of the
underlying Municipal Securities that are subject to a commitment.
Each Portfolio would acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a "stand-by commitment"
would not affect the valuation or assumed maturity of the underlying Municipal
Securities, which would continue to be valued in accordance with
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the ordinary method of valuation employed by the Portfolio. "Stand-by
commitments" which would be acquired by a Portfolio would be valued at zero in
determining net asset value. Where a Portfolio paid any consideration directly
or indirectly for a "stand-by commitment," its cost would be reflected as
unrealized depreciation for the period during which the commitment was held by
the Portfolio.
CONVERTIBLE SECURITIES. The Capital Income Fund, Corporate
Bond Fund and International Equity Fund may invest in convertible securities.
Convertible securities entitle the holder to receive interest paid or accrued
on debt or the dividend paid on preferred stock until the convertible
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities for a Portfolio, the
investment adviser or sub-adviser will consider, among other factors, its
evaluation of the creditworthiness of the issuers of the securities; the
interest or dividend income generated by the securities; the potential for
capital appreciation of the securities and the underlying stocks; the prices of
the securities relative to other comparable securities and to the underlying
stocks; whether the securities are entitled to the benefits of sinking funds or
other protective conditions; diversification of the Portfolio as to issuers; and
whether the securities are rated by Moody's, S&P, D&P or Fitch and, if so, the
ratings assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates rise and increasing as interest rates decline, and
by the credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
stock. If the conversion value is low relative to the investment value, the
price of the convertible securities is governed principally by their investment
value. To the extent the market
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price of the underlying stock approaches or exceeds the conversion price, the
price of the convertible securities will be increasingly influenced by their
conversion value. In addition, convertible securities generally sell at a
premium over their conversion value determined by the extent to which investors
place value on the right to acquire the underlying stock while holding fixed
income securities.
The Portfolios may convert Convertible Securities during
periods when market conditions are unfavorable for their disposition or as a
result of developments such as the issuer's call or a decline in the market
liquidity for such Convertible Securities. The securities obtained upon the
conversion may be retained for temporary periods of not greater than two months
after conversion, and during such periods such securities will be considered to
be Convertible Securities for purposes of complying with this policy.
Conversions may also occur when necessary to permit orderly disposition of the
investment (for example, where a more substantial market exists for the
underlying security than for a relatively thinly traded Convertible Security) or
when a Convertible Security reaches maturity or has been called for redemption.
ASSET-BACKED AND MORTGAGE-RELATED SECURITIES. The
Short-Term Government Fund 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. The Corporate Bond Fund,
Intermediate Bond Master Portfolio, Asset Allocation Fund and U.S. Government
Securities Fund may invest in asset-backed securities, including mortgage-backed
securities representing an undivided ownership interest in a pool of mortgages,
such as certificates of GNMA and FHLMC. These certificates are in most
cases pass-through instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees. The average life of a mortgage-backed security varies with
the underlying mortgage instruments, which have maximum maturities of 40 years.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of prepayments,
mortgage refinancings or foreclosure. Mortgage prepayment rates are affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Such prepayments are passed through to the registered holder with the regular
monthly payments of principal and interest and have the effect of reducing
future payments.
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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 the GNMA include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and 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 the FNMA include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are
solely the obligations of the FNMA and are not backed by or entitled to the full
faith and credit of the United States, but are supported by the right of the
issuer to borrow from the Treasury. FNMA is a government-sponsored organization
owned, entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Bank, and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
The U.S. Government Securities Fund and Short-Term Government
Fund may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S. Government
agencies , 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.
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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 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
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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."
The Corporate Bond Fund, Asset Allocation Fund and
Intermediate Bond Master Portfolio may also invest in non-mortgage backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Non-mortgage backed securities may not be issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in the respective obligations only by filing a financing statement and
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by having the servicer of the obligations, which is usually the originator, take
custody thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most of the
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the cardholder.
The development of non-mortgage backed securities is at an
early stage compared to mortgage backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for mortgage
backed securities issued by certain private organizations and non-mortgage
backed securities is not as well developed as that for mortgage backed
securities guaranteed by government agencies or instrumentalities. Bank of
America intends to limit its purchases for the Corporate Bond Fund of mortgage
backed securities issued by certain private organizations and non-mortgage
backed securities to securities that are readily marketable at the time of
purchase.
ZERO COUPON SECURITIES. The California Tax-Exempt Bond Fund
and National Municipal Bond Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the purchase price and
their value at maturity.
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The discount varies, depending on the time remaining until
maturity or cash payment date, prevailing interests rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon and delayed interest securities are generally more volatile and more
likely to respond to changes in interest rates than the market prices of
securities having similar maturities and credit quality that pay interest
periodically. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on such security (other than tax-exempt original issue discount from a
zero coupon security) that accrues that year, even though the holder receives no
cash payments of interest during the year. Zero coupon securities are subject to
greater market value fluctuations from changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest (cash).
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, each Portfolio (except the Short-Term Government Fund) is
permitted to borrow funds for temporary purposes by entering into reverse
repurchase agreements with such financial institutions as banks and
broker-dealers in accordance with the investment limitations described therein.
Whenever a Fund or Portfolio enters into a reverse repurchase agreement, it will
place in a segregated account maintained with its custodian liquid assets such
as cash, U.S. Government securities or other liquid high grade securities
having a value equal to the repurchase price (including accrued interest), and
Bank of America or Wellington Management will subsequently continuously monitor
the account for maintenance of such equivalent value. Each Portfolio intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
OPTIONS TRADING. A Portfolio may, under certain circumstances
and in accordance with investment limitations described in its prospectus,
engage in options trading. Such options may relate to U.S. and foreign
securities or to various stock indices. In addition, a Portfolio may acquire
options relating to foreign currencies in order to hedge against changes in
exchange rates. Such options may be traded on U.S. exchanges, over-the-counter,
and on foreign exchanges to the extent permitted by law. The International
Equity Fund may also invest in futures for the purposes of adjusting country
exposure, hedging or income enhancement.
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Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Regardless of how much the market price
of the underlying security, index or currency increases or decreases, the option
buyer's risk is limited to the amount of the original premium paid for the
purchase of the option. However, options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. A listed call option for a particular
security or amount of currency gives the purchaser of the option the right to
buy from a clearing corporation, and a writer has the obligation to sell to the
clearing corporation the underlying security or currency amount at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security or currency. The premium paid to the writer is
in consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security or amount of currency at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security or currency. In contrast to an option on a
particular security, an option on a stock index provides the holder with the
right to make or receive a cash settlement upon exercise of the option. The
amount of this settlement will be equal to the difference between the closing
price of the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple. Unlisted options are not
subject to the protections afforded purchases of options listed by the Options
Clearing Corporation, which performs the obligations of its members who fail to
do so in connection with the purchase or sale of options. Furthermore, it is the
position of the staff of the SEC that over-the-counter options are illiquid. To
the extent that a Portfolio invests in options that are illiquid (including
over-the-counter options), such investment will be subject to the Portfolio's
limitations on illiquid securities.
A Portfolio will continue to receive interest or dividend
income on the securities underlying such puts until they are exercised by the
Portfolio. Any losses realized by a Portfolio in connection with its purchase of
put options will be limited to the premiums paid by the Portfolio for the
options plus any transaction costs. A gain or loss may be wholly or partially
offset by a change in the value of the underlying security which the Fund or
Portfolio owns.
In the case of a call option on a security, the option is
"covered" if a Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such
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amount as are held in a segregated account by its custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if a Portfolio maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if a
Portfolio holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Portfolio in cash or cash
equivalents in a segregated account with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for the
premium, the covered option writer gives up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to an
option, the covered option writer has no control over when it may be required to
sell its securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer.
If a Portfolio desires to sell a particular security it owns
on which it has written an option, the Portfolio will seek to effect a closing
purchase transaction prior to, or concurrently with, the sale of the security.
In order to close out a covered call option position, a Portfolio will enter
into a "closing purchase transaction" - the purchase of a call option on a
security or stock index with the same exercise price and expiration date as the
call option which it previously wrote on the same security or index.
When a Portfolio purchases a put or call option, the premium
paid by it is recorded as an asset of the Portfolio. When a Portfolio writes an
option, an amount equal to the net premium (the premium less the commission)
received by the Portfolio is included in the liability section of the statement
of assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to- market to reflect the current
value of the option purchased or written. The current value of the traded option
is the last sale price or, in the absence of a sale, the average of the closing
bid and asked prices. If an option purchased by a Portfolio expires unexercised,
the Portfolio realizes a loss equal to the premium paid. If a Fund enters into a
closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by it on the closing transaction is more
than the premium paid to purchase the option, or a loss if it is
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less. Moreover, because increases in the market price of an option will
generally reflect (although not necessarily in direct proportion) increases in
the market price of the underlying security any loss resulting from a closing
purchase transaction is likely to be offset in whole or in part by appreciation
of the underlying security if such security is owned by the Portfolio. If an
option written by a Portfolio expires on the stipulated expiration date or if
the Portfolio enters into a closing purchase transaction, it will realize a gain
(or loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option written by a Portfolio is exercised, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities, currencies and indices. For example,
there are significant differences between the securities, currencies and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a liquid
secondary market for particular options, whether traded over-the-counter or on a
national securities exchange ("Exchange") may be absent for reasons which
include the following: there may be insufficient trading interest in certain
options; restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities; unusual or unforeseen circumstances may interrupt normal
operations on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well- conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.
FUTURES. The Portfolios may engage in futures contracts. The
International Equity Fund may also invest in futures for the purposes of
adjusting country exposure, hedging or income enhancement. A futures contract is
a bilateral
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agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the value of a specified obligation or stock index (which assigns relative
values to the common stocks included in the index) at the close of the last
trading day of the contract and the price at which the futures contract is
originally struck. No physical delivery of the underlying securities is normally
made. A Portfolio may not purchase or sell futures contracts and purchase
related options unless immediately after any such transaction the aggregate
initial margin that is required to be posted by that Portfolio under the rules
of the exchange on which the futures contract (or futures option) is traded,
plus any premiums paid by the Portfolio on its open futures options positions,
does not exceed 5% of the Portfolio's total assets, after taking into account
any unrealized profits and losses on the Portfolio's open contracts and
excluding the amount that a futures option is "in-the-money" at the time of
purchase. An option to buy a futures contract is "in-the-money" if the then
current purchase price of the contract that is subject to the option is less
than the exercise or strike price; an option to sell a futures contract is
"in-the-money" if the exercise or strike price exceeds the then current purchase
price of the contract that is the subject of the option.
Successful use of futures contracts by a Portfolio is subject
to Bank of America's or Wellington Management's ability to predict correctly
movements in the direction of the stock market or interest rates. There are
several risks in connection with the use of futures contracts by a Portfolio as
a hedging 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, a
Portfolio would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the futures contract. If the
price of the futures contract moves more than the price of the hedged
securities, a Portfolio involved will experience either a loss or gain on the
futures contract which will not be completely offset by movements in the price
of the securities which are the subject of the hedge.
It is also possible that, where a Portfolio has sold futures
contracts to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in a Portfolio may decline. If this
occurred, a Portfolio would
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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 or Wellington
Management may still not result in a successful hedging transaction over a short
time frame.
Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures
contracts. Although the Portfolios intend to purchase or sell futures contracts
only on exchanges or boards of trade where there appear to be active secondary
markets, there is no assurance that a liquid secondary market on any exchange or
board of trade will exist for any particular contract or at any particular time.
In such event, it may not be possible to close a futures investment position,
and in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin. The liquidity of a
secondary market in a futures contract may in addition be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which limit
the amount of fluctuation in a futures contract price during a single trading
day. Once the daily limit has been reached in the contract, no trades may be
entered into at a price beyond the limit, thus preventing the liquidation of
open futures positions.
For additional information concerning Futures and options
thereon, please see Appendix B to this Statement of Additional Information.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call
options on a futures contract will give a Portfolio the right (but not the
obligation), for a specified price, to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Portfolio obtains the benefit
of the futures position if prices move in a favorable direction but limits its
risk of loss in the event of an unfavorable price movement to the loss of the
premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Portfolio's assets. By writing a
call option, a Portfolio
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becomes obligated, in exchange for the premium, to sell a futures contract,
which may have a value higher than the exercise price. Conversely, the writing
of a put option on a futures contract generates a premium, which may partially
offset an increase in the price of securities that the Portfolio intends to
purchase. However, the Portfolio becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Portfolio in writing options on futures is potentially unlimited
and may exceed the amount of the premium received. The Portfolio will incur
transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on the same
series. There is no guarantee that such closing transactions can be effected. A
Portfolio's ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
INTEREST RATE AND CURRENCY SWAPS. Inasmuch as interest rate
and currency swaps are entered into for hedging purposes or are offset by a
segregated account as described below, the Corporate Bond Fund and Bank of
America believe that swaps do not constitute senior securities as defined in the
1940 Act and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions. The net amount of the excess, if any, of the Corporate
Bond Fund's obligations over its entitlements with respect to each interest
rate or currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (i.e., securities rated in one of the top
three ratings categories by Moody's or Standard & Poor's), or, if unrated,
deemed by Bank of America to be of comparable credit quality, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by the Fund's custodian. The Corporate Bond
Fund will not enter into any interest rate or currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by Bank of America. If there
were a default by the other party to such a transaction, the Corporate Bond
Fund would have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standard swap documentation. As a result, the swap market
has become relatively liquid in comparison with the markets for other similar
instruments which are traded in the interbank market.
FOREIGN INVESTMENTS. In considering whether to invest
in the securities of a foreign company, Bank of America or
Wellington Management considers such factors as the
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characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located.
The Corporate Bond Fund, Intermediate Bond Master Portfolio,
Asset Allocation Fund and International Equity Fund may invest in securities
of foreign issuers that may or may not be publicly traded in the United States.
The Aggressive Growth Fund may invest up to 20% of its total assets, either
directly, or indirectly through investments in American Depositary Receipts
("ADRs") and closed-end investment companies, in securities issued by foreign
companies wherever organized. The Capital Income Fund may invest up to 15% of
its total assets in Eurodollar Convertible Securities that are convertible into
or exchangeable for foreign equity securities represented by listed ADRs.
Interest and dividends on such Eurodollar securities are payable in U.S. dollars
outside of the United States.
ADRs are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars;
the underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. The extent to which a Portfolio will be invested in foreign
companies and ADRs will fluctuate from time to time within the limits stated in
the Prospectuses depending on the investment adviser's or sub- adviser's
assessment of prevailing market, economic and other conditions.
The International Equity Fund may purchase debt obligations
issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their agencies,
authorities or instrumentalities. The International Equity Fund and the
Corporate Bond Fund may purchase debt obligations issued or guaranteed by
supranational entities organized or supported by several national governments,
such as the International Bank for Reconstruction and Development (the "World
Bank"), the Inter- American Development Bank, the Asian Development Bank and the
European Investment Bank. The International Equity Fund also may purchase debt
obligations of foreign corporations or financial institutions, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers),
Samurai bonds (yen-denominated bonds sold in Japan by non-Japanese issuers and
Euro bonds (bonds not issued in the country (and possibly currency of the
country) of the issuer). The
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International Equity Fund's investments will be allocated among securities
denominated in the currencies of a number of foreign countries and, within each
such country, among different types of debt securities. The percentage of assets
invested in securities of a particular country or denominated in a particular
currency will vary in accordance with Bank of America's or Wellington
Management's assessment of the country's gross domestic product, purchasing
power parity and market capitalization and the relationship of a country's
currency to the United States dollar. Fundamental economic strength, credit
quality and interest rate trends will be the principal factors considered by
Bank of America or Wellington Management's in determining whether to increase or
decrease the emphasis placed upon a particular type of security within the
International Equity Fund.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Portfolios endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of a Portfolio is uninvested
and no return is earned thereon. The inability of the Portfolios to make
intended security purchases due to settlement problems could cause a Portfolio
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolios due to subsequent declines in value of the portfolio securities, or,
if a Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth or
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Investments in foreign securities involve certain inherent
risks, such as political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
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corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
Foreign brokerage commissions and custodian fees are generally higher than in
the United States. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
BONDS OF SUPRANATIONAL ENTITIES. The Corporate Bond Fund and
International Equity Fund may invest in bonds of supranational entities. A
supranational entity is an entity established or financially supported by the
national governments of one or more countries to promote reconstruction or
development. Examples of supranational entities include, among others, the World
Bank, the European Economic Community, the European Coal and Steel Community,
the European Investment Bank, the Inter-American Development Bank, the
Export-Import Bank and the Asian Development Bank. The risks associated with
investments in foreign issuers are described above under "Foreign Investments."
Obligations issued by the International Bank for Reconstruction and Development,
the Asian Development Bank or the Inter-American Development Bank are not
permissible investments for the Asset Allocation, Blue Chip and Intermediate
Bond Master Portfolios.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. All Portfolios may agree to purchase securities on a "when-issued,"
and "forward commitment" basis. All Portfolios except for the Asset Allocation
Fund, Intermediate Bond Master Portfolio, and Blue Chip Master Portfolio may
agree to purchase securities on a "delayed settlement" basis. When a Portfolio
agrees to purchase securities on a "when-issued," "forward commitment" or
"delayed settlement" basis, its custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, a Portfolio may be required subsequently
to place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the commitment. It may be
expected that the net assets of a Portfolio will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. The Portfolios do not intend to engage in these
transactions for speculative purposes but primarily in order to hedge against
anticipated changes in interest rates. Because a Fund will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described, its liquidity and the ability of the investment adviser or
sub-adviser to manage it may be affected in the event
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the forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 25% of the value of a Fund's assets.
A Portfolio will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, forward commitment
and delayed settlement transactions, it relies on the other party to consummate
the trade. Failure of such party to do so may result in the Portfolio's
incurring a loss or missing an opportunity to obtain a price considered to be
advantageous.
The market value of the securities underlying a when- issued
purchase, forward commitment to purchase securities, or a delayed settlement and
any subsequent fluctuations in their market value is taken into account when
determining the market value of a Portfolio starting on the day the Portfolio
agrees to purchase the securities. A Portfolio does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on
the settlement date.
SECURITIES LENDING. The Aggressive Growth, Capital Income,
U.S. Government Securities , Corporate Bond, Asset Allocation and International
Equity Funds and the Blue Chip Master Portfolio may lend securities as
described in their Prospectuses. Such loans will be secured by cash or
securities of the U.S. Government and its agencies and instrumentalities, and
additionally in the case of the Aggressive Growth Fund by an irrevocable letter
of credit issued by a U.S. commercial bank that is a member of the Federal
Reserve System or the Federal Deposit Insurance Corporation and has total assets
in the excess of $1.5 billion. The collateral must be at all times equal to at
least the market value of the securities loaned and is "marked to market" daily.
The Portfolio will continue to receive interest or dividends on the securities
it loans, and will also earn interest on the investment of any cash collateral.
In the case of the Capital Income and U.S. Government Securities Funds, cash
collateral may be invested in short-term U.S. Government securities, and in the
case of the Aggressive Growth, International Equity and Corporate Bond
Funds, cash collateral may be invested in short-term U.S. Government securities,
certificates of deposit, other high-grade, short-term obligations or
interest-bearing cash equivalents. Additionally, the International Equity Fund
may also invest cash collateral
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in U.S. Treasury notes. Although voting rights, or rights to consent, attendant
to securities loaned pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a fund if a material
event affecting the investment is to occur.
ILLIQUID SECURITIES. It is possible that unregistered
securities purchased by a Non-Feeder Fund, in reliance upon Rule 144A under
the Securities Act of 1933 (the "1933 Act") could have the effect of increasing
the level of such Portfolio's illiquidity to the extent that qualified
institutional buyers become, for a period, uninterested in purchasing these
securities.
ADDITIONAL INFORMATION - CORPORATE BOND FUND, CAPITAL INCOME
FUND, NATIONAL MUNICIPAL BOND FUND AND CALIFORNIA TAX-EXEMPT BOND
FUND
In general, investments in high yielding fixed-income
securities are subject to a significant risk of a change in the credit rating or
financial condition of the issuing entity. Investments in high yielding
fixed-income securities of medium or lower quality are also likely to be subject
to greater market fluctuation and to greater risk of loss of income and
principal due to default than investments of higher rated fixed-income
securities. Such high yielding securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities, which react more to fluctuations in the general level of interest
rates. The Fund seeks to reduce risk to the investor by diversification, credit
analysis and attention to current developments in trends of both the economy and
financial markets. However, while diversification reduces the effect on the Fund
of any single investment, it does not reduce the overall risk of investing in
lower rated securities.
In seeking to attain the investment objective of the Fund, the
investment adviser may consider both the relative risks and potential returns of
higher-rated and lower-rated securities. As a result, the Fund may hold
higher-rated fixed-income securities when the differential in return between
lower-rated and higher-rated securities narrows and the investment adviser
believes that the risk of loss of income and principal may be substantially
reduced with only a relatively small reduction in potential capital appreciation
and yield. The relative proportions of the types of securities in the Fund may
vary from time to time according to the prevailing and projected market and
economic conditions and other factors.
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ADDITIONAL INFORMATION - AGGRESSIVE GROWTH FUND
The selection of investments for the Aggressive Growth Fund is
the result of a continuous study of trends in industries and companies, earning
power, growth features and other investment criteria. Fund holdings will consist
primarily of common stocks of companies that the investment adviser expects will
experience above-average growth in earnings and price. Most of these companies
will be smaller-capitalized organizations that have limited product lines,
markets and financial resources and are dependent upon a limited management
group. Examples of possible investments include emerging growth companies
employing new technology, initial public offerings of companies offering high
growth potential, or other corporations offering good potential for high growth
in market value. The securities of smaller companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects. The Aggressive Growth Fund's net asset value per share is subject to
rapid substantial fluctuation because greater risk is assumed in order to seek
maximum growth.
Securities owned by the Aggressive Growth Fund may be traded
only in the over-the-counter market or on a regional securities exchange, may be
listed only in the quotation service commonly known as the "pink sheets," and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Aggressive Growth Fund
of portfolio securities, to meet redemptions or otherwise, may require the Fund
to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
CUSTODIAL RECEIPTS AND PARTICIPATION INTEREST. Securities
acquired by the California Tax-Exempt Bond Fund and National Municipal Bond Fund
may be in the form of custodial receipts evidencing rights to receive a specific
future interest payment, principal payment or both on certain Municipal
Securities. Such obligations are held in custody by a bank on behalf of holders
of the receipts. These custodial receipts are known by various names, including
"Municipal Receipts", "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATs") and "Municipal Zero- Coupon Receipts." Participation
interests that the California Tax-Exempt Bond Fund and National Municipal Bond
Fund and the Corporate Bond Master Portfolio may acquire give the Portfolios an
undivided interest in the security or securities involved. Participation
interests may have fixed, floating or variable rates of interest, and will have
remaining maturities of thirteen months or less as determined in accordance with
the regulations of the SEC (although the securities held by the issuer may have
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longer maturities). If a participation interest in unrated, the investment
adviser will have determined that the interest is of comparable quality to those
instruments in which each Portfolio may invest pursuant to guidelines approved
by the particular Board. For certain participation interests, each Portfolio
will have the right to demand payment, on not more than 30 days' notice, for all
or any part of its participation interest, plus accrued interest. As to these
instruments, each Portfolio intends to exercise its right to demand payment as
needed to provide liquidity, to maintain or improve the quality of its
investment portfolio or upon a default (if permitted under the terms of the
instrument).
ADDITIONAL INFORMATION - ALL FUNDS
- ----------------------------------
The investment adviser's or sub-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 Portfolio. The Portfolios may also invest in
securities, interests or obligations of companies or entities which have a
deposit, loan, commercial banking or other business relationship with Bank of
America or any of its affiliates (including outstanding loans to such issuers
which may be repaid in whole or in part with the proceeds of securities
purchased by a Portfolio).
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL
- -------------------------------------------------------
SECURITIES
- ----------
This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company has no reason to believe
that the information summarized herein is not correct in all material respects,
this information has not been independently verified for accuracy or
thoroughness by the Company. Rather, the information presented herein has been
culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California, available as of the date of this Statement of Additional
Information. Further, the estimates and projections presented herein should not
be construed as statements of fact. They are based upon assumptions which may be
affected by numerous factors and there can be no assurance that target levels
will be achieved. While the Company has not independently verified such
information, it has no reason to believe that such information is not correct in
all material respects.
ECONOMIC FACTORS
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FISCAL YEARS PRIOR TO 1996-97. By the close of the
1989-90 Fiscal Year, California's revenues had fallen below
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projections so that the State's budget reserve, the Special Fund for Economic
Uncertainties (the "Special Fund"), was fully depleted by June 30, 1990. A
recession which had begun in mid- 1990, combined with higher health and welfare
costs driven by the State's rapid population growth, adversely affected General
Fund revenues and raised expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted
a period of budget imbalance . Beginning with the 1990-91 Fiscal Year and for
several years thereafter, the budget required multi-billion dollar actions to
bring projected revenues and expenditures into balance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund --approaching
$2.8 billion at its peak on June 30, 1993.
By the 1993-94 Fiscal Year, the accumulated deficit was too
large to be prudently retired in one year and a two- year program was
implemented . This program used revenue anticipation warrants to carry a
portion of the deficit over to the end of the fiscal year.
The 1994-95 Budget Act projected General Fund revenues and
transfers of $41.9 billion. Expenditures were projected to be $40.9 billion --
an increase of $1.6 billion over the prior year. As a result of the improving
economy, however, the fiscal year ultimately produced revenues and transfers of
$42.7 billion which more than offset expenditures of $42.0 billion and thereby
reduced the accumulated budget deficit.
With strengthening revenues and reduced caseload growth
driven by an improving economy, the State entered the 1995-96 Fiscal Year budget
negotiations with the smallest nominal "budget gap" to be closed in many years.
The 1995-96 Budget Act projected General Fund revenues and transfers of $44.1
billion, a 3.5 percent increase from the prior year, and expenditures were
budgeted at $43.4 billion. In addition, the Department of Finance projected that
after repaying the last of the carryover budget deficit , there would be a
positive balance of $28 million in the budget reserve as of June 30, 1996.
1996-97 FISCAL YEAR.
--------------------
The 1996-97 Governor's Budget, released January 10, 1996,
projected General Fund revenues and transfers of $45.6 billion, a 1.3%
increase over 1995-96. The Governor's budget proposed two major initiatives, a
15% personal and corporate income tax cuts and a revision of the trial court
funding program, which would have the effect of reducing General Fund revenues.
The Governor's Budget proposed General Fund expenditures of $45.2 billion. The
Governor's Budget also
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proposed Special Fund revenues equal to expenditures, at a level
of $13.3 billion.
The May Revision of the Governor's Budget, released on May 21,
1996 ("The May Revision"), updated revenue estimates for the 1996-97 Fiscal
Year, reflecting stronger economic activity in the State and thus greater
revenue growth. The revised estimate was for $47.1 billion of revenues, still
assuming the Governor's tax cut would be enacted, and $46.5 billion of
expenditures.
1996-97 Budget Act
------------------
The 1996-97 Budget Act was signed by the Governor on July 15,
1996, along with various implementing bills. The Governor vetoed about $82
million of appropriations (both General Fund and Special Fund). With the signing
of the Budget Act, the State implemented its regular cash flow borrowing program
with the issuance of $3.0 billion of Revenue Anticipation Notes to mature on
June 30, 1997. The Budget Act appropriates a budget reserve in the Special Fund
of $305 million, as of June 30, 1997. The Department of Finance projects that,
on June 30, 1997, the State's available borrowable (cash) resources will be $2.9
billion, after payment of all obligations due by that date, so that no
cross-fiscal year borrowing is anticipated.
Revenues - The Legislature rejected the Governor's proposed
15% cut in personal income taxes (to be phased in over three years), approved a
5% cut in bank and corporation taxes, to be effective for income years
commencing on January 1, 1997. As a result of the Legislature's failure to enact
the personal income tax cut, revenues for the Fiscal Year are estimated to be
$550 million higher than projected in the May Revision, and are now estimated to
total $47.643 billion, a 3.3 percent increase over the final estimated 1995-96
revenues. Special Fund revenues are estimated to be $13.3 billion.
Expenditures - The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures. Special Fund expenditures are budgeted at
$12.6 billion.
The following are principal features of the 1996-97 Budget
Act:
1. Proposition 98 funding for schools and community college
districts increased by almost $1.6 billion (General Fund) and $1.65 billion
above revised 1995-96 levels. Almost half of this money was budgeted to fund
class-size reductions in kindergarten and grades 1-3. Also, for the second
consecutive year, the full cost of living allowance (3.2 percent) was funded.
Proposition 98 increases have brought K-12 expenditures to almost $4,800 per
pupil (also called ADA, or Average Daily Attendance),
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an almost 15% increase over the level prevailing during the recession years. Out
of this $1.6 billion total community colleges will receive an increase in
funding of $157 million for 1996-97.
Due to higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for community
colleges) was appropriated and retroactively applied towards the 1995-96
Proposition 98 guarantee, bringing K-12 expenditures in that year to over $4,600
per ADA. Similar retroactive increases totaling $230 million, based on final
figures on revenues and State population growth, were made to the 1991-92 and
the 1994-95 Proposition 98 guarantees, most of which was allocated to each
school site.
2. The Budget Act assumed savings of approximately $660
million in health and welfare costs which required changes in federal law,
including federal welfare reform. The Budget Act further assumed federal law
changes in August 1996 which would allow welfare cash grant levels to be reduced
by October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings. See "Federal Welfare Reform".
3. A 4.9 percent increase in funding for the University of
California ($130 million General Fund) and the California State University
system ($101 million General Fund), with no increases in student fees.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund. (For purposes of cash
flow projections, the Department of Finance expects $540 million of this amount
to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for competitive
grants to local governments for programs to combat juvenile crime.
The Budget Act did not contain any tax increases. As noted,
there was a reduction in bank and corporate taxes. In addition, the Legislature
approved another one-year suspension of the Renters Tax Credit, saving $520
million in expenditures.
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Federal Welfare Reform - Following enactment of the 1996-97
Budget Act, Congress passed and the President signed (on August 22, 1996) the
Personal Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the
"Law") making a fundamental reform of the current welfare system. Among many
provisions, the Law includes: (i) conversion of Aid to Families with Dependent
Children from an entitlement program to a block grant titled Temporary
Assistance for Needy Families (TANF), with lifetime time limits on TANF
recipients, work requirements and other changes; (ii) provisions denying certain
federal welfare and public benefits to legal noncitizens, allowing states to
elect to deny additional benefits (including TANF) to legal noncitizens, and
generally denying almost all benefits to illegal immigrants; and (iii) changes
in the Food Stamp program, including reducing maximum benefits and imposing work
requirements.
The Law requires states to implement the new TANF program not
later than July 1, 1997 and provides California approximately $3.7 billion in
block grant funds for FY 1996-97. States are allowed to implement TANF as soon
as possible and will receive a prorated block grant effective the date of
application. The California State Plan is to be submitted in time to allow grant
reductions to be implemented effective January 1, 1997 (allowing $92 million of
the $163 million referred to in paragraph 2 above to be saved) and to allow the
State to capture approximately $267 million in additional federal block grant
funds over the currently budgeted level. None of the other federal changes
needed to achieve the balance of the $660 million cost savings were enacted.
Thus in lieu of the $660 million savings initially assumed to be saved, it is
now projected that savings will total approximately $360 million.
A preliminary analysis of the Law by the Legislative Analyst's
Office indicated that an overall assessment of how these changes will affect the
State's General Fund will not be known for some time, and will depend on how the
State implements the Law. There are many choices including how quickly the State
implements the Law; the degree to which the State elects to make up for cuts in
federal aid; provide more aid to counties, or cut some of its own existing
programs for noncitizens; and the State's ability to avoid certain penalties
written into the Law.
1997-98 FISCAL YEAR PROPOSED BUDGET.
------------------------------------
On January 9, 1997, the Governor released his proposed budget
for the 1997-98 Fiscal Year (the "Governor's Budget"). The Governor's Budget
projects General Fund revenues and transfers in 1997-98 of $50.7 billion, a 4.6%
increase from revised 1996-97 figures. The Governor proposes expenditures of
$50.3 billion, a 3.9% increase from 1996-97. The Governor's Budget projects a
balance in the SFEU of $553 million on June 30, 1998. The Governor's Budget also
anticipates about $3 billion of
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external borrowing for cash flow purposes during the year, with no requirement
for cross-fiscal year borrowing.
Among the major initiatives and features of the Governor's
Budget are the following:
1. A proposed 10% cut in the Bank and Corporation Tax
rate, to be phased in over two years.
2. Proposition 98 funding for K-14 schools will be increased
again, as a result of stronger revenues. Per-pupil funding for K-12 schools will
reach $5,010, compared to $4,220 as recently as the 1993-94 Fiscal Year. Part of
the new funding is proposed to be dedicated to the completion of the current
program to reduce class size to 20 pupils in lower elementary grades, and to
expand the program by one grade, so that it will cover K-3rd grade.
3. Funding for higher education will be increased consistent
with a four-year "compact" established in 1995-96. There is not projected to be
any increase in student fees at any of the three levels of the State higher
education system.
4. The 1997-98 proposed Governor's Budget assumes
approximately $500 million in savings contingent upon federal action. The Budget
assumes that federal law will be enacted to remove the maintenance-of-effect
requirement for Supplemental Security Income (SSI) payments, thereby enabling
the state to reduce grant levels pursuant to previously enacted state law ($279
million). The Budget also assumes the federal government will fund $216 million
in costs of health care for illegal immigrants.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange
County, California and its Investment Pool (the "Pool") filed for bankruptcy
under Chapter 9 of the United States Bankruptcy Code. The subsequent
restructuring led to the sale of substantially all of the Pool's portfolio and
resulted in losses estimated to be approximately $1.7 billion (or approximately
22% of amounts deposited by the Pool investors). Approximately 187 California
public entities -- substantially all of which are public agencies within the
county -- had various bonds, notes or other forms of indebtedness outstanding.
In some instances the proceeds of such indebtedness were invested in the Pool.
In April, 1996, the County emerged from bankruptcy after
closing on a $900 million recovery bond transaction. At that time, the County
and its financial advisors stated that the County had emerged from the
bankruptcy without any structural fiscal problems and assured that the County
would not slip back into bankruptcy. However, for many of the cities, schools
and special districts that lost money in the County portfolio,
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repayment remains contingent on the outcome of litigation which is pending
against investment firms and other finance professionals. Thus, it is impossible
to determine the ultimate impact of the bankruptcy and its aftermath on these
various agencies and their claims.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.
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Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could produce the adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain Debt Obligations in the
Portfolio may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's general fund will be distributed in the future to
counties, cities and their various entities is unclear.
HEALTH CARE LEGISLATION. Certain Debt Obligations in the
Portfolio may be obligations which are payable solely from the revenues of
health care institutions. Certain provisions under California law may adversely
affect these revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation. California
law now provides that the State of California shall selectively contract with
hospitals to provide acute inpatient services to Medi-Cal patients. Medi-Cal
contracts currently apply only to acute inpatient services. Generally, such
selective contracting is made on a flat per diem payment basis for all services
to Medi-Cal beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions or limitations
may be imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal
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contract with the State of California will be paid for non-emergency acute
inpatient services rendered to Medi-Cal beneficiaries. The State may also
terminate these contracts without notice under certain circumstances and is
obligated to make contractual payments only to the extent the California
legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured Debt Obligations, the State Treasurer
will issue debentures payable out of a reserve fund established under the
insurance program or will pay principal and interest on an unaccelerated basis
from unappropriated State funds. At the request of the Office of Statewide
Health Planning and Development, Arthur D. Little, Inc. prepared a study in
December 1983, to evaluate the adequacy of the reserve fund established under
the insurance program and based on certain formulations and assumptions found
the reserve fund substantially underfunded. In September of 1986, Arthur D.
Little, Inc. prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method. In March of 1990, Arthur D. Little, Inc. prepared a further review of
the study and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
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MORTGAGES AND DEEDS. Certain Debt Obligations in the
Portfolio may be obligations which are secured in whole or in part by a mortgage
or deed of trust on real property. California has five principal statutory
provisions which limit the remedies of a creditor secured by a mortgage or deed
of trust. Two statutes limit the creditor's right to obtain a deficiency
judgment, one limitation being based on the method of foreclosure and the other
on the type of debt secured. Under the former, a deficiency judgment is barred
when the foreclosure is accomplished by means of a nonjudicial trustee's sale.
Under the latter, a deficiency judgment is barred when the foreclosed mortgage
or deed of trust secures certain purchase money obligations. Another California
statute, commonly known as the "one form of action" rule, requires creditors
secured by real property to exhaust their real property security by foreclosure
before bringing a personal action against the debtor. The fourth statutory
provision limits any deficiency judgment obtained by a creditor secured by real
property following a judicial sale of such property to the excess of the
outstanding debt over the fair value of the property at the time of the sale,
thus preventing the creditor from obtaining a large deficiency judgment against
the debtor as the result of low bids at a judicial sale. The fifth statutory
provision gives the debtor the right to redeem the real property from any
judicial foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute
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"state action," and could hold that the private-right-of-sale proceedings
violate the due process requirements of the Federal or State Constitutions,
consequently preventing an issuer from using the nonjudicial foreclosure remedy
described above.
Certain Debt Obligations in the Portfolio may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
PROPOSITION 13. Certain of the Debt Obligations may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, California voters approved an
amendment to the California Constitution known as Proposition 13, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA was to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad
valorem tax on real property to 1% of full cash value to be collected by the
counties and apportioned according to law. The 1% limitation does not apply to
ad valorem taxes or special assessments to pay the interest and redemption
charges on any bonded indebtedness for the acquisition or improvement of real
property approved by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under 'full cash value' or, thereafter, the appraised value of real property
when
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purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement
Article XIIIA provides that notwithstanding any other law, local agencies may
not levy any ad valorem property tax except to pay debt service on indebtedness
approved by the voters prior to July 1, 1978, and that each county will levy the
maximum tax permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be adjusted annually to reflect changes in consumer prices,
population, and certain services provided by these entities. Article XIIIB also
provides that if these entities' revenues in any year exceed the amounts
permitted to be spent, the excess is to be returned by revising tax rates or fee
schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment and
statute called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would
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receive the amount appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an additional small
adjustment factor. If Test 3 is used in any year, the difference between Test 3
and Test 2 would become a "credit" to schools which would be the basis of
payments in future years when per capita General Fund revenue growth exceeds per
capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote
of both houses, with the Governor's concurrence -- to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article XIII
B limit to K-14 schools.
During the recession years of the early 1990s, General Fund
revenues for several years were less than originally projected, so that the
original Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, CALIFORNIA TEACHERS'
ASSOCIATION V. GOULD, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school funding will not be in jeopardy over repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1 -- on the June
5, 1990 ballot as Proposition 111 -- was approved by the voters and took effect
on July 1, 1990. Among a number of important provisions, Proposition 111
recalculated spending limits for the State and for local governments, allowed
greater annual increases in the limits, allowed the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduced the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removed the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts in
the base calculation for the next year, limited the amount of State tax revenue
over the limit which would be transferred to
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school districts and community college districts, and exempted increased
gasoline taxes and truck weight fees from the State appropriations limit.
Additionally, Proposition 111 exempted from the State appropriations limit
funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This
initiative provided the following:
1. Requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental
entity;
2. Requires that any special tax (defined as taxes levied for
other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the voters
within that jurisdiction;
3. Restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by Article
XIIIA;
5. Prohibits the imposition of transaction taxes and sales
taxes on the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the electorate
within two years of the adoption of the initiative;
7. Requires that, in the event a local government fails to
comply with the provisions of this measure, a reduction in the amount
of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable
to the tax levied in violation of the initiative; and
8. Permits these provisions to be amended exclusively by the
voters of the State of California.
In September 1988, the California Court of Appeal in City Of
Westminster V. County Of Orange, 204 Cal.app. 3D 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior
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to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in CITY OF WOODLAKE V. LOGAN, (1991) 230 Cal.App.3d 1058, subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review both the CITY OF WESTMINSTER and the CITY OF WOODLAKE
decisions.
In SANTA CLARA LOCAL TRANSPORTATION AUTHORITY V. GUARDINO,
(Sept. 28, 1995) 11 Cal.4th 220, REH'G DENIED, MODIFIED (Dec. 14, 1995) 12
Cal.4th 344e, the California Supreme Court upheld the constitutionality of
Proposition 62's popular vote requirements for future taxes, and specifically
disapproved of the CITY OF WOODLAKE decision as erroneous. The Court did not
determine the correctness of the CITY OF WESTMINSTER decision, because that case
appeared distinguishable, was not relied on by the parties in GUARDINO, and
involved taxes not likely to still be at issue. It is impossible to predict the
impact of the Supreme Court's decision on charter cities or on taxes imposed in
reliance on the CITY OF WOODLAKE case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996,
would make the GUARDINO decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995. The
California State Senate passed the Bill on May 16, 1996 and it is currently
pending in the California State Assembly. It is not clear whether the Bill, if
enacted, would be constitutional as a non-voted amendment to Proposition 62 or
as a non-voted change to Proposition 62's operative date.
PROPOSITION 218. On November 5, 1996,the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and
XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of local governments to levy and collect both
existing and future taxes, assessments, fees and charges. Proposition 218 became
effective on November 6, 1996. The Sponsors are unable to predict whether and to
what extent Proposition 218 may be held to be constitutional or how its terms
will be interpreted and applied by the courts. However, if upheld, Proposition
218 could substantially restrict certain local governments' ability to raise
future revenues and could subject certain existing sources of revenue to
reduction or repeal, and increase local government costs to hold elections,
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calculate fees and assessments, notify the public and defend local government
fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter
approval for the imposition, extension or increase of general taxes and
two-thirds voter approval for the imposition, extension or increase of special
taxes, including special taxes deposited into a local government's general fund.
Proposition 218 also provides that any general tax imposed, extended or
increased without voter approval by any local government on or after January 1,
1995 and prior to November 6, 1996 shall continue to be imposed only if approved
by a majority vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
ROSSI V. BROWN, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in ROSSI V.
BROWN by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of
Proposition 218, by its terms, applies to all local taxes, assessments, fees and
charges and is not limited to local taxes, assessments, fees and charges that
are property related.
Article XIII D of Proposition 218 adds several new
requirements making it generally more difficult for local agencies to levy and
maintain "assessments" for municipal services and programs. "Assessment" is
defined to mean any levy or charge upon real property for a special benefit
conferred upon the real property.
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after
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<PAGE> 400
June 30, 1997, existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which (i)
generate revenues exceeding the funds required to provide the property related
service, (ii) are used for any purpose other than those for which the fees and
charges are imposed, (iii) are for a service not actually used by, or
immediately available to, the owner of the property in question, or (iv) are
used for general governmental services, including police, fire or library
services, where the service is available to the public at large in substantially
the same manner as it is to property owners. Further, before any property
related fee or charge may be imposed or increased, written notice must be given
to the record owner of each parcel of land affected by such fee or charges. The
local government must then hold a hearing upon the proposed imposition or
increase of such property based fee, and if written protests against the
proposal are presented by a majority of the owners of the identified parcels,
the local government may not impose or increase the fee or charge. Moreover,
except for fees or charges for sewer, water and refuse collection services, no
property related fee or charge may be imposed or increased without majority
approval by the property owners subject to the fee or charge or, at the option
of the local agency, two-thirds voter approval by the electorate residing in the
affected area.
PROPOSITION 87. On November 8, 1988, California voters
approved Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989.
OTHER INVESTMENT INFORMATION. The investment adviser believes
that it is likely that sufficient California Municipal Securities will be
available to satisfy the investment objective, policies and limitations of the
California Tax-Exempt Bond Fund, and to enable the Fund to invest at least 50%
of its total assets in California Municipal Securities at the close of each of
its fiscal quarters. In meeting this investment policy the Fund may invest in
Municipal Securities which are private activity bonds (including industrial
development bonds under prior law) the interest on which is subject to the 26%
to 28% federal alternative minimum tax applicable to individuals and the 20%
federal alternative minimum tax and the environmental tax applicable to
corporations. The environmental tax applicable to corporations is imposed at the
rate of .12% on the excess of the corporations modified federal alternative
minimum taxable income over $2,000,000. Investments in such securities, however,
will not exceed under normal market conditions 20% of the Fund's total assets
when added together with any taxable investments held by
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the Fund. Moreover, although the Fund does not presently intend to do so on a
regular basis, it may invest more than 25% of its assets in Municipal Securities
the interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Fund's investment adviser
in light of the Fund's investment objective and policies. To the extent that the
Fund's assets are concentrated in Municipal Securities payable from revenues on
similar projects, the Fund will be subject to the peculiar risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated.
If Pacific Horizon's Board of Directors, after consultation
with the investment adviser, should for any reason determine that it is
impracticable to invest at least 50% of the Fund's total assets in California
Tax-Exempt Bond Fund at the close of each quarter of the Fund's taxable year,
the Board would re-evaluate the Fund's investment objective and policies and
consider changes in its structure and name or possible dissolution.
OTHER INVESTMENT LIMITATIONS
- ----------------------------
A Fund's or Master Portfolio's investment objectives are
fundamental; the prospectus for each Fund or Master Portfolio summarizes certain
other fundamental policies that may not be changed with respect to such Fund or
Master Portfolio without the affirmative vote of the holders of the majority of
the Fund's or Master Portfolio's outstanding shares (as defined below under
"Additional Information - Miscellaneous"). Similarly, the following enumerated
additional fundamental policies, as well as the Fund's or Master Portfolio's
investment objectives, may not be changed with respect to each Fund or Master
Portfolio without such a vote of shareholders.
THE NATIONAL MUNICIPAL BOND FUND MAY NOT:
-----------------------------------------
1. Invest 25% or more of its total assets in the securities of
one or more issuers conducting their principal business activities in the same
industry, except that this limitation shall not apply to Municipal Securities or
governmental guarantees of the Municipal Securities and that all of the assets
of the Fund may be invested in another investment company.
2. Purchase or sell real estate (However, the National
Municipal Bond Fund may, to the extent appropriate to its investment objective,
purchase securities issued by the U.S. Government, its agencies and
instrumentalities, purchase Municipal Securities secured by real estate or
interests therein or securities issued by companies investing in real estate or
interests therein).
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3. Sell securities short or purchase securities on margin,
except such short-term credits as are necessary for the clearance of
transactions. For this purpose, the deposit or payment by the National Municipal
Bond Fund for initial or maintenance margin in connection with future contracts
is not considered to be the purchase or sale of a security on margin.
4. Underwrite the securities of other issuers except that all
of the assets of the Fund may be invested in another investment company.
5. Purchase securities of companies for the purpose of
exercising control.
6. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs. However, the National Municipal
Bond Fund may, to the extent appropriate to its investment objective, purchase
publicly traded securities of companies engaging in whole or in part in such
activities, but may enter into futures contracts and options thereon in
accordance with its Prospectus.
7. Acquire any other investment company or investment company
security except as provided for in the Investment Company Act of 1940 provided
that all of the assets of the Fund may be invested in another investment
company.
8. Write or sell puts, calls, straddles, spreads or
combinations thereof except that the National Municipal Bond Fund may acquire
standby commitments with respect to its Municipal Securities and may enter into
futures contracts and options thereon to the extent disclosed in the Prospectus
and this Statement of Additional Information.
9. Borrow money except from banks or through reverse
repurchase agreements to meet redemptions and other temporary purposes in
amounts of up to 25% of its total assets at the time of such borrowing. The
National Municipal Bond Fund will not purchase securities while its borrowings
(including reverse repurchase agreements) are outstanding.
THE INTERNATIONAL EQUITY FUND AND CORPORATE BOND 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 Funds may be invested in
their respective Master Portfolio or another investment company.
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<PAGE> 403
2. Underwrite the securities of other issuers, provided that
all of the assets of the Funds may be invested in their respective Master
Portfolio or another investment company.
3. Purchase or sell real estate, except that each 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 a 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. Write or sell puts, calls, straddles, spreads or
combinations thereof, except that it may engage in options transactions.
6. Purchase or sell commodities or commodity contracts, or
invest in oil, gas or mineral exploration or development programs, except that:
(a) it may, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs; and (b) it may purchase and sell
futures contracts and options on futures contracts.
7. Purchase securities of other investment companies to the
extent prohibited by the 1940 Act, except that the Corporate Bond Fund may
purchase securities of other investment companies in connection with a merger,
consolidation, acquisition or reorganization; or as may otherwise be permitted
by the 1940 Act; provided that all of the assets of the Corporate Bond Fund may
be invested in the Corporate Bond Master Portfolio or another investment
company.
8. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in obligations issued or guaranteed by the federal
government and its agencies and instrumentalities; (b) each utility (such as
gas, gas transmission, electric and telephone service) will be considered a
single industry for purposes of this policy; and (c) wholly-owned finance
companies will be considered to be in the industries of their parents if
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their activities are primarily related to financing the
activities of their parents.
9. Purchase securities of any issuer if as a result it would
own more than 10% of the voting securities of such issuer; provided that all of
the assets of each Fund may be invested in the respective Master Portfolio or
another investment company.
10. Borrow money for the purpose of obtaining investment
leverage or issue senior securities (as defined in the 1940 Act), provided that
each Fund and the respective Master Portfolio may borrow from banks for
temporary purposes and in an amount not exceeding 10% of the value of the total
assets of each Fund or the respective Master Portfolio; or mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of its total assets at the time of such borrowing. This restriction shall
not apply to (a) the sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase, or (b) transactions in currency, options,
futures contracts and options on futures contracts, or forward commitment
transactions.
11. Make loans, except that with respect to the International
Equity Fund it may invest in debt securities, repurchase agreements and
securities loans and with respect to the Corporate Bond Fund it may purchase
or hold debt obligations in accordance with its investment objective, policies
and limitations; may enter into repurchase agreements with respect to
securities; and may lend portfolio securities against collateral consisting of
cash or securities of the U.S. Government and its agencies and instrumentalities
which are consistent with its permitted investments.
Neither the Intermediate Bond, Blue Chip or Asset
Allocation Funds, nor Intermediate Bond and Blue Chip Master
Portfolios, may:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result, more than 5% of
its total assets will be invested in the securities of any one issuer or it
would own more than 10% of the voting securities of such issuer, except that up
to 25% of its total assets may be invested without regard to these limitations;
and provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the same
investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
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2. Pledge, mortgage or hypothecate the assets of any Fund to
any extent greater than 10% of the value of the total assets of that Fund.
3. Make loans to other persons, except that a Fund may make
time or demand deposits with banks, provided that time deposits shall not have
an aggregate value in excess of 10% of a Fund's net assets, and may purchase
bonds, debentures or similar obligations that are publicly distributed, may loan
portfolio securities not in excess of 10% of the value of the total assets of
such Fund, and may enter into repurchase agreements as long as repurchase
agreements maturing in more than seven days do not exceed 10% of the value of
the total assets of a Fund;
4. Purchase or sell commodities contracts, except that any
Fund may purchase or sell futures contracts on financial instruments, such as
bank certificates of deposit and U.S. Government securities, foreign currencies
and stock indexes and options on any such futures if such options are written by
other persons and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums paid on all such
options that are held at any time do not exceed 20% of the total net assets of
that Fund, and (iii) the aggregate margin deposits required on all such futures
or options thereon held at any time do not exceed 5% of the total assets of the
Fund;
5. Purchase any securities for any Fund that would cause more
than 25% of the value of the Fund's total assets at the time of such purchase to
be invested in the securities of one or more issuers conducting their principal
activities in the same industry; provided that there is no limitation with
respect to investments in obligations issued or guaranteed by the United States
Government, its agencies and instrumentalities; and provided further that a Fund
may invest all its assets in a diversified, open-end management investment
company, or a series thereof, with substantially the same investment objectives,
policies and restrictions as the Fund without regard to the limitations set
forth in this paragraph (5).
6. Invest the assets of any Fund in nonmarketable securities
that are not readily marketable (including repurchase agreements maturing in
more than seven days, securities described in restriction with respect to such
Fund (2) in the Prospectuses, restricted securities, certain OTC options and
securities used as cover for such options and stripped mortgage-backed
securities) to any extent greater than 10% of the value of the total assets of
that Fund; provided, however, that a Fund may invest all its assets in a
diversified, open-end management investment company, or a series thereof with
substantially the same investment objectives, policies and restrictions as the
Fund, without regard to the limitations set forth in this paragraph (6).
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7. Borrow money for any Fund except for temporary emergency
purposes and then only in an amount not exceeding 5% of the value of the total
assets of that Fund. Borrowing shall, for purposes of this paragraph, include
reverse repurchase agreements. Any borrowings, other than reverse repurchase
agreements, will be from banks. Pacific Horizon will repay all borrowings in any
Fund before making additional investments for that Fund and interest paid on
such borrowings will reduce income.
8. Issue senior securities.
9. Underwrite any issue of securities, provided, however, that
a Fund may invest all its assets in a diversified, open-end management
investment company, or a series thereof, having substantially the same
investment objectives, policies and restrictions as such Fund, without regard to
the limitations set forth in this paragraph (9).
10. Purchase or sell real estate or real estate mortgage
loans, but this shall not prevent investments in instruments secured by real
estate or interests therein or in marketable securities of issuers that engage
in real estate operations.
11. Purchase on margin or sell short.
12. Purchase or retain securities of an issuer if those
members of the Board of Pacific Horizon or the Master Portfolio, each of whom
own more than 1/2 of 1% of such securities, together own more than 5% of the
securities of such issuer, provided, however, that a Fund may invest all its
assets in a diversified, open-end management investment company, or a series
thereof, having substantially the same investment objectives, policies and
restrictions as such Fund, without regard to the limitations set forth in this
paragraph (12).
13. Purchase securities of any other investment company
(except in connection with a merger, consolidation, acquisition or
reorganization) if, immediately after such purchase, Pacific Horizon (and any
companies controlled by it) would own in the aggregate (i) more than 3% of the
total outstanding voting stock of such investment company, (ii) securities
issued by such investment company would have an aggregate value in excess of 5%
of the value of the total assets of Pacific Horizon, or (iii) securities issued
by such investment company and all other investment companies would have an
aggregate value in excess of 10% of the value of the total assets of Pacific
Horizon provided, however, that a Fund may invest all its assets in a
diversified, open-end management investment company, or a series thereof, having
substantially the same investment objectives, policies and restrictions as such
Fund,
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without regard to the limitations set forth in this paragraph
(13).
14. Invest in or sell put, call, straddle or spread options or
interests in oil, gas or other mineral exploration or development programs.
THE AGGRESSIVE GROWTH FUND MAY NOT:
-----------------------------------
1. Purchase or sell real estate (however, the Fund may, to the
extent appropriate to its investment objective, purchase securities issued by
companies investing in real estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of
exercising control.
4. Purchase securities on margin, make short sales of
securities or maintain a short position, except that this limitation shall not
apply to transactions in futures contracts and related options.
5. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or as may otherwise be permitted by the Investment Company
Act of 1940.
6. Purchase securities of any one issuer (other than
obligations issued or guaranteed by U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
In accordance with current regulations of the Securities and
Exchange Commission, the Aggressive Growth Fund presently intends to limit its
investments in the securities of any single issuer to not more than 5% of its
total assets (measured at the time of purchase), except that up to 25% of the
Fund's total assets may be invested without regard to this limitation. This
intention is not, however, a fundamental policy of the Fund.
7. Purchase any securities which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry,
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provided that (a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) the industry classification of utilities will
be determined according to their service. For example, gas, gas transmission,
electric and gas, electric and telephone will be considered a separate industry.
8. Borrow money or issue senior securities, except that the
Fund may borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in excess
of the lesser of the dollar amounts borrowed or 10% of its total assets at the
time of such borrowing; or purchase securities at any time after such borrowings
(including reverse repurchase agreements) have been entered into and before they
are repaid. The Fund's transactions in futures and related options (including
the margin posted by the Fund in connection with such transactions) are not
subject to this investment limitation.
9. Make loans except that the Fund may purchase or hold debt
instruments or enter into repurchase agreements pursuant to its investment
objective and policies and may lend portfolio securities in an amount not
exceeding 30% of its total assets.
10. Purchase securities without available market quotations
which cannot be sold without registration or the filing of a notification under
Federal or state securities laws, enter into repurchase agreements providing for
settlement more than seven days after notice, or purchase any other securities
deemed illiquid by the Directors if, as a result, such securities and repurchase
agreements would exceed 10% of the Fund's total value.
The Fund intends that variable amount master demand notes with
maturities of nine months or less, as well as any investments in securities that
are not registered under the 1933 Act but that may be purchased by institutional
buyers under Rule 144A and for which a liquid trading market exists as
determined by the Board of Directors or Bank of America (pursuant to guidelines
adopted by the Board), will not be subject to this 10% limitation on illiquid
securities.
11. Purchase or sell commodity contracts, or invest in oil,
gas or mineral exploration or development programs, except that the Fund may, to
the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities, and may
enter into futures contract and related options.
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The U.S. Government Securities Fund And Capital Income
------------------------------------------------------
Fund May Not:
- -------------
1. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation. Securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities are not subject to this investment limitation.
2. Underwrite any issue of securities, except to the extent
that the purchase of securities directly from the issuer thereof in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
3. Purchase or sell real estate, except that a Fund may, to
the extent appropriate to its investment objective, invest in GNMA Certificates
and securities issued by companies which invest in real estate or interests
therein.
4. Purchase securities on margin (except for such short-term
credits as may be necessary for the clearance of transactions), make short sales
of securities or maintain a short position.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Funds may write covered call options.
6. Purchase or sell commodities or commodity contracts, or
invest in oil, gas or mineral exploration or development programs, except that:
(a) a Fund may, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs; and (b) a Fund may purchase and sell
futures contracts and options on futures contracts.
7. Purchase securities of other investment companies, except
(a) securities of money-market funds, to the extent permitted by the Investment
Company Act of 1940, or (b) in connection with a merger, consolidation,
acquisition or reorganization.
8. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in obligations issued or guaranteed by the federal
government and its agencies and instrumentalities; (b)
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each utility (such as gas, gas transmission, electric and telephone service)
will be considered a single industry for purposes of this policy; and (c)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents.
9. Purchase securities of any issuer if as a result the Fund
will own more than 10% of the voting securities of such issuer.
10. Borrow money except from banks for temporary purposes and
in an amount not exceeding 10% of the value of the Fund's total assets, issue
senior securities (as defined in the Investment Company Act of 1940) or
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time of such
borrowing. Borrowing may take the form of sale of portfolio securities
accompanied by a simultaneous agreement as to their repurchase. (This borrowing
provision is not for investment leverage, but solely to facilitate management of
the Fund's portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be disadvantageous or
inconvenient. The Fund will not purchase any securities while borrowings are
outstanding. Interest paid on borrowed funds will reduce the net investment
income of the Fund.) For the purpose of this restriction, collateral or escrow
arrangements with respect to margin for futures contracts are not deemed to be a
pledge of assets, and neither such arrangements nor the purchase of futures
contracts are deemed to be the issuance of a senior security.
11. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations; may enter into repurchase agreements with respect to securities;
and may lend portfolio securities against collateral consisting of cash or
securities of the U.S. Government and its agencies and its agencies and
instrumentalities which are consistent with its permitted investments.
12. Invest more than 10% of the value of its total assets in
securities with legal or contractual restrictions on resale (including
repurchase agreements with terms greater than seven days over the-counter
options and the securities covering such options.)
The Fund intends that investments in securities that are not
registered under the 1933 Act but may be purchased by institutional buyers under
Rule 144A and for which a liquid
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trading market exists as determined by the Board of Directors or Bank of America
(pursuant to guidelines adopted by the Board), will not be subject to this 10%
limitation on illiquid securities.
13. Purchase securities of any issuer which has been in
continuous operation for less than three years (including operations of its
predecessors), except obligations issued or guaranteed by the U.S. government or
its agencies.
In Addition:
1. Under normal market conditions the U.S. Government
Securities Fund may not invest less than 65% of its total assets
in GNMA Certificates.
2. Under normal market conditions the Capital Income Fund may
not invest less than 65% of its total assets in Convertible Securities. For
purposes of this limitation, securities acquired upon the conversion of
Convertible Securities are deemed to be Convertible Securities for a period of
two months after the effective date of their conversion.
The California Tax-Exempt Bond Fund may not:
--------------------------------------------
1. Make loans except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies.
2. Purchase or sell real estate (however, the Fund may, to the
extent appropriate to its investment objective, purchase Municipal Securities
secured by real estate or interests therein or securities issued by companies
investing in real estate or interests therein).
3. Purchase securities on margin, make short sales of
securities or maintain a short position.
4. Underwrite the securities of other issuers.
5. Purchase securities of companies for the purpose of
exercising control.
6. Invest in industrial revenue bonds where the payment of
principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation.
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs (however, the Fund may, to the
extent appropriate to its investment
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objective, purchase publicly traded securities of companies engaging in whole or
in part in such activities).
8. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets.
9. Purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
10. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
11. Purchase any securities which would cause 25% or more of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that this limitation shall not apply to Municipal
Securities or governmental guarantees of Municipal Securities; and provided,
further, that for the purpose of this limitation only, industrial development
bonds that are backed only by the assets and revenues of a nongovernmental user
shall not be deemed to be Municipal Securities.
12. Borrow money or issue senior securities, except that the
Fund may borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in excess
of the lesser of the dollar amounts borrowed or 10% of its total assets at the
time of such borrowing.
13. Write or sell puts, calls, straddles, spreads, or
combinations thereof except that the Fund may acquire stand-by commitments with
respect to its Municipal Securities.
14. Invest more than 10% of its total assets in securities
with legal or contractual restrictions on resale or for which no readily
available market exists, including repurchase agreements providing for
settlement more than seven days after notice.
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THE SHORT-TERM GOVERNMENT 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 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.
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<PAGE> 414
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.
* * *
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For the purposes of investment limitation P. 1 in this
Statement of Additional Information with respect to the National Municipal Bond
Fund, investment limitation P. 7 in this Statement of Additional Information
with respect to the Aggressive Growth Fund, investment limitation P. 11 in this
Statement of Additional Information with respect to the California Tax-Exempt
Bond Fund, investment limitation P. 8 in this Statement of Additional
Information with respect to the U.S. Government Securities Fund, Capital Income
Fund, Corporate Bond Fund and International Equity Fund and investment
limitation P. 5 in this Statement of Additional Information with respect to the
Intermediate Bond, Blue Chip and Asset Allocation Funds and the Intermediate
Bond and Blue Chip Master Portfolios, the Funds treat, in accordance with the
current views of the staff of the SEC and as a matter of non-fundamental policy
that may be changed without a vote of shareholders, all supranational
organizations as a single industry and each foreign government (and all of its
agencies) as a separate industry.
* * *
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<PAGE> 415
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how
such shares are priced, is included in the Prospectuses. Additional information
is contained below. The net asset values of the Master Portfolios corresponding
to each of the Feeder Funds are determined at the same time and on the same days
as the net asset values per share of the respective Feeder Funds are determined.
The net asset value of each of the Feeder Funds is equal to such Fund's pro rata
share of the total investments and other assets of its corresponding Master
Portfolio, less any liabilities with respect to such Feeder Fund, including each
Feeder Fund's pro rata share of the Master Portfolio's liabilities.
VALUATION OF THE AGGRESSIVE GROWTH FUND
- ---------------------------------------
Portfolio securities are valued at the last sales price on the
securities exchange on which such securities are primarily traded or at the last
sales price obtained from NASDAQ. Securities not listed on an exchange or
NASDAQ, or securities for which there were no transactions, are valued at the
average of the most recent bid and asked prices. Restricted securities,
securities for which market quotations are not readily available, and other
assets are valued at fair value, using methods determined under the supervision
of the Board of the Company. Valuation of options is described above under
"Investment Objectives and Policies--Options Trading." Short-term securities are
valued at amortized cost, which approximates market value. The amortized cost
method involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of the difference
between the principal amount due at maturity and cost.
VALUATION OF THE CALIFORNIA TAX-EXEMPT BOND FUND AND THE NATIONAL
- -----------------------------------------------------------------
MUNICIPAL BOND FUND
- -------------------
The California Tax-Exempt Bond Fund's and National Municipal
Bond Fund's assets are valued for purposes of pricing sales and redemptions by
an independent pricing service (the "Service") approved by the Board. When, in
the judgment of the Service, quoted bid prices for portfolio securities are
readily available and are representative of the bid side of the market, these
investments are valued at the mean between quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by the
Service based upon its evaluation of the market for such securities). Other
investments (which constitute a majority of the California Tax- Exempt Bond
Fund's securities) are carried at fair value as determined by the Service, based
on methods which include consideration of yields or prices of municipal bonds of
comparable quality, coupon, maturity and type; indications as to
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<PAGE> 416
values from dealers; and general market conditions. The Service may also employ
electronic data processing techniques and matrix systems to determine value.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost, which approximates market value. The amortized cost method
involves valuing a security at its cost on the date of purchase or, in the case
of securities purchased with more than 60 days remaining to maturity and to be
valued on the amortized cost basis only during the final 60 days of its
maturity, the market value on the 61st day prior to maturity. Thereafter, the
Company assumes a constant amortization to maturity of the difference between
the principal amount due at maturity and cost.
VALUATION OF CAPITAL INCOME FUND, U.S. GOVERNMENT SECURITIES FUND, SHORT-TERM
GOVERNMENT FUND, INTERNATIONAL EQUITY FUND, ASSET ALLOCATION AND CORPORATE BOND
FUND
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers. Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the particular Board. Debt securities with remaining maturities
of 60 days or less are valued on an amortized cost basis unless the Board
determines that such basis does not represent fair value at the time. Under this
method, such securities are valued initially at cost on the date of purchase or,
in the case of securities purchased with more than 60 days to maturity, are
valued at their market or fair value each day until the 61st day prior to
maturity. Thereafter, absent unusual circumstances, a constant proportionate
amortization of any discount or premium is assumed until maturity of the
security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely solely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the particular Board. Valuation of options is
described above under "Investment Objectives and Policies Options Trading."
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<PAGE> 417
VALUATION OF THE INTERMEDIATE BOND MASTER PORTFOLIO AND BLUE
CHIP MASTER PORTFOLIO
Except for debt securities held by the Intermediate Bond and
Blue Chip Master Portfolios with remaining maturities of 60 days or less, assets
for which market quotations are available are valued as follows: (a) each listed
security is valued at its closing price obtained from the primary exchange on
which the security is listed, or, if there were no sales on that day, at its
last reported current closing price; (b) each unlisted security is valued at the
last current bid price (or last current sale price, as applicable) obtained from
NASDAQ; (c) United States Government and agency obligations are valued based
upon bid quotations from the Federal Reserve Bank for identical or similar
obligations; and (d) short-term money market instruments (such as certificates
of deposit, bankers' acceptances and commercial paper) are most often valued by
bid quotations or by reference to bid quotations of available yields for similar
instruments of issuers with similar credit ratings. The Board of Trustees of
Master Trust I has determined that the values obtained using the procedures
described in (c) and (d) represent the fair values of the securities valued by
such procedures. Most of these prices are obtained by PFPC, Inc. ("PFPC") from a
service that collects and disseminates such market prices. Bid quotations for
short-term money market instruments reported by such service are the bid
quotations reported to it by major dealers in such instruments.
Valuation of options is described above under
"Investment Objectives and Policies--Options Trading."
Debt securities held by the Intermediate Bond and Blue Chip
Master Portfolios with remaining maturities of 60 days or less are valued on the
basis of amortized cost, which provides stability of net asset value. Under this
method of valuation, the security is initially valued at cost on the date of
purchase or, in the case of securities purchased with more than 60 days
remaining to maturity and to be valued on the amortized cost basis only during
the final 60 days of its maturity, the market value on the 61st day prior to
maturity. Thereafter Master Trust I assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security,
unless the Board of Trustees determines that amortized cost no longer represents
fair value. Master Trust I will monitor the market value of these investments
for the purpose of ascertaining whether any such circumstances exist.
When approved by the Board of Trustees of Master Trust I,
certain securities may be valued on the basis of valuations provided by an
independent pricing service when such prices are believed to reflect the fair
market value of such securities.
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<PAGE> 418
These securities may include those that have no available recent market value,
have few outstanding shares and therefore infrequent trades, or for which there
is a lack of consensus on the value, with quoted prices covering a wide range.
The lack of consensus might result from relatively unusual circumstances such as
no trading in the security for long periods of time, or a company's involvement
in merger or acquisition activity, with widely varying valuations placed on the
company's assets or stock. Prices provided by an independent pricing service may
be determined without exclusive reliance on quoted prices and may take into
account appropriate factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data.
In the absence of an ascertainable market value, assets are
valued at their fair value as determined using methods and procedures reviewed
and approved by the Board of Trustees of Master Trust I.
SUPPLEMENTARY PURCHASE INFORMATION - A SHARES
- ---------------------------------------------
For the purpose of applying the Right of Accumulation or
Letter of Intent privileges available to certain shareholders as described in
the Prospectuses, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) although more than one
beneficiary is involved; or "a qualified group" which has been in existence for
more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount, provided
that the purchases are made through a central administrator or a single dealer,
or by other means which result in economy of sales effort or expense. A
"qualified group" must have more than 10 members, must be available to arrange
for group meetings between representatives of the Funds and the members, and
must be able to arrange for mailings to members at reduced or no cost to the
Distributor. The value of shares eligible for the Right of Accumulation
privilege may also be used as a credit toward completion of the Letter of Intent
privilege. Such shares will be valued at their offering price prevailing on the
date of submission of the Letter of Intent. Distributions on shares held in
escrow pursuant to the Letter of Intent privilege will be credited to the
shareholder, but such shares are not eligible for a Fund's Exchange Privilege.
The computation of the hypothetical offering price per
share of A Shares for each Fund based on the value of the
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<PAGE> 419
California Tax-Exempt Bond, Aggressive Growth, U.S. Government Securities,
Capital Income, Intermediate Bond, Blue Chip, Asset Allocation, Corporate Bond,
National Municipal Bond, Short-Term Government and International Equity Funds'
net assets on February 28, 1997, and each Fund's A Shares outstanding on such
date is as follows:
<TABLE>
<CAPTION>
U.S.
California Aggressive Government Capital Intermediate
Tax-Exempt Growth Securities Income Bond Blue Chip
Bond Fund Fund Fund Fund Fund Fund
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets .... $ 221,109,794 $ 201,906,794 $ 74,484,639 $ 309,308,683 $ 22,936,555 $ 152,747,859
=============== =============== =============== =============== =============== ===============
Outstanding
Securities ... 30,085,974 10,303,402 8,009,635 17,822,748 2,403,740 6,056,570
=============== =============== =============== =============== =============== ===============
Net Asset Value
Per Share .... $ 7.35 $ 19.60 $ 9.30 $ 17.35 $ 9.54 $ 25.22
=============== =============== =============== =============== =============== ===============
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share) ... $ 0.35 $ 0.92 $ 0.44 $ 0.82 $ 0.45 $ 1.19
=============== =============== =============== =============== =============== ===============
Maximum
Offering Price
to Public .... $ 7.70 $ 20.52 $ 9.74 $ 18.17 $ 9.99 $ 26.41
=============== =============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Asset Corporate National Short-Term International
Allocation Bond Municipal Government Equity
Fund Fund Bond Fund Fund Fund
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Assets .... $ 34,838,046 $ 32,790,157 $ 15,413,655 $ 15,541,475 $ 16,217,437
=============== =============== =============== =============== ===============
Outstanding
Securities ... 1,795,743 2,076,625 1,513,439 1,553,943 1,636,100
=============== =============== =============== =============== ===============
Net Asset Value
Per Share .... $ 19.40 $ 15.79 $ 10.18 $ 10.00 $ 9.91
=============== =============== =============== =============== ===============
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share) ... $ 0.91 $ 0.74 $ 0.48 $ 0.47 $ 0.47
=============== =============== =============== =============== ===============
Maximum
Offering Price
to Public .... $ 20.31 $ 16.53 $ 10.66 $ 10.47 $ 10.38
=============== =============== =============== =============== ===============
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: A AND K SHARES
- -----------------------------------------------------
A and K Shares in the Capital Income Fund, U.S. Government
Securities Fund, California Tax-Exempt Bond Fund, Intermediate Bond Fund, Blue
Chip Fund, Asset Allocation Fund, Corporate Bond Fund, International Equity
Fund, Short-Term Government Fund (A Shares Only) and National Municipal Bond
Fund for which orders for wire redemption are received on a business day before
the close of regular trading hours on the New York Stock Exchange (currently
4:00 p.m. Eastern time) will be redeemed as of the close of regular trading
hours on such Exchange and the proceeds of redemption 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 particular Fund are priced and the
proceeds will normally be
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wired in federal funds on the next business day thereafter. Redemption proceeds
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 182090, Columbus, Ohio 43218-2090. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectuses. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
A and K Share investors in the U.S. Government Securities
Fund, California Tax-Exempt Bond Fund, Corporate Bond Fund , National Municipal
Bond Fund and Intermediate Bond Fund redeeming by check generally will be
subject to the same rules and regulations that commercial banks apply to
checking accounts, although the election of this privilege creates only a
shareholder-transfer agent relationship with the Transfer Agent. An investor may
deliver Checks directly to the Transfer Agent, BISYS Fund Services, Inc., 3435
Stelzer Road, Columbus, Ohio 43219, in which case the proceeds will be mailed,
wired or made available at the Transfer Agent on the next business day. The
Check delivered to the Transfer Agent must be accompanied by a properly executed
stock power form on which the investor's signature is guaranteed as described in
the Funds' Prospectuses. After clearance, Checks will be returned to the
investor.
Because dividends on the U.S. Government Securities Fund,
California Tax-Exempt Bond Fund, Corporate Bond Fund and National Municipal Bond
Fund are declared daily, Checks should not be used to close an account, as a
small balance is likely to result.
Check redemption may be modified or terminated at any time by
the Company or the Transfer Agent upon notice to shareholders.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION: ALL FUNDS
- -------------------------------------------------- ---------
IN GENERAL. As described in the Prospectuses, A Shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment
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advisers, accountants and estate planning firms that have entered into service
and/or selling agreements with the Distributor. (The Distributor, such
institutions and professionals are collectively referred to as "Service
Organizations.") K Shares may only be purchased by: (a) businesses or other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; (c) accounts opened for IRA rollovers from a
401(k) plan in which the assets were held in any Pacific Horizon or Time Horizon
Fund and subsequent purchases into an IRA rollover account opened as described
above, so long as the original IRA rollover account remains open; (d) accounts
under Section 403(b)(7) of the Code, (e) deferred compensation plans under
Section 457 of the Code and (f) certain other retirement plans. Bank of America
and Service Organizations may impose minimum customer account and other
requirements in addition to those imposed by the Funds and described in the
respective Prospectuses. Purchase orders will be effected only on business days.
SRF Shares of the Funds are available for the investment of retirement funds
held in Eligible Retirement Accounts as described in the SRF Share Prospectus.
A Shares in each Fund are sold with a sales load, except for
such exemptions as noted in the Prospectuses. The exemptions to the imposition
of a sales load on A Shares are due to the nature of the investors and/or the
reduced sales efforts that will be necessary in obtaining such investments. A
Shares are also subject to a shareholder servicing fee. K Shares are offered at
net asset value with neither a front-end sales charge, nor a contingent deferred
sales charge. K Shares are subject to a distribution plan fee and an
administrative and shareholder services fee. SRF Shares in each Fund are sold
without a sales load. SRF Shares are subject to Shareholder Servicing fees.
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.
-74-
<PAGE> 422
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 A or K shares into a new account may not
be made by wire. However, persons wishing to make a subsequent purchase of
Company shares into an already existing account by wire should telephone the
Transfer Agent at (800) 346- 2087. The investor's bank must be instructed to
wire federal funds to the Transfer Agent, referring in the wire to the
particular Fund in which such investment is to be made; the investor's portfolio
account number; and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for
IRAs, payment of which could require the liquidation of shares. All fees
charged are described in the appropriate form. Shares may be purchased in
connection with these plans only by direct remittance to the Transfer Agent.
Purchases for IRA accounts will be effective only when payments received by the
Transfer Agent are converted into federal funds. Purchases for these plans may
not be made in advance of receipt of funds.
For processing redemptions, the Transfer Agent may request
further documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the
TeleTrade Privilege, any request for a wire redemption will be effected as a
TeleTrade transaction through the Automated Clearing House (ACH) system unless
more prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
All or a portion of the SRF Shares held in a Fund can be
redeemed (sold) at any time. The redemption price will be the net asset value
per share next determined following receipt by the Company of a shareholder's
satisfactorily completed instructions. The value of an SRF Share upon redemption
may be more or less than the value when purchased, depending upon the net asset
value of an SRF Share of the Fund at the time of the redemption. Redemptions are
subject to determination by the Company that the investment instruction form or
the redemption request and other distribution documents, if any, are complete.
Payment for SRF Shares redeemed will normally be made to the
custodian of the shareholder within one business day of receipt by the Company
of redemption instructions, but in no
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<PAGE> 423
event will payment be made more than seven days after receipt of redemption
instructions except in the circumstances described below.
EXCHANGE PRIVILEGES FOR A AND K SHARES. 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 the Time Horizon Funds.
B. A Shares of any investment portfolio in the Pacific
Horizon Family of Funds or like shares of the Time
Horizon Funds acquired by a previous exchange
transaction involving shares on which a sales load has
directly or indirectly been paid (e.g. A Shares
purchased with a sales load or issued in connection
with an exchange transaction involving A Shares that
had been purchased with a sales load), as well as
additional shares acquired through reinvestment of
dividends or distributions on such shares, may be
redeemed and the proceeds used to purchase without a
sales load A Shares of any other investment portfolio
within 90 days of your redemption trade date. To
accomplish an exchange transaction under the provisions
of this paragraph, investors must notify the Transfer
Agent of their prior ownership of shares and their
account number.
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<PAGE> 424
C. 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.
D. 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.
E. K Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
other K Shares of any other investment portfolio in the
Pacific Horizon Family of Funds or for like shares of the
Time Horizon Funds.
Except as stated above, a sales load will be imposed when
shares of any investment portfolio in the Pacific Horizon Family of Funds that
were purchased or otherwise acquired without a sales load are exchanged for A
Shares of another investment portfolio in the Pacific Horizon Family or for like
shares of the Time Horizon Funds which are sold with a sales load.
Exchange requests received on a business day prior to the time
shares of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day in
the manner described above.
EXCHANGE PRIVILEGES FOR ELIGIBLE RETIREMENT ACCOUNTS. SRF
Shares held in any Fund may be exchanged for SRF Shares of any other Fund. SRF
Shares held in any Fund may also be exchanged for A Shares in any other taxable,
non-money market Fund offered by the Company or a Time Horizon Fund without
incurring the front-end sales charge otherwise applicable on sales of A Shares
("Eligible Exchange Shares"). SRF Shares or Eligible Exchange Shares may be
exchanged for Pacific Horizon Shares of the Pacific Horizon Prime Fund. Eligible
Exchange Shares may be further exchanged for A Shares in any taxable, non- money
market fund offered by the Company or a Time Horizon Fund without incurring the
front-end sales charges otherwise applicable, or for SRF Shares offered by a
Fund. SRF Shares or
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<PAGE> 425
Eligible Exchange Shares held in an IRA account for which a Participant's
surviving spouse is the beneficiary may continue to be exchanged for SRF Shares
or A Shares as described above. 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.
The following transactions are examples of transactions that
will interrupt the maintenance of Eligible Retirement Account status for a
Participant's account and will terminate the account's ability to engage in the
exchange privileges described above:
1. SRF Shares or Eligible Exchange Shares held in an Eligible
Pension or Profit Sharing Trust or a SEP IRA, which are
transferred by the Participant into a personal rollover IRA,
will no longer be eligible to exchange such shares for A
Shares without incurring the front-end sales load applicable
to A Shares;
2. SRF Shares or Eligible Exchange Shares held in an IRA account
for which a Participant's surviving beneficiary upon transfer
out of the decedent's account is other than the Participant's
spouse will no longer be eligible to exchange such shares for
A Shares without incurring the front-end sales load applicable
to A Shares; and
3. SRF Shares or Eligible Exchange Shares which are liquidated in
their entirety by the Participant into a Certificate of
Deposit will no longer be eligible to exchange such shares for
A Shares without incurring the front-end sales load applicable
to A Shares.
MISCELLANEOUS. Certificates for shares will not be
issued.
Depending on the terms of the customer account at Bank of
America or a Service Organization, certain purchasers may arrange with the
Company's custodian for sub-accounting services paid by the Company without
direct charge to the purchaser.
A "business day" for purposes of processing share
purchases and redemptions received by the Transfer Agent at its
Columbus office is a day on which the New York Stock Exchange is
open for trading. In 1997, the holidays on which the New York
Stock Exchange is closed are: New Year's Day, Presidents' Day,
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<PAGE> 426
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or (d)
an emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will
not require a shareholder to redeem shares of 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.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL - ALL FUNDS
- -------------------
Each Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, each Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year a Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions (including amounts derived from interest on
Municipal Securities in the case of the California Tax-Exempt Bond Fund and the
National Municipal Bond Fund ) to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
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<PAGE> 427
particular Fund and would be eligible for the dividends received deduction in
the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
net short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss, if any), subject to certain adjustments and excluding
the excess of net long-term capital gain for the taxable year over the net
short-term capital loss for such year, if any. Each Fund will be taxed on its
undistributed investment company taxable income, if any. As stated, each Fund of
the Company intends to distribute at least 90% of its investment company taxable
income, if any, for each taxable year. To the extent such income is distributed
by a Fund (whether in cash or additional shares), it will be taxable to
shareholders as ordinary income.
A Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to a Fund's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities) (the
"Short-Short test"). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and the
cost of the securities subject to the call is capital gain or loss. Premiums
from expired call options written by a Fund and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. See Appendix B -- "Accounting and Tax Treatment" -- for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial
-80-
<PAGE> 428
instruments, including their treatment under the Short-Short
test.
Any distribution of the excess of net long-term capital gain
over net short-term capital loss is taxable to shareholders as long-term
capital gain, regardless of how long the shareholder has held Fund shares and
whether such gain is 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
marginal 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 gain is 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%.
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 net capital
gain over net capital loss). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company that they are not subject to backup withholding or
that they are "exempt recipients."
At February 28, 1997, the U.S. Government Securities Fund
had capital loss carryovers of $9,989,002 of which $8,325,087, will expire in
fiscal 2003 and $1,663,915 will expire in fiscal 2005; the Intermediate Bond
Fund had capital loss carryovers of approximately $160,488, which will expire
in fiscal 2005; and the Corporate Bond Fund had capital loss carryovers of
$6,727,109 of which $442,467, $5,401,993 and
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<PAGE> 429
$882,649 will expire in fiscal 1998, 1999 and 2003, respectively. To the
extent provided by the regulations of the Code, these capital loss carryovers
will be used to offset future net realized gains on securities transactions. As
such, it is probable that the gains so offset will not be distributed to
shareholders.
FEDERAL - CALIFORNIA TAX-EXEMPT BOND FUND AND NATIONAL MUNICIPAL
- ----------------------------------------------------------------
BOND FUND
- ---------
The California Tax-Exempt Bond Fund's and National Municipal
Bond Fund's policy is to pay each year as exempt- interest dividends
substantially all the Fund's Municipal Securities interest income net of certain
deductions. An exempt- interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of such Fund's taxable year. However, the aggregate amount of dividends so
designated by a Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by such Fund during its taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the particular Fund for such year. In order for a Fund
to pay exempt-interest dividends for any taxable year, at the close of each
quarter of its taxable year at least 50% of the aggregate value of such Fund's
assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of
the Funds as items of interest excludable from their gross income under Section
103(a) of the Code. However, each shareholder is advised to consult his or her
tax adviser with respect to whether exempt-interest dividends would retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" or a "related person" to such user with respect to facilities
financed through any of the tax-exempt obligations held by the Funds. A
"substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his or her
trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. A "related person"
includes certain related natural persons, affiliated corporations, partners and
partnerships and S corporations and their shareholders.
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<PAGE> 430
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry shares, equal to the percentage of the total
non-capital gain dividends distributed during the shareholder's taxable year
that are exempt-interest dividends, is not deductible for federal income tax
purposes. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six months holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
As discussed in the Prospectus for the California Tax-Exempt
Bond Fund, dividends attributable to interest on certain private activity bonds
issued after August 7, 1986 must be included by shareholders as an item of tax
preference for purposes of determining possible liability for the Federal
alternative minimum tax applicable to individuals and corporations and the
environmental tax applicable to corporations. The alternative minimum tax rate
for individuals is 26-28% and for corporations is 20%. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified alternative minimum taxable income over $2,000,000.
Income itself exempt from federal income taxation may be
considered in addition to adjusted gross income when determining whether Social
Security payments received by a shareholder are subject to federal income
taxation.
STATE - CALIFORNIA TAX-EXEMPT BOND FUND
- ---------------------------------------
As a regulated investment company, the California Tax- Exempt
Bond Fund (the "Fund") will be relieved of liability for California state
franchise and corporate income tax to the extent its earnings are distributed to
its shareholders. The Fund will be taxed on its undistributed taxable income. If
for any year the Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of the Fund's taxable income (including
interest income on California Municipal Securities for franchise tax purposes
only) may be subject to California state franchise or income tax at regular
corporate rates.
If, at the close of each quarter of its taxable year, at least
50% of the value of the total assets of a regulated investment company, or
series thereof, consists of obligations the interest on which, if held by an
individual, is exempt from
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<PAGE> 431
taxation by California ("California Exempt Securities"), then a regulated
investment company, or series thereof, will be qualified to pay dividends exempt
from California state personal income tax to its non-corporate shareholders
(hereinafter referred to as "California exempt-interest dividends"). For this
purpose, California Exempt Securities are generally limited to California
Municipal Securities and certain U.S. Government and U.S. Possession
obligations. "Series" of a regulated investment company is defined as a
segregated portfolio of assets, the beneficial interest in which is owned by the
holders of an exclusive class or series of stock of the company. The Fund
intends to qualify under the above requirements so that it can pay California
exempt-interest dividends. If the Fund fails to so qualify, no part of its
dividends to shareholders will be exempt from the California state personal
income tax. The Fund may reject purchase orders for shares if it appears
desirable to avoid failing to so qualify.
Within 60 days after the close of its taxable year, the Fund
will notify each shareholder of the portion of the dividends paid by the Fund to
the shareholder with respect to such taxable year which is exempt from
California state personal income tax. The total amount of California
exempt-interest dividends paid by the Fund with respect to any taxable year
cannot exceed the excess of the amount of interest received by the Fund for such
year on California Exempt Securities over any amounts that, if the Fund were
treated as an individual, would be considered expenses related to tax-exempt
income or amortizable bond premium and would thus not be deductible under
federal income or California state personal income tax law. The percentage of
total dividends paid by the Fund with respect to any taxable year which
qualifies as California exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Exempt Securities held by the Fund,
such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. See "Additional Information Concerning Taxes
- -Federal - California Tax-Exempt Bond Fund" above.
To the extent, if any, dividends paid to shareholders are
derived from the excess of net long-term capital gains over net short-term
capital losses, such dividends will not constitute California exempt-interest
dividends and will generally be taxed as long-term capital gains under rules
similar to those regarding
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<PAGE> 432
the treatment of capital gains dividends for federal income tax purposes. See
"Additional Information Concerning Taxes -Federal- All Funds" above. Moreover,
interest on indebtedness incurred by a shareholder to purchase or carry Fund
shares is not deductible for California state personal income tax purposes if
the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.
The foregoing is only a summary of some of the important
California state personal income tax considerations generally affecting the Fund
and its shareholders. No attempt is made to present a detailed explanation of
the California state personal income tax treatment of the Fund or its
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of any Fund dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
the Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation, in
general.
TAXATION OF THE MASTER PORTFOLIOS
- ---------------------------------
Management of the Master Portfolios corresponding to each of
the Feeder Funds intends for each Master Portfolio to be treated as a
partnership (or, in the event that a Feeder Fund is the sole investor in a
Master Portfolio, as an agent or nominee) rather than as a regulated investment
company or a corporation under the Code. Under the rules applicable to a
partnership (or an agent of nominee) under the Code, any interest, dividends,
gains and losses of the Master Portfolios will be deemed to have been reported
as income/loss (i.e., "passed through") to their investors, regardless of
whether any amounts are actually distributed by the Master Portfolios.
Each investor in a Master Portfolio will be taxed on its share
(as determined in accordance with the governing instruments of the particular
Master Portfolio) of the Master Portfolio's ordinary income and capital gains in
determining its income tax liability. The determination of such share will be
made in accordance with the Code and regulations promulgated thereunder. It is
intended that each Master Portfolio's assets, income and distributions will be
managed in such a way that an investor in a Master Portfolio will be able to
satisfy the
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<PAGE> 433
requirements of Subchapter M of the Code, assuming that the investor invested
all of its assets in the Master Portfolio.
OTHER INFORMATION
- -----------------
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities.
Except as noted above with respect to California state
personal income taxation of dividends paid by the California Tax- Exempt Bond
Fund, income distributions may be taxable to shareholders under state or local
law as dividend income even though all or a portion of such distributions may be
derived from interest on tax-exempt obligations or U.S. government obligations
which, if realized directly, would be exempt from such income taxes.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally affecting purchasers of Fund shares. No attempt is made
to present a detailed explanation of the federal income tax treatment of the
Funds or their shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential purchasers of Fund shares
should consult their tax advisers with specific reference to their own tax
situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
- -------------------------------------
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position With
Name And Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 62 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Chairman of the
Board and Trustee,
</TABLE>
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<PAGE> 434
Position With
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
Master Investment
Trust, Series I
(registered investment
company) (since 1993);
President and Chairman
of the Board of Pacific
Horizon Funds, Inc.
(1982 to August 31,
1995); former Trustee,
Master Investment
Trust, Series II
(registered investment
company) 1993 to April
1997; former Director,
Bunker Hill Income
Securities, Inc.
(registered investment
company) through 1991.
Douglas B. Fletcher 71 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisor,
Suite 100 Incorporated, (regis-
Newport Beach, CA 92660-2629 tered investment
advisor) 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.
-87-
<PAGE> 435
osition With
Name And Address Age ompany Principal Occupations
- ---------------- --- ------ ---------------------
Robert E. Greeley 64 irector Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from
1979 to 1991; Trustee,
Master Investment
Trust, Series I
(since 1993); Director,
Morgan Grenfell Small
Cap Fund (since 1986);
former Director, Bunker
Hill Income Securities,
Inc. (since 1989) ;
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992; former
Trustee, Master
Investment Trust,
Series II from 1993 to
February 1997
(registered investment
companies).
Kermit O. Hanson 80 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Shoreline, 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).
-88-
<PAGE> 436
<TABLE>
<CAPTION>
Position With
Name And Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Cornelius J. Pings* 67 Chairman of President, Association
Association of American the Board and of American Universi-
Universities President ties, February 1993
to
1200 New York Avenue, NW date;
Provost, 1982 to
Suite 550 January 1993, Senior
Washington, DC 20005 Vice President for
Academic Affairs, 1981 to January
1993, University of Southern
California; Trustee, Master
Investment Trust, Series I (since
1995); former Trustee , Master
Investment Trust, Series II
(October 1995 to February 1997).
J. David Huber 49 Executive Employee of BISYS Fund
BISYS Fund Services Vice President Services, Inc.,
3435 Stelzer Road June 1987 to present;
Columbus, OH 43219 President of Master
Investment Trust, Series I, Master
Investment Trust Series II (1996-
February 1997) and Seafirst
Retirement Funds (since 1996.)
Michael Brascetta 37 Vice President Senior Vice President
BISYS Fund Services of Shareholder Services,
3435 Stelzer Road BISYS Fund Services,
Columbus, OH 43219 Inc., April 1996 to
present; Employee, The
Vanguard Group, 1981 to
April 1996.
Irimga McKay 36 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 (1996-February 1997) and
Seafirst Retirement Funds (since
1993); Regional Vice President,
Continental Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty Partners (a
real estate
</TABLE>
-89-
<PAGE> 437
<TABLE>
<CAPTION>
Position With
Name And Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
limited partnership),
May 1986 to June 1987.
<S> <C>
Stephanie L. Blaha 37 Vice Director of Client
BISYS Fund Services President Services of the 3435
Stelzer Road Administrator, March
Columbus, OH 43219 1995 to date,
prior thereto Assistant Vice
President of the Administrator and
Distributor, October 1991 to March
1995; Vice President (since 1996)
Seafirst Retirement Funds, Master
Investment Trust, Series I and
Master Investment Trust, Series II
(1996- February 1997) ; Account
Manager, AT&T American Transtech,
Mutual Fund Division, July 1989 to
October 1991.
Kevin L. Martin 35 Treasurer Vice President, Fund
BISYS Fund Services Accounting BISYS
Fund
3435 Stelzer Road Services, Inc.
Columbus, OH 43219 February 1996 to
Present; Treasurer (since 1996),
Seafirst Retirement Funds and
Master Investment Trust, Series II
(1996- February 1997); Senior Audit
Manager, Ernst & Young LLP (1984 to
February 1996).
Lisa Ling 36 Assistant Employee, BISYS Fund
BISYS Fund Services Treasurer Services, Inc., November
3435 Stelzer Road 1995 to present;
Columbus, OH 43219 Assistant Treasurer
(since 1996); Master Investment
Trust Series II (1996-February
1997) and Seafirst Retirement
Funds; employee, Federated
Investors, October 1982 to November
1995.
W. Bruce McConnel, III 54 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath LLP.
Building, Suite 1100
Philadelphia, PA 19107
</TABLE>
-90-
<PAGE> 438
<TABLE>
<CAPTION>
Position With
Name And Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C>
George O. Martinez 36 Assistant Senior Vice President and Director
BISYS Fund Services Secretary of Administrative and Regulatory
3435 Stelzer Road Services, of the Administrator,
Columbus, OH 43219 since April 1995; Assistant Secretary
(since 1995) Seafirst Retirement
Funds and Master Investment Trust,
Series II (1996-February 1997);
prior thereto, Vice 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 Services,
Columbus, OH 43219 BISYS 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>
* Dr. 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 in
recognition of his years of service to the Company until February 28, 1997; each
member of a Committee of the Board is entitled to receive $1,000 for each
Committee meeting they participate in (whether or not held on the same day as a
Board meeting); and each Chairman of a Committee of the Board shall be entitled
to receive an annual retainer of $1,000 for his services
-91-
<PAGE> 439
as Chairman of the Committee. Mr. Trefftzs became a director emeritus on
September 1, 1996 of the Company and received 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 28, 1997, the Company
paid or accrued for the account of its directors as a group for services in all
capacities a total of $74,687. Of that amount, $4,667, $6,604, $2,529, $7,525,
$417, $1,444, $857, $506, $51, $81 and $1,229 of directors' compensation were
allocated to the Aggressive Growth, California Tax-Exempt Bond, U.S. Government
Securities, Capital Income, Intermediate Bond, Blue Chip, Asset Allocation,
Corporate Bond, Short-Term Government, International Equity and National
Municipal Bond Funds, respectively. Each director is also reimbursed for
out-of-pocket expenses incurred as a director. Drinker Biddle & Reath LLP, of
which Mr. McConnel is a partner, receives legal fees as counsel to the Company.
As of the date of this Statement of Additional Information, the directors and
officers of the Company, as a group, own less than 1% of the outstanding shares
of each of the Company's investment portfolios.
Under a retirement plan approved by the Board of Directors,
including a majority of its directors who are not "interested persons" of the
Company, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer then
in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director served as Chairman of the
Board.
Years of service for purposes of calculating the benefit
described above are based upon service as a director or Chairman after February
28, 1994. Retirement benefits in which a director has become vested may not be
reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits paid by the Company within 45 days of the
death or resignation of
-92-
<PAGE> 440
the director. The present value of such benefits is to be calculated (i) based
on the retainer that was payable by the Company during the year of the
director's death or resignation (and not on any retainer payable to directors
thereafter), and (ii) using the interest rate in effect as of the date of the
director's death or resignation by the Pension Benefit Guaranty Corporation (or
any successor thereto) for valuing immediate annuities under terminating defined
benefit pension plans. A director's election to receive a single sum must be
made in writing within the 30 calendar days after the date the individual is
first elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before March
1, 1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit following the director's death or resignation (unless the
director has vested benefits as a result of completing nine years of service).
Any such action shall be approved by the Board and by a majority of the
directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former
director is neither secured nor funded by the Company but shall be binding upon
its successors in interest. The payment of benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Investment Trust, Series I
("Master Trust I"), their addresses, age, and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
Position with
Name And Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C>
Thomas M. Collins 62 Chairman of See "Directors and
McDermott & Trayner the Board Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
</TABLE>
-93-
<PAGE> 441
<TABLE>
<CAPTION>
Position with
Name And Address Age Master Trust I Principal Occupations
- ---------------- --- -------------- ---------------------
<S> <C>
Michael Austin 59 Trustee of Master Chartered Accountant;
Victory House, Trust I Trustee, Master Invest-
Nelson Quay ment Trust, Series II
Governor's Harbour (1993 to February 1997);
Grand Cayman Retired Partner, KPMG Peat
Cayman Islands Marwick LLP
British West Indies
Robert E. Greeley 64 Trustee of Master See "Directors and
Page Mill Asset Trust I Officers of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee of Master Retired President, Laird
1200 Shenandoah Drive East Trust I Norton Trust Company,
Seattle, WA 98112 Chairman of the Board of
Advisors, Phoenix Venture Funds;
Trustee, Seafirst Retirement Funds;
Trustee, Master Investment Trust,
Series II (1993 to February 1997);
former Supervisor, Collective
Investment Trust for Seafirst
Retirement Accounts; former Trustee,
First Funds of America (registered
investment companies).
Cornelius J. Pings 67 Trustee of Master See "Directors and Officers of
Association of American Trust I the Company."
Universities
1200 New York Avenue, N.W.
Suite 550
Washington, DC 20005
J. David Huber 49 President of See "Directors and
BISYS Fund Services Master Trust I Officers of the Company."
3435 Stelzer Road
Columbus, OH 43219
Adrian J. Waters 32 Executive Vice Managing Director,
BISYS Fund Services President, Concord Management
Floor 2, Block 2 Treasurer and (Ireland) Ltd. since May
Harcourt Centre Assistant 1993; Manager in the
Dublin 2, Ireland Secretary of Investment Company Industry
Master Trust I Services Group, Price
Waterhouse 1989 to May 1993;
Member of Oliver Freaney and
Co./Spicer and Openheim
Chartered Accountants 1986-
1989.
</TABLE>
-94-
<PAGE> 442
<TABLE>
<CAPTION>
Position with
Name And Address Age Master Trust I Principal Occupations
- ---------------- --- -------------- ---------------------
<S> <C>
Stephanie L. Blaha 37 Vice President of See "Directors and Officers of
BISYS Fund Services Master Trust I the Company."
3435 Stelzer Road
Columbus, OH 43219
W. Bruce McConnel, III 54 Secretary of See "Directors and
1345 Chestnut Street Master Trust I Officers of the Company."
Philadelphia, PA 19107
</TABLE>
- -----------------------------
* Mr. Nathane is an "interested trustee" of Master Trust I as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a Director or Trustee of a feeder fund of
one of the portfolios of Master Trust I) plus $500 per day for each travel day
and each day of a Board or committee meeting attended, for his services as
trustee of each of Master Trust I. Each trustee is also reimbursed for
out-of-pocket expenses incurred as a trustee. For its fiscal year ended February
28, 1997, Master Trust I paid or accrued for the account of its trustees as a
group for services in all capacities a total of $50,362; of that amount,
$32, $1,894, $14,942, $7,722 and $25,773 were allocated to the Master Portfolios
corresponding to the International Equity, Corporate Bond, Asset Allocation,
Intermediate Bond and Blue Chip Funds, respectively (prior to September 1,
1996, September 1, 1996 and June 23, 1997 the International Equity , Corporate
Bond and Asset Allocation Funds operated as part of a master-feeder structure
and invested all of their respective assets in the International Equity,
Corporate Bond and Asset Allocation Master Portfolios, respectively). The
trustee's fees and reimbursements are allocated among all of Master Trust I's
portfolios based on their relative net asset values. Drinker Biddle & Reath LLP,
of which Mr. McConnel is a partner, receives legal fees as counsel to Master
Trust I.
-95-
<PAGE> 443
The following chart provides certain information for the fiscal year ended
February 28, 1997 about the fees received by directors of the Company as
directors and/or officers of the Company and as directors and/or trustees of the
Fund Complex:
<TABLE>
<CAPTION>
============================================================================================================================
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS ESTIMATED REGISTRANT
AGGREGATE ACCRUED AS ANNUAL AND FUND
COMPENSATION PART OF BENEFITS COMPLEX**
NAME OF PERSON/ FROM THE FUND UPON PAID TO
POSITION COMPANY EXPENSES* RETIREMENT DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $76,000 $ 0 $ 0 $86,125
Director
- ---------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $37,000 $ 0 $ 0 $37,000
Vice Chairman of
the Board
- ---------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley $33,000 $ 0 $ 0 $51,625
Director
- ---------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $35,000 $ 0 $ 0 $43,000
Director
- ---------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $78,500 $ 0 $ 0 $78,500
Director Emeritus
- ---------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,000 $ 0 $ 0 $68,125
President and
Chairman of the
Board
===========================================================================================================================
</TABLE>
- ------------------------------
* For the fiscal year ended February 28, 1997, the Company accrued on
the part of all of the directors an aggregate of $57,273 in
retirement benefits.
** The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Trust I, Master Trust, II, Time Horizon Funds and World Horizon
Funds. Fees from the Time Horizon Funds are for the period from March
1, 1996 to February 28, 1997.
-96-
<PAGE> 444
INVESTMENT ADVISER
- ------------------
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to the Company since the commencement of its operations. As described in
the Prospectuses, the Feeder Funds have not retained the services of an
investment adviser because they seek to achieve their investment objectives by
investing all their assets in their corresponding Master Portfolio. In the
Investment Advisory Agreements with the Companies, Bank of America has agreed to
provide investment advisory services as described in each Prospectus. Bank of
America has also agreed to pay all expenses incurred by it in connection with
its activities under its agreements other than the cost of securities, including
brokerage commissions, if any, purchased for the Portfolios. In rendering its
advisory services, Bank of America may utilize Bank officers from one or more of
the departments of the Bank which are authorized to exercise the fiduciary
powers of Bank of America with respect to the investment of trust assets. In
some cases, these officers may also serve as officers, and utilize the
facilities, of wholly-owned subsidiaries and other affiliates of Bank of America
or its parent corporation. In addition, the Investment Advisory Agreements with
respect to the Capital Income Fund, Intermediate Bond Master Portfolio, Blue
Chip Master Portfolio, Asset Allocation Fund, Short-Term Government Fund and
International Equity Fund provide that Bank of America may, in its discretion,
provide advisory services through its own employees or employees of one or more
of its affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation; provided such employees are under the management of
Bank of America.
For the services provided and expenses assumed pursuant to the
particular investment advisory agreement, the Companies have agreed to pay Bank
of America fees, accrued daily and payable monthly, at the annual rates of .25%
of the average daily net assets of the Short-Term Government Fund; .30% of the
net assets of the Intermediate Bond Master Portfolio; .35% of the net assets of
each of the National Municipal Bond Fund and U.S. Government Securities Fund;
.40% of the net assets of the California Tax-Exempt Bond Fund and Asset
Allocation Fund; .45% of the net assets of each of the Capital Income Fund and
Corporate Bond Fund; .50% of the net assets of the Blue Chip Master
Portfolio; .60% of the net assets of the Aggressive Growth Fund; and .75% of the
net assets of the International Equity Fund for the services provided and
expenses assumed pursuant to the particular Investment Advisory Agreement. The
fees payable to Bank of America are not subject to reduction as the value of
each Fund's or Master Portfolio's net assets increase. From time to time,
-97-
<PAGE> 445
Bank of America may voluntarily waive fees or reimburse a particular Fund or
Master Portfolio for expenses . Prior to June 23, 1997, Bank of America was
entitled to receive an investment advisory fee at the annual rate of 0.45%,
0.75% and 0.55% of the respective average daily net assets of the Intermediate
Bond, Blue Chip and Asset Allocation Master Portfolios.
For the fiscal years indicated, the following advisory
fees (net of waivers) were paid or payable to Bank of America by the Aggressive
Growth, California Tax-Exempt Bond, Capital Income , U.S. Government Securities
Funds, International Equity Fund and Short-Term Government Fund as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year ended Year Ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $1,239,652 $ 935,275 $ 816,300
Fund
- ------------------------------------------------------------------------------------------------------
California Tax- $ 857,206 $ 584,994 $ 606,131
Exempt Bond Fund
- ------------------------------------------------------------------------------------------------------
Capital Income $1,220,622 $ 992,349 $ 572,638
Fund
- ------------------------------------------------------------------------------------------------------
U.S. Government $ 283,471 $ 269,498 $ 397,905
Securities Fund
- ------------------------------------------------------------------------------------------------------
International Equity $ 48,128 N/A N/A
Fund(1)
- ------------------------------------------------------------------------------------------------------
Short-Term $ 12,022 N/A N/A
Government Fund(2)
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Period from September 1, 1996 to February 28, 1997. For the period from May
13, 1996 (inception date) to August 31, 1996, the International Equity
Master Portfolio paid $0 in advisory fees (net of waivers) to Bank of
America.
(2) Period from August 2, 1996 (inception date) to February 28, 1997.
For the fiscal years indicated, Bank of America waived
advisory fees with respect to the Aggressive Growth, California Tax-Exempt Bond,
Capital Income , U.S. Government Securities, International Equity and
Short-Term Government Funds as follows:
-98-
<PAGE> 446
<TABLE>
<CAPTION>
---------------------------------------------
Year ended Year Ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $ 0 $ 0 $ 0
Fund
- -------------------------------------------------------------------------------------
California Tax- $244,720 $234,006 $242,173
Exempt Bond Fund
- -------------------------------------------------------------------------------------
Capital Income $ 0 $ 0 $359,205
Fund
- -------------------------------------------------------------------------------------
U.S. Government $134,763 $ 41,779 $ 0
Securities Fund
- -------------------------------------------------------------------------------------
International Equity $ 56,931 N/A N/A
Fund(1)
- -------------------------------------------------------------------------------------
Short-Term $ 12,022 N/A N/A
Government Fund(2)
- -------------------------------------------------------------------------------------
<FN>
(1) Period from September 1, 1996 to February 28, 1997. For the period from May
13, 1996 (inception date) to August 31, 1996, Bank of America waived
advisory fees of $8,262 with respect to the International Equity Master
Portfolio.
(2) Period from August 2, 1996 (inception date) to February 28, 1997.
</TABLE>
Except as noted below, for the fiscal years indicated Bank
of America waived its entire advisory fee with respect to the Intermediate Bond
Master Portfolio, Blue Chip Master Portfolio, Asset Allocation Master Portfolio
and National Municipal Bond Fund (Municipal Master Portfolio for periods prior
to July 1, 1996) as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate
Bond Master $428,2871 $ 296,136 $ 293,222
Portfolio
</TABLE>
- --------
1 For the fiscal year ended February 28, 1997, Bank of America waived
$256,439, $961,001, $735,797 and $0 in advisory fees with respect to the
Intermediate Bond Master Portfolio, Blue Chip Master Portfolio, Asset
Allocation Master Portfolio and National Municipal Bond Fund. Prior to June
23, 1997, the Asset Allocation Fund invested all of its assets in the
(continued...)
-99-
<PAGE> 447
<TABLE>
<CAPTION>
------------------------------------------------
Year ended Year Ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Master $2,701,648(1) $1,574,3882 $1,091,132
Portfolio
- --------------------------------------------------------------------------------
Asset Allocation $1,046,406(1) $ 913,660(2) $ 849,188
Master Portfolio
- --------------------------------------------------------------------------------
National
Municipal Bond $ 34,135(1) $ 24,739 $ 6,147
Fund3
- --------------------------------------------------------------------------------
</TABLE>
Additionally, for the fiscal years indicated , Bank of
America assumed certain operating expenses of the Intermediate
Bond Fund, Blue Chip Fund, Asset Allocation Fund, Municipal
Master Portfolio , National Municipal Bond Fund, U.S. Government
Securities Fund, Corporate Bond Fund, International Equity Fund,
and Short-Term Government Fund as follows:
- --------
1.(...continued)
Asset Allocation Master Portfolio. On June 23, 1997, the Asset Allocation
Fund withdrew assets from the Asset Allocation Master Portfolio and
invested them directly in investment securities.
2 For the fiscal year ended February 29, 1996, Bank of America waived
$1,164,328 and $720,259, respectively, in advisory fees with respect to the
Blue Chip Master Portfolio and Asset Allocation Master Portfolio.
3 Prior to July 1, 1996, the National Municipal Bond Fund invested all of its
assets in the Municipal Master Portfolio. On July 1, 1996, the National
Municipal Bond Fund withdrew assets from the Municipal Master Portfolio and
invested them directly in investment securities. For the period from March
1, 1996 to June 30, 1996 the Municipal Master Portfolio paid advisory fees
of $0 and Bank of America waived advisory fees of $14,997. For the fiscal
years ended February 29, 1996 and February 28, 1995, the Municipal Master
Portfolio paid the advisory fees listed above.
-100-
<PAGE> 448
<TABLE>
<CAPTION>
------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February
1997 1996 28, 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Intermediate Bond $146,716 $ 0 $207,033
Fund
- --------------------------------------------------------------------------------
Blue Chip Fund $ 0 $ 0 $245,776
- --------------------------------------------------------------------------------
Asset Allocation $ 31,598 $ 0 $245,718
Fund
- --------------------------------------------------------------------------------
Municipal Master $ 0(1) $ 0 $121,591
Portfolio
- --------------------------------------------------------------------------------
National $ 0 $ 0 $180,700
Municipal Bond Fund
- --------------------------------------------------------------------------------
U.S. Government $ 93,097 $ 0 $ 0
Securities Fund
- --------------------------------------------------------------------------------
Corporate Bond Fund $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------
International $132,666 N/A N/A
Equity Fund(2)
- --------------------------------------------------------------------------------
Short-Term $114,415 N/A N/A
Government Fund(3)
- --------------------------------------------------------------------------------
<FN>
(1) Prior to July 1, 1996, the National Municipal Bond Fund invested all of its
assets in the Municipal Master Portfolio. On July 1, 1996, the National
Municipal Bond Fund withdrew assets from the Municipal Master Portfolio and
invested them directly in investment securities. Assumed operating expenses
are for the period March 1, 1996 to June 30, 1996.
(2) Period from September 1, 1996 to February 28, 1997. For the period from May
13, 1996 (inception date) to August 31, 1996, Bank of America assumed
operating expenses of $41,154 with respect to the International Equity
Master Portfolio.
(3) Period from August 2, 1996 (inception date) to February 28, 1997.
</TABLE>
For the periods indicated, Bank of America waived its entire
advisory fee with respect to the Corporate Bond Fund (and Corporate Bond Master
Portfolio for the period prior to September 1, 1996) as follows:
-101-
<PAGE> 449
<TABLE>
<CAPTION>
----------------------------------------------------------
Period April
25, 1994
(the date
the
Predecessor
Fund was
reorganized
into the
Period Corporate
October 1, Bond Fund)
Year ended Year ended 1994 through through
February February February 28, September
28, 1997 29, 1996 1995 30, 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate $ 70,991(1) $144,324 $ 58,897 $ 73,575
Bond
Fund
- -------------------------------------------------------------------------------
<FN>
(1) Prior to September 1, 1996, the Corporate Bond Fund invested all of its
assets in the Corporate Bond Master Portfolio . On September 1, 1996, the
Corporate Bond Fund withdrew assets from the Corporate Bond Master
Portfolio and invested them directly in investment securities. Fees waived
are for the period from September 1, 1996 to February 28, 1997. For the
same period Bank of America waived $129,971 in advisory fees with respect
to the Corporate Bond Fund. For the period from March 1, 1996 to August 31,
1996 the Corporate Bond Master Portfolio paid advisory fees of $0 and Bank
of America waived $69,539 in advisory fees with respect to the Corporate
Bond Master Portfolio.
</TABLE>
The Investment Advisory Agreements between Bank of America and
each Company will be in effect until October 31, 1997, and will continue in
effect with respect to a particular Master Portfolio or Fund from year to year
thereafter only so long as such continuation is approved at least annually by
(i) the Board of Trustees/Directors of the particular Company or the vote of a
"majority," as defined in the 1940 Act, of the outstanding voting securities of
such particular Master Portfolio or Fund, and (ii) a majority of those
trustees/directors of the particular Company who are not "interested persons,"
as defined in the 1940 Act, of any party to the particular Investment Advisory
Agreement, acting in person at a meeting called for the purpose of voting on
such approval. Each Investment Advisory Agreement will terminate automatically
in the event of its "assignment," as defined in the 1940 Act. In addition, each
Investment Advisory Agreement is terminable with respect to a particular Master
Portfolio or Fund at any time without penalty upon 60 days' written notice by
the Board of Trustees/Directors of the particular Company, by vote of the
holders of a majority
-102-
<PAGE> 450
of a particular Master Portfolio's or Fund's outstanding voting securities, or
by Bank of America.
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Funds or
Master Portfolios.
The Investment Advisory Agreements provide that Bank of
America shall not be liable for any error of judgment or mistake of law or for
any loss suffered in connection with the performance of the Investment Advisory
Agreements, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
SUB-ADVISER
- -----------
Wellington Management, with principal offices at 75 State
Street, Boston, Massachusetts 02109, serves as sub-adviser to the International
Equity Fund. Wellington Management is a professional investment counselling firm
that provides investment services to investment companies, employee benefit
plans, endowments, foundations, and other institutions and individuals. The
Sub-Adviser's predecessor organizations have provided investment advisory
services to investment companies since 1933 and to investment counseling clients
since 1960.
Under the Sub-Advisory Agreement dated January 1, 1997,
between Bank of America and Wellington Management, the Sub-Adviser, subject to
the oversight and supervision of the Adviser and the Company's Board of
Directors, provides a continuous investment program for the International Equity
Fund, including investment research and management with respect to all
securities and investments and cash equivalents in the International Equity
Fund. The Sub-Adviser also determines from time to time what securities and
other investments will be purchased, retained or sold by the International
Equity Fund. The Sub-Advisory Agreement provides that Bank of America will pay
Wellington Management a quarterly fee based on the average month-end net assets
of the International Equity Fund, at the annual rate of 0.40% of the Fund's
first $50 million of average month-end net assets, plus 0.30% of the next $100
million of the Fund's average month-end net assets, plus 0.25% of the next $350
million of the Fund's average month-end net assets, plus 0.20% of the Fund's
average month-end net assets over $500 million.
Pursuant to the sub-advisory agreement, the Sub-Adviser is not liable
for any error of judgment or mistake of law or for any loss suffered by the
Company in connection with the performance of the sub-advisory agreement, except
that the Sub-Adviser is
-103-
<PAGE> 451
liable to the Company and the Adviser for any loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or any
loss resulting from willful misfeasance, bad faith or negligence on the part of
the Sub-Adviser in the performance of its duties or from reckless disregard by
it of its obligations and duties under the sub-advisory agreement.
The sub-advisory agreement between Bank of America and Wellington
Management will be in effect until October 31, 1998 and continue in effect for
successive annual periods ending on October 31, provided such continuance is
specifically approved at least annually (a) by the vote of a majority of those
members of the Company's Board of Directors who are not interested persons of
any party to the sub-advisory agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Company's Board of
Directors or by vote of a majority of the outstanding voting securities of the
International Equity Fund. The Agreement may be terminated at any time, without
the payment of any penalty, by the Adviser or by the Company (in the case of the
Company, by vote of the Company's Board of Directors or by vote of a majority of
the outstanding voting securities of the International Equity Fund) on sixty
days' written notice to the Sub-Adviser, or by the Sub-Adviser, on sixty days'
written notice to the Company, provided that in each such case, notice is given
simultaneously to the Adviser. In addition, in the event of the termination of
the Investment Advisory Agreement with respect to the International Equity Fund
for any reason (whether by the Company, by the Adviser or by operation of law)
the sub-advisory agreement terminates upon the effective date of such
termination of the Investment Advisory Agreement.
For the period from January 1, 1997 to February 28, 1997,
Wellington Management earned advisory fees of $2924 and Wellington Management
waived advisory fees of $6823.
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,
-104-
<PAGE> 452
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, but do not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent and
custodian to such an investment company. In 1981, the United States Supreme
Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V. INVESTMENT
COMPANY INSTITUTE that the Board of Governors did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies.
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may perform the services for
the Portfolios contemplated by the particular Investment Advisory Agreement, the
Prospectuses, and this Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a
national bank may perform services comparable to those performed by Bank of
America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Portfolios or from continuing to purchase Fund shares for the accounts of its
customers. (For a discussion of the Glass Steagall Act in connection with the
Company's Shareholder Service Plan, see "Plan Payments" in the Funds'
Prospectuses.)
On the other hand, as described herein, the Funds are
currently distributed by Concord Financial Group, Inc., The BISYS Group, Inc.,
either directly or through its off-shore subsidiary with respect to the
Intermediate Bond Master Portfolio and Blue Chip Master Portfolio, provides
the Funds and Master Portfolios with administrative services. If current
restrictions under the Glass-Steagall Act preventing a bank from sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, the Companies expect that Bank of America would consider the
possibility of offering to perform some or all of the services now provided by
The BISYS Group, Inc. or Concord Financial Group, Inc. From time to time,
legislation modifying such restriction has been introduced in Congress which, if
enacted, would permit a bank holding company to establish a non-bank subsidiary
having the authority to organize, sponsor and distribute shares of an investment
company. If this or similar legislation were enacted, the Companies expect that
Bank of America's parent bank holding company would consider the possibility of
one of its non-bank subsidiaries offering to
-105-
<PAGE> 453
perform some or all of the services now provided by The BISYS Group, Inc. or
Concord Financial Group, Inc. It is not possible, of course, to predict whether
or in what form such legislation might be enacted or the terms upon which Bank
of America or such a non-bank affiliate might offer to provide services for
consideration by a particular Company's Board of Directors/Trustees.
ADMINISTRATOR
- -------------
The BISYS Group, Inc. through its wholly-owned subsidiary
BISYS Fund Services, L.P. (the "Administrator" or "BISYS"), with offices at 150
Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road, Columbus, Ohio
43219 serves as administrator. The Administrator also serves as administrator
to several other investment companies. Prior to November 1, 1996, Concord
Holding Corporation, an indirect, wholly-owned subsidiary of BISYS served as the
Funds' administrator (the "Prior Administrator").
The Administrator (and/or its off-shore affiliate with respect
to the Intermediate Bond Master Portfolio and Blue Chip Master Portfolio)
provides administrative services to the Funds and the Master Portfolios as
described in the Funds' Prospectuses pursuant to separate administration
agreements for each Company. Each Master Portfolio's administration agreement
will continue in effect until October 31, 1997 and thereafter for successive
periods of one year, provided that such continuance is specifically approved at
least annually (a) by a vote of a majority of those members of the Board of
Trustees of the particular Master Trust who are not parties to the
administration agreement or "interested persons" of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the particular Master Trust or by vote of a
"majority of the outstanding voting securities" of such Master Portfolio. Each
Master Portfolio's administration agreement is terminable at any time with
respect to such Master Portfolio, without penalty, by its Board of Trustees or
by vote of a majority of such Master Portfolio's outstanding voting securities
upon 60 days' notice to the Administrator, or by the Administrator, upon 90
days' written notice to such Master Portfolio. The Company's administration
agreement will continue in effect until October 31, 1997 and thereafter will
be extended with respect to each Fund for successive periods of one year,
provided that each such extension is specifically approved by (a) vote of a
majority of those members of the Company's Board of Directors who are not
interested persons of any party to the agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) the Company's Board
of Directors or by vote of a majority of the outstanding voting securities of
such Fund. The agreement is terminable at any time without penalty by the
Company's Board
-106-
<PAGE> 454
of Directors or by vote of a majority of the outstanding voting securities of
any Fund upon 60 days' notice to the Administrator, or by the Administrator upon
90 days' notice to the Company.
The Companies have agreed to pay the Administrator fees for
its services as Administrator, accrued daily and payable monthly, at the annual
rates of .05% of the average daily net assets of the Intermediate Bond Master
Portfolio and Blue Chip Master Portfolio; .15% of the average daily net assets
of the Intermediate Bond Fund, Blue Chip Fund and Asset Allocation Fund ; .20%
of the average daily net assets of the U.S. Government Securities, National
Municipal Bond Fund, Short-Term Government, Capital Income, Corporate Bond and
International Equity Funds; and .30% of the average daily net assets of the
Aggressive Growth and California Tax-Exempt Bond Funds. The fees payable to the
Administrator are not subject to reduction as the value of each Fund's and
Master Portfolio's net assets increase. From time to time, the Administrator may
voluntarily waive fees or reimburse a Fund or Master Portfolio for expenses.
Prior to July 1, 1996, September 1, 1996, September 1, 1996 and June 23, 1997,
the Administrator or Prior Administrator was entitled to receive an
administration fee payable at the annual rate of 0.15% of the National Municipal
Bond Fund's and 0.05% of the Municipal Master Portfolio's average daily net
assets, 0.15% of the Corporate Bond Fund's and 0.05% of the Corporate Bond
Master Portfolio's average daily net assets, 0.15% of the International Equity
Fund's and 0.05% of the International Equity Master Portfolio's average daily
net assets and 0.15% of the Asset Allocation Fund's and 0.05% of the Asset
Allocation Master Portfolio's average daily net assets, respectively.
-107-
<PAGE> 455
For the fiscal years indicated, the following administration
fees (net of waivers) were paid or payable to the Administrator or Prior
Administrator by the Aggressive Growth Fund, California Tax-Exempt Bond Fund,
Capital Income Fund, U.S. Government Securities Fund, Short-Term Government
Fund, International Equity Fund and International Equity Master Portfolio as
follows:
<TABLE>
<CAPTION>
--------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $619,826 $467,638 $408,150
Fund
- -------------------------------------------------------------------------------
California Tax- $459,068 $438,745 $454,249
Exempt Bond Fund
- -------------------------------------------------------------------------------
Capital Income $542,500 $441,044 $414,134
Fund
- -------------------------------------------------------------------------------
U.S. Government $ 84,992 $153,997 $227,374
Securities Fund
- -------------------------------------------------------------------------------
Short-Term $ 0(1) N/A N/A
Government Fund
- -------------------------------------------------------------------------------
International Equity $ 0(2) N/A N/A
Fund
- -------------------------------------------------------------------------------
International $ 0(3) N/A N/A
Equity Master
Portfolio
- -------------------------------------------------------------------------------
<FN>
(1) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
(2) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
(3) Prior to September 1, 1996, the International Equity Fund invested all of
its assets in the International Equity Master Portfolio. On September 1,
1996, the International Equity Fund withdrew its assets from the
International Equity Master Portfolio and invested directly in investment
securities. For the period from May 13, 1996 (inception date) to August 31,
1996, the International Equity Master Portfolio paid administration fees
(net of waivers) of $0 to the Prior Administrator and the Prior
Administrator waived administration fees of $551 with respect to the
International Equity Master Portfolio.
</TABLE>
For the fiscal years indicated, the Administrator or Prior
Administrator waived administration fees with respect to
-108-
<PAGE> 456
the Aggressive Growth, California Tax-Exempt Bond, Capital Income , U.S.
Government Securities, Short-Term Government and International Equity Funds as
follows:
<TABLE>
<CAPTION>
------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Aggressive Growth $ 0 $ 0 $ 0
Fund
- --------------------------------------------------------------------------------
California Tax- $183,837 $175,505 $181,979
Exempt Bond Fund
- --------------------------------------------------------------------------------
Capital Income $ 0 $ 0 $ 0
Fund
- --------------------------------------------------------------------------------
U.S. Government $ 77,220 $ 23,875 $ 0
Securities Fund
- --------------------------------------------------------------------------------
Short-Term $ 9,617(1) N/A N/A
Government Fund
- --------------------------------------------------------------------------------
International Equity $ 15,032(2) N/A N/A
Fund
- --------------------------------------------------------------------------------
<FN>
(1) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
(2) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
</TABLE>
Additionally, for the fiscal years indicated, the
Administrator or Prior Administrator reimbursed operating expenses of the Blue
Chip Fund, Asset Allocation Fund, Intermediate Bond Fund, National Municipal
Bond Fund, Municipal Master Portfolio , Corporate Bond Fund, Corporate Bond
Master Portfolio, U.S. Government Securities Fund, International Equity Fund and
International Equity Master Portfolio as follows:
-109-
<PAGE> 457
<TABLE>
<CAPTION>
--------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Fund $ 303 $150,472 $ 0
- -------------------------------------------------------------------------------
Asset Allocation $ 31,598 $192,545 $ 0
Fund
- -------------------------------------------------------------------------------
Intermediate Bond $146,716 $253,991 $ 0
Fund
- -------------------------------------------------------------------------------
National Municipal $147,200 $172,071 $ 0
Bond Fund
- -------------------------------------------------------------------------------
Municipal Master $ 0 $169,773 $ 0
Portfolio(1)
- -------------------------------------------------------------------------------
Corporate Bond Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------
Corporate Bond $ 0 $233,360 $ 0
Master Portfolio(2)
- -------------------------------------------------------------------------------
U.S. Government $ 0(3) N/A N/A
Securities Fund
- -------------------------------------------------------------------------------
International $ 0(4) N/A N/A
Equity Fund
- -------------------------------------------------------------------------------
International $ 0(5) N/A N/A
Equity Master
Portfolio
- -------------------------------------------------------------------------------
<FN>
- --------------------
(1) Prior to July 1, 1996, the National Municipal Bond Fund
invested all of its assets in the Municipal Master
Portfolio. On July 1, 1996, the National Municipal Bond
Fund withdrew its investment from the Municipal Master
Portfolio and invested directly in investment securities.
For the period March 1, 1996 to June 30, 1996 the Prior
Administrator reimbursed operating expenses of $0 with
respect to the Municipal Master Portfolio.
(2) Prior to September 1, 1996, the Corporate Bond Fund invested
all of its assets in the Corporate Bond Master Portfolio.
On September 1, 1996, the Corporate Bond Fund withdrew its
investment from the Corporate Bond Master Portfolio and
invested directly in investment securities. For the period
March 1, 1996 to August 31, 1996, the Prior Administrator
reimbursed operating expenses of $0 with respect to the
Corporate Bond Master Portfolio.
-110-
<PAGE> 458
(3) Period from August 2, 1996 (inception date of fund) to
February 28, 1997.
(4) Period from May 13, 1996 (inception date of fund) to
February 28, 1997.
(5) Prior to September 1, 1996, the International Equity Fund
invested all of its assets in the International Equity
Master Portfolio. On September 1, 1996, the International
Equity Fund withdrew its investment from the International
Equity Master Portfolio and invested them directly in
securities. For the period March 1, 1996 to August 31,
1996, the Prior Administrator reimbursed operating expenses
of $32,892 with respect to the International Equity Master
Portfolio.
</TABLE>
Except as noted below, for the fiscal years indicated the
Administrator or Prior Administrator waived its entire administration fee with
respect to the Intermediate Bond Fund and the Intermediate Bond Master
Portfolio, the Blue Chip Fund and the Blue Chip Master Portfolio, the Asset
Allocation Fund and the Asset Allocation Master Portfolio and National Municipal
Bond Fund and the Municipal Master Portfolio as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Year Ended Year Ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate $ 24,165 $ 9,952 $ 1,723
Bond Fund
- --------------------------------------------------------------------------------
Intermediate $ 47,588(1) $ 30,769 $ 33,431
Bond Master
Portfolio
- --------------------------------------------------------------------------------
Blue Chip Fund $153,571 $ 44,971 $ 5,833
- --------------------------------------------------------------------------------
Blue Chip $180,110(1) $104,889(2) $ 72,742
Master
Portfolio
- --------------------------------------------------------------------------------
Asset $ 41,432 $ 19,909 $ 4,703
Allocation Fund
- --------------------------------------------------------------------------------
Asset $ 94,685(1) $ 83,060(2) $ 79,573
Allocation Master
Portfolio
- --------------------------------------------------------------------------------
National $ 25,897(1) $ 10,543 $ 2,720
Municipal Bond
Fund
- --------------------------------------------------------------------------------
-111-
<PAGE> 459
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal $ 0 $ 3,534 $ 896
Master Portfolio(3)
- ------------------------------------------------------------------------------
<FN>
- --------------------
(1) For the fiscal year ended February 28, 1997, the Administrator or Prior
Administrator waived $28,508, $64,005, $66,954 and $0 with respect to
the Intermediate Bond Master Portfolio, Blue Chip Master Portfolio,
Asset Allocation Master Portfolio and National Municipal Bond Fund,
respectively.
(2) For the fiscal year ended February 29, 1996, the Prior Administrator
waived $77,922 and $65,491, respectively in administration fees with
respect to the Blue Chip Master Portfolio and Asset Allocation Master
Portfolio.
(3) Prior to July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. On July 1, 1996, the
National Municipal Bond Fund withdrew its assets from the Municipal
Master Portfolio and invested directly in investment securities. For
the period from March 1, 1996 to June 30, 1996 the Municipal Master
Portfolio paid administration fees of $0 and the Prior Administrator
waived administration fees of $1,951 with respect to the Municipal
Master Portfolio.
</TABLE>
For the periods indicated, the Administrator or the Prior
Administrator waived its entire administration fee with respect to the Corporate
Bond Fund and the Corporate Bond Master Portfolio as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Period April 25, 1994
(the date the
Predecessor Fund was
reorganized into the
Period October 1, 1994 Corporate Bond Fund)
Year ended Year ended through February 28, through September 30,
February 28, 1997 February 29, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bond Fund $54,670 $48,108 $19,569 $24,407
- ------------------------------------------------------------------------------------------------------------------
Corporate Bond Master $ 0 $16,036 $ 6,544 $ 8,175
Portfolio(1)
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) Prior to September 1, 1996, the Corporate Bond Fund invested all of its
assets on the Corporate Bond Master Portfolio. On September 1, 1996,
the Corporate Bond Fund withdrew its investment from the Corporate Bond
Master Portfolio and
-112-
<PAGE> 460
invested them directly in portfolio securities. For the period from
March 1, 1996 to August 31, 1996, the Corporate Bond Master Portfolio
paid administration fees of $0 and the Prior Administrator waived
administration fees of $7,727 with respect to the Corporate Bond Master
Portfolio.
</TABLE>
During the course of the Company's fiscal year, the Bank of
America and other service providers may prospectively waive payment of fees
and/or assume certain expenses of one or more of the Funds or Master Portfolios,
as a result of competitive pressures and in order to preserve and protect the
business and reputation of these entities. This will have the effect of
increasing yield to investors at the time such fees are not received or amounts
are assumed and decreasing yield when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with
the performance of its services under the administration agreements with the
exception of the fees charged by The Bank of New York (with respect to the
California Tax-Exempt Bond Fund, U.S. Government Securities Fund, Capital Income
Fund and Aggressive Growth Fund) and PFPC (with respect to the National
Municipal Bond Fund, Corporate Bond Fund, International Equity Fund, Short-Term
Government Fund and Asset Allocation Fund, and an offshore affiliate of PFPC
with respect to the Intermediate Bond Fund and Blue Chip Fund and their
corresponding Master Portfolios) for certain fund accounting services which are
borne by the Funds and Master Portfolios. See "General Information-- Custodian
and Transfer Agent" below. Expenses borne by the Funds and Master Portfolios
include taxes, interest, brokerage fees and commissions, if any, fees of Board
members who are not officers, directors, partners, employees or holders of 5% or
more of the outstanding voting securities of Bank of America or the
Administrator or any of their affiliates, SEC fees and state securities
qualification fees, advisory fees, administration fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
outside auditing and legal expenses, costs of maintaining corporate existence,
costs attributable to investor services, including without limitation telephone
and personnel expenses, costs of preparing and printing prospectuses and
Statements of Additional Information for regulatory purposes, cost of
shareholders' and interestholders' reports and corporate meetings and any
extraordinary expenses. Certain shareholder servicing (and/or distribution fees
with respect to the Non-Feeder Funds) in connection with Pacific Horizon's
shares are also paid by Pacific Horizon. See "Distributor and Plan Payments."
The administration agreements provide that the Administrator
shall not be liable for any error of judgment or mistake of law or any loss
suffered by the Company, the Funds, Master Trust I, or the Master Portfolios in
connection with the
-113-
<PAGE> 461
performance of the administration agreements, except a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties or
from the reckless disregard by it of its obligations and duties thereunder.
The Bank of New York ("BONY") (with respect to the
California Tax-Exempt Bond Fund, U.S. Government Securities Fund, Capital Income
Fund and Aggressive Growth Fund) and PFPC (with respect to the National
Municipal Bond Fund, Corporate Bond Fund, International Equity Fund, Short-Term
Government Fund and Asset Allocation Fund, and an off-shore affiliate of PFPC
with respect to the Intermediate Bond Fund and Blue Chip Fund and their Master
Portfolios) provide the Funds and their corresponding Master Portfolios with
certain accounting services pursuant to separate fund accounting services
agreements with the Administrator. Under the fund accounting services
agreements, BONY and PFPC have agreed to provide certain accounting,
bookkeeping, pricing, dividend and distribution calculation services with
respect to the Funds and the Master Portfolios. The monthly fees charged by
BONY and PFPC under the fund accounting services agreements are borne by the
Funds and the Master Portfolios.
DISTRIBUTOR AND PLAN PAYMENTS
- -----------------------------
Concord Financial Group, Inc. (the "Distributor"), a wholly
owned subsidiary of the Administrator, acts as distributor of the shares of
Pacific Horizon. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
Pacific Horizon's shares although it is not obliged to sell any particular
amount of shares. The distribution agreement shall continue in effect with
respect to each Fund until October 31, 1997. Thereafter, if not terminated,
the distribution agreement shall continue automatically for successive terms of
one year, provided that such continuance is specifically approved at least
annually (a) by a vote of a majority of those members of Pacific Horizon's Board
of Directors who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by Pacific Horizon's Board of Directors or
by vote of a "majority of the outstanding voting securities" of the Funds as to
which the distribution agreement is effective; PROVIDED, HOWEVER, that the
distribution agreement may be terminated by Pacific Horizon at any time, without
the payment of any penalty, by vote of a majority of Pacific Horizon's entire
Board of Directors or by a vote of a "majority of the outstanding voting
securities" of such Funds on 60 days' written notice to the Distributor, or by
the Distributor at any time, without the payment of any penalty, on 90 days'
written notice to Pacific Horizon. The agreement will automatically and
immediately terminate in the event of its "assignment".
-114-
<PAGE> 462
For the fiscal years ended February 28, 1997, February 29,
1996 and February 28, 1995, the Distributor received sales loads in connection
with the purchase of A shares of the Aggressive Growth, California Tax-Exempt
Bond, U.S. Government Securities, Capital Income, Intermediate Bond, Blue Chip,
Asset Allocation, National Municipal Bond, Short-Term Government and
International Equity Funds as follows:
-115-
<PAGE> 463
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1997
-------------------------------------------------------------------
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By Distributor Distributor America
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $1,088,000(1) $ 120,955 $ 938,206
Fund
- --------------------------------------------------------------------------------------------------------
California Tax- $ 591,000(1) $ 45,746 $ 542,086
Exempt Bond Fund
- --------------------------------------------------------------------------------------------------------
U.S. Government $ 179,000(1) $ 19,990 $ 161,482
Securities Fund
- --------------------------------------------------------------------------------------------------------
Capital Income $2,424,000(1) $ 268,543 $2,094,439
Fund
- --------------------------------------------------------------------------------------------------------
Intermediate Bond $ 92,000(1) $ 10,026 $ 82,259
Fund
- --------------------------------------------------------------------------------------------------------
Blue Chip Fund $2,418,000(1) $ 268,770 $2,128,530
- --------------------------------------------------------------------------------------------------------
Asset Allocation $ 421,000(1) $ 47,026 $ 373,436
Fund
- --------------------------------------------------------------------------------------------------------
National Municipal $ 203,000(1) $ 21,986 $ 180,834
Bond Fund
- --------------------------------------------------------------------------------------------------------
Corporate Bond $ 103,000(1) $ 11,522 $ 90,340
Fund
- --------------------------------------------------------------------------------------------------------
Short-Term $ 0(1) $ 0 $ 0
Government Fund(2)
- --------------------------------------------------------------------------------------------------------
International $ 115,000(1) $ 12,765 $ 101,858
Equity Fund(3)
- --------------------------------------------------------------------------------------------------------
<FN>
- --------
1 Balance was paid to selling dealers.
2 Period from August 2, 1996 (inception date of fund) to February 28,
1997.
3 Period from May 13, 1996 (inception date of fund) to February 28, 1997.
</TABLE>
-116-
<PAGE> 464
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 29, 1996
--------------------------------------------------
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By Distributor Distributor America
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $ 805,092(1) $ 118,403 $ 653,024
Fund
- --------------------------------------------------------------------------------
California Tax- $1,180,348(1) $ 131,821 $1,048,152
Exempt Bond Fund
- --------------------------------------------------------------------------------
U.S. Government $ 571,074(1) $ 63,560 $ 505,941
Securities Fund
- --------------------------------------------------------------------------------
Capital Income $1,746,063(1) $ 202,102 $1,493,113
Fund
- --------------------------------------------------------------------------------
Intermediate Bond $ 460,801(1) $ 51,076 $ 408,407
Fund
- --------------------------------------------------------------------------------
Blue Chip Fund $2,138,130(1) $ 255,167 $1,875,240
- --------------------------------------------------------------------------------
Asset Allocation $ 642,818(1) $ 69,818 $ 569,332
Fund
- --------------------------------------------------------------------------------
National Municipal $ 370,172(1) $ 40,099 $ 325,350
Bond Fund
- --------------------------------------------------------------------------------
Corporate Bond $ 152,616 $ 17,586 $ 133,287
Fund
- --------------------------------------------------------------------------------
<FN>
- --------
1 Balance was paid to selling dealers.
</TABLE>
-117-
<PAGE> 465
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1995
-------------------------------------------------
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By Distributor Distributor America
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $ 340,853(1) $ 60,878 $257,259
Fund
- ---------------------------------------------------------------------------------
California Tax- $ 322,982(1) $ 37,001 $268,563
Exempt Bond Fund
- ---------------------------------------------------------------------------------
U.S. Government $ 181,635(1) $ 21,022 $ 90,642
Securities Fund
- ---------------------------------------------------------------------------------
Capital Income $2,449,559(1) $201,638 $388,254
Fund
- ---------------------------------------------------------------------------------
Intermediate Bond $ 53,285 $ 5,470 $ 47,815
Fund
- ---------------------------------------------------------------------------------
Blue Chip Fund $ 286,628 $121,377 $165,251
- ---------------------------------------------------------------------------------
Asset Allocation $ 114,388 $ 30,504 $ 83,884
Fund
- ---------------------------------------------------------------------------------
National Municipal $ 85,535(1) $ 9,400 $ 74,860
Bond Fund
- ---------------------------------------------------------------------------------
<FN>
- ------------------
1 Balance was paid to selling dealers.
</TABLE>
-118-
<PAGE> 466
<TABLE>
<CAPTION>
Period October 1, 1994 through
February 28, 1995
-----------------------------------------------------
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By Distributor Distributor America
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond $11,175 $ 1,436 $ 9,326
Fund
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Period April 25, 1994 (the date the
Predecessor Fund reorganized into the
Corporate Bond Fund) through September 30,
1994
----------------------------------------------
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By Distributor Distributor America
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond $1,4851 $125 $1,175
Fund
- -------------------------------------------------------------------------------------
<FN>
- --------------------
1 Balance was paid to selling dealers.
</TABLE>
The following table shows all sales loads, commissions and
other compensation received by the Distributor directly or indirectly from each
of the Aggressive Growth Fund, California Tax-Exempt Bond Fund, U.S. Government
Securities Fund, Capital Income Fund, Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, National Municipal Bond Fund, Corporate Bond Fund,
Short-Term Government Fund and International Equity Fund during each fund's
fiscal year ended February 28, 1997.
-119-
<PAGE> 467
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions(1) And Repurchase Transactions sation(2)
-------------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc.
Aggressive Growth Fund $120,955 $ 0 $ 0 $308,283
California Tax-Exempt Bond $ 45,746 $ 0 $ 0 $205,096
Fund
U.S. Government Securities $ 19,990 $ 0 $ 0 $161,482
Fund
Capital Income Fund $268,543 $ 0 $ 0 $ 46,625
Intermediate Bond Fund $ 10,026 $ 0 $ 0 $ 82,259
Blue Chip Fund $268,770 $ 0 $ 0 $ 19,012
Asset Allocation Fund $ 47,026 $ 0 $ 0 $ 2,735
National Municipal
Bond Fund $ 21,986 $ 0 $ 0 $ 478
Corporate Bond Fund $ 11,522 $ 0 $ 0 $ 90,340
Short-Term Government Fund $ 0 $ 0 $ 0 $ 0
International Equity Fund $ 12,765 $ 0 $ 0 $ 0
<FN>
- ---------------------------
(1) Represents amounts received from front-end sales charge on A Shares.
(2) Represents the total of (i) amounts paid to the Administrator for
administrative services provided to the Fund (see "Management of the
Company-Administrator" above) and (ii) payments made under the
Shareholder Service Plan, Distribution Plan and Administrative and
Shareholder Services Plan (see discussion in next section) and retained
by the Distributor.
</TABLE>
THE SHAREHOLDER SERVICES PLAN. Pacific Horizon has adopted
separate Shareholder Services Plans (the "Plans") for SRF Shares and A Shares,
under which SRF Shares and A Shares of each Fund reimburse the Distributor for
shareholder servicing fees the Distributor pays to Service Organizations. The
fees paid under the Shareholder Services Plan for A Shares are in addition to
the sales loads on A Shares described above and in the Prospectus.
Under the Shareholder Service Plans for A Shares and SRF
Shares, Pacific Horizon pays the Distributor, with respect to the Funds for (a)
non-distribution shareholder services provided by the Distributor to Service
Organizations and/or the beneficial
-120-
<PAGE> 468
owners of Fund shares, including, but not limited to shareholder servicing
provided by the Distributor at facilities dedicated for use by Pacific Horizon,
provided such shareholder servicing is not duplicative of the servicing
otherwise provided on behalf of the Funds, and (b) fees paid to Service
Organizations (which may include the Distributor itself) for the provision of
support services for shareholders for whom the Service Organization is the
dealer of record or holder of record or with whom the Service Organization has a
servicing relationship ("Clients").
Support services provided by Service Organizations may
include, among other things: (i) establishing and maintaining accounts and
records relating to Clients that invest in Fund shares; (ii) processing dividend
and distribution payments from the Funds on behalf of Clients; (iii) providing
information periodically to Clients regarding their positions in shares; (iv)
arranging for bank wires; (v) responding to Client inquiries concerning their
investments in Fund shares; (vi) providing the information to the Funds
necessary for accounting or subaccounting; (vii) if required by law, forwarding
shareholder communications from the Funds (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (viii) assisting in processing exchange and redemption
requests from Clients; (ix) assisting Clients in changing dividend options,
account designations and addresses; and (x) providing such other similar
services.
Each Shareholder Services Plan provides that the Distributor
is entitled to receive payments for expenses on a monthly basis, at an annual
rate not exceeding .25% of the average daily net assets of the SRF Shares or A
Shares of the Funds, as the case may be, during such month for shareholder
servicing expenses. The calculation of a Fund's average daily net assets for
these purposes does not include assets held in accounts opened via a transfer of
assets from trust and agency accounts of Bank of America. Further, payments made
out of or charged against the assets of a particular Fund must be in payment for
expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies
than can be immediately paid due to the percentage limitations described above,
the unpaid amount is carried forward from month to month while a 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 a 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 a Plan may not
-121-
<PAGE> 469
be "carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
For the fiscal year ended February 28, 1997, the A Shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Corporate
Bond, National Municipal Bond, Short-Term Government and International Equity
Funds were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Amount of
Amount of Total
Amount of Total Shareholder
Total Shareholder Service Fee
Shareholder Service Fee Paid to
Total Service Fee Paid to Affiliates of
Shareholder Paid to Bank of Bank of
Service Fee Distributor America America
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Aggressive Growth $516,392 $308,283 $ 0 $182,530
Fund
- --------------------------------------------------------------------------------------
California Tax- $535,750 $205,096 $ 0 $303,684
Exempt Bond Fund
- --------------------------------------------------------------------------------------
Capital Income $677,727 $ 46,625 $ 0 $593,044
Fund
- --------------------------------------------------------------------------------------
U.S. Government $202,413 $ 7,966 $ 0 $185,292
Securities Fund
- --------------------------------------------------------------------------------------
Intermediate Bond $ 40,161 $ 1,045 $ 0 $ 18,409
Fund
- --------------------------------------------------------------------------------------
Blue Chip Fund $256,504 $ 19,012 $ 0 $230,703
- --------------------------------------------------------------------------------------
Asset Allocation $ 68,548 $ 2,735 $ 0 $ 64,576
Fund
- --------------------------------------------------------------------------------------
Corporate Bond $ 77,972 $ 54,333 $ 0 $ 9,525
Fund
- --------------------------------------------------------------------------------------
National Municipal $ 35,033 $ 478 $ 0 $ 18,506
Bond Fund [$15,738
waived]
- --------------------------------------------------------------------------------------
Short-Term $ 12,022 $ 0 $ 0 $ 0
Government Fund [$12,022
waived]
- --------------------------------------------------------------------------------------
International $ 18,778 $ 0 $ 0 $ 0
Equity Fund [$18,778
waived]
- --------------------------------------------------------------------------------------
</TABLE>
-122-
<PAGE> 470
As of February 28, 1997, no SRF Shares had been issued in a
public offering.
For the fiscal year ended February 29, 1996, the A Shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation,
Corporate Bond and National Municipal Bond were charged the following amounts
pursuant to the Shareholder Service Plan:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Amount of
Amount of Total
Amount of Total Shareholder
Total Shareholder Service Fee
Shareholder Service Fee Paid to
Total Service Fee Paid to Affiliates of
Shareholder Paid to Bank of Bank of
Service Fee Distributor America America
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $389,698 $257,687 $ 0 $110,825
Fund
- ------------------------------------------------------------------------------------------
California Tax- $511,875 $232,686 $ 0 $277,153
Exempt Bond Fund
- ------------------------------------------------------------------------------------------
Capital Income $551,305 $ 64,707 $ 0 $483,153
Fund
- ------------------------------------------------------------------------------------------
U.S. Government $222,341 $ 17,257 $ 0 $205,084
Securities Fund
- ------------------------------------------------------------------------------------------
Intermediate Bond $ 16,582 $ 0 $ 0 $ 0
Fund [$16,582
waived]
- ------------------------------------------------------------------------------------------
Blue Chip Fund $ 74,950 $ 0 $ 0 $ 0
[$74,950
waived]
- ------------------------------------------------------------------------------------------
Asset Allocation $ 33,182 $ 0 $ 0 $ 0
Fund [$33,182
waived]
- ------------------------------------------------------------------------------------------
Corporate Bond $ 80,246 $ 0 $ 0 $ 0
Fund [$80,246
waived]
- ------------------------------------------------------------------------------------------
National Municipal $ 17,571 $ 0 $ 0 $ 0
Bond Fund [$17,571
waived]
- ------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 471
For the fiscal year ended February 29, 1995, the A Shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Corporate
Bond, National Municipal Bond, Short-Term Government and International Equity
Funds were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Amount of
Amount of Total
Amount of Total Shareholder
Total Shareholder Service Fee
Shareholder Service Fee Paid to
Total Service Fee Paid to Affiliates of
Shareholder Paid to Bank of Bank of
Service Fee Distributor America America
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $340,125 $207,752 $0 $ 61,145
Fund
- ----------------------------------------------------------------------------------------------------------------------------------
California Tax- $530,190 $198,585 $0 $253,362
Exempt Bond Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Income $517,667 $ 42,808 $0 $333,632
Fund
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government $284,218 $ 7,186 $0 $198,847
Securities Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond $ 2,873 $ 0 $0 $0
Fund [$ 2,873
waived]
- ----------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 9,721 $ 0 $0 $ 0
[$ 9,721
waived]
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation $ 7,757 $ 0 $0 $ 0
Fund [$ 7,757
waived]
- ----------------------------------------------------------------------------------------------------------------------------------
Corporate Bond $ 32,614 $ 0 $0 $ 0
Fund [$ 32,614
waived]
- ----------------------------------------------------------------------------------------------------------------------------------
National Municipal $ 4,533 $ 0 $0 $ 0
Bond Fund [$ 4,533
waived]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-124-
<PAGE> 472
Payments for shareholder service expenses under the Plans
are not subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the
Plans, the Distributor provides that a report of the amounts expended under the
Plans, and the purposes for which such expenditures were incurred, will be
made to the Board of Directors for its review at least quarterly. In addition,
the Plans provide that the selection and nomination of the directors of
Pacific Horizon who are not "interested persons" thereof have been committed to
the discretion of the directors who are neither "interested persons" (as defined
in the 1940 Act) of Pacific Horizon nor have any direct or indirect financial
interest in the operation of the Plans (or related servicing agreements) (the
"Non-Interested Plan Directors").
Pacific Horizon understands that Bank of America and/or some
Service Organizations may charge their clients a direct fee for administrative
and shareholder services in connection with the holding of A or SRF Shares.
These fees would be in addition to any amounts which might be received under the
Plans. Small, inactive long-term accounts involving such additional charges
may not be in the best interest of shareholders.
Pacific Horizon's Board of Directors has concluded that the
Plans will benefit the Funds and their A and SRF shareholders. The Plans were
subject to annual reapproval by a majority of the Non-Interested Plan Directors
and is terminable at any time with respect to any Fund by a vote of majority of
such Directors or by vote of the holders of a majority of the A or SRF Shares of
the Fund, as the case may be, involved. Any agreement entered into pursuant to
the Plans with a Service Organization is terminable with respect to any Fund
without penalty, at any time, by vote of the Non-Interested Plan Directors, by
vote of the holders of a majority of the A or SRF Shares of such Fund, as the
case may be, by the Distributor or by the Service Organization. Each agreement
will also terminate automatically in the event of its assignment.
THE DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER
SERVICES PLAN. The Distributor is also entitled to payment from the Company for
distribution fees pursuant to the Distribution Plan adopted on behalf of K
Shares. Under the Distribution Plan, the Company may pay the Distributor for:
(a) direct out-of-pocket promotional expenses incurred by the Distributor in
advertising and marketing K Shares; (b) expenses incurred in connection with
preparing, printing, mailing, and distributing or publishing advertisements and
sales literature for K Shares; (c) expenses incurred in connection with printing
and mailing Prospectuses and Statements of Additional Information to other than
current K shareholders; (d) periodic payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, "a
-125-
<PAGE> 473
Distribution Organization") with respect to a Fund's K Shares beneficially owned
by customers for whom the Distribution Organization is the Distribution
Organization of record or holder of record of such K Shares; (e) the direct or
indirect cost of financing the payments or expenses included in (a) and (d)
above; or (f) for such other services as may be construed, by any court or
governmental agency or commission, including the SEC, to constitute distribution
services under the 1940 Act or rules and regulations thereunder. With respect to
K Shares, payments under the Distribution Plan are not intended for distribution
services to the extent they are not permitted under the Employee Retirement
Income Security Act of 1974, as amended.
Pursuant to the Administrative and Shareholder Services Plan
with respect to K Shares, the Company may also pay securities dealers, brokers,
financial institutions or other industry professionals, such as investment
advisors, accountants, and estate planning firms (severally, a "Service
Organization") for support services provided with respect to its Client's K
Shares. Administrative and shareholder services provided may include some or all
of the following: (i) processing dividend and distribution payments from a Fund
on behalf of its Clients; (ii) providing statements periodically to its Clients
showing their positions in K Shares; (iii) arranging for bank wires; (iv)
responding to routine Client inquiries concerning their investment; (v)
providing the information to the Funds necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from a Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its Clients;
(vii) aggregating and processing purchase, exchange, and redemption requests
from its Clients and placing net purchase, exchange, and redemption orders for
its Clients; (viii) establishing and maintaining accounts and records relating
to Clients; (ix) assisting Clients in changing dividend options, account
designation and addresses or (x) other similar services if requested by the
Company.
The Distribution Plan provides that the Distributor is
entitled to receive payments on a monthly basis at an annual rate not exceeding
0.75% of the average daily net assets during such month of the outstanding K
Shares. In addition, under the Administrative and Shareholder Services Plan, the
Distributor is entitled to receive payments on a monthly basis for
administrative services and shareholder services at an annual rate not exceeding
0.75% and 0.25%, respectively, of the average daily net assets during such month
of the outstanding K Shares. The total of all 12b-1 fees, administrative service
and shareholder service fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average daily net assets of a Fund's K Shares.
-126-
<PAGE> 474
Payments made out of or charged against the assets of a
particular class of shares of a particular Fund must be in payment for expenses
incurred on behalf of that class.
Payments for distribution expenses under the Distribution Plan
(the "12b-1 Plan") are subject to Rule 12b-1 (the "Rule") under the 1940 Act.
The Rule defines distribution expenses to include the cost of "any activity
which is primarily intended to result in the sale of [Company] shares." The Rule
provides, among other things, that an investment company may bear such expenses
only pursuant to a plan adopted in accordance with the Rule. In accordance with
the Rule, the 12b-1 Plan provides that a written report of the amounts expended
under the 12b-1 Plan, and the purposes for which such expenditures were
incurred, will be made to the Board of Directors for its review at least
quarterly. In addition, the 12b-1 Plan provides that it may not be amended to
increase materially the costs which a Fund may bear for distribution pursuant to
the 12b-1 Plan without shareholder approval and that other material amendments
of the 12b-1 Plan must be approved by a majority of the Board of Directors, and
by a majority of the directors who are neither "interested persons" (as defined
in the 1940 Act) of the Company nor have any direct or indirect financial
interest in the operation of the 12b-1 Plan, or in any agreements entered into
in connection with the 12b-1 Plan, by vote cast in person at a meeting called
for the purpose of considering such amendments (the "Non-Interested Plan
Directors"). The selection and nomination of the directors of the Company who
are not "interested persons" of the Company have been committed to the
discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan and the Administrative and Shareholder
Services Plan will benefit the Funds and their K shareholders. The 12b-1 Plan
and the Administrative and Shareholder Services Plan are subject to annual
reapproval by a majority of the Company's Board of Directors, including a
majority of the Non-Interested Plan Directors and are terminable without penalty
at any time with respect to any Fund by a vote of a majority of the
Non-Interested Plan Directors or by vote of the holders of a majority of the
outstanding K Shares of the Fund involved. Any agreement entered into pursuant
to the 12b-1 Plan and the Administrative and Shareholder Services Plan with a
Service Organization is terminable with respect to any Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Directors, by vote of
the holders of a majority of the outstanding K Shares of such Fund, or by the
Service Organization. Each agreement will also terminate automatically in the
event of its assignment.
If in any month the Distributor expends or
-127-
<PAGE> 475
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 a 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 a 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 a Plan may not be "carried forward" beyond the end of the fiscal year in
which such amounts or credits due are accrued.
For the fiscal year ended February 28, 1997, the K Shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Corporate
Bond, National Municipal Bond and International Equity Funds were charged the
following amounts pursuant to the Administrative and Shareholder Service Plan:
-128-
<PAGE> 476
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Amount of
Amount of Total
Amount of Total Administra-
Total Administra- tive and
Administra- tive and Shareholder
Total tive and Shareholder Service Fee
Administra- Shareholder Service Fee Paid to
tive and Service Fee Paid to Affiliates of
Shareholder Paid to Bank of Bank of
Service Fee Distributor America America
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $ 138 $0 $0 $0
Fund [$ 138
waived]
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax- $ 0 $0 $0 $0
Exempt Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Income $ 396 $0 $0 $0
Fund $ 396
[waived]
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government $ 170 $0 $0 $0
Securities Fund $ 170
[waived]
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond $ 116 $0 $0 $0
Fund [$ 116
waived]
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 632 $0 $0 $0
[$ 583
waived]
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Allocation $ 1506 $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Bond $0 $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
National Municipal $0 $0 $0 $0
Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
International $ 148 $0 $0 $0
Equity Fund [$ 4
waived]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 28, 1997, the K Shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Corporate
Bond, National Municipal Bond and International Equity Funds were charged the
following amounts pursuant to the Distribution Plan:
-129-
<PAGE> 477
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Amount of Amount of
Total Total
Amount of Distribu- Distribu-
Total tion Plan tion Plan Fee
Total Distribution Fee Paid Paid to
Distribution Plan Fee to Bank Affiliates of
Plan Paid to of Bank of
Fee Distributor America America
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $ 121 $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax- $ 0 $0 $0 $0
Exempt Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Income $1,186 $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government $ 510 $0 $0 $0
Securities Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond $ 0 $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $1,242 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Allocation $1,000 $0 $0 $0
Fund [$499 waived]
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Bond $ 284 $0 $0 $0
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
National Municipal $ 0 $0 $0 $0
Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
International $ 0 $0 $0 $0
Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
No K Shares were outstanding for the fiscal year ended
February 29, 1996 and February 28, 1995.
During the fiscal year ended February 28, 1997, all amounts
paid under the Distribution Plan were paid as compensation to broker/dealers.
YIELD, TAX-EQUIVALENT YIELD AND TOTAL RETURN
From time to time, the yields, tax-equivalent yield (with
respect to the National Municipal and California Tax-Exempt Bond Funds) and the
total returns of the Funds may be quoted in and compared to other mutual funds
with similar investment objectives in advertisements, shareholder reports or
other
-130-
<PAGE> 478
communications to shareholders. The Funds may also include calculations in such
communications that describe hypothetical investment results. (Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of a Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Funds may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of a Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a Fund
and/or a Master Portfolio), as well as the views of the investment adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund. The Funds may also include in
advertisements charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stocks, bonds, Treasury bills and shares of a Fund. In addition,
advertisements or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. From time to time, the investment adviser may enter into alliances with
retirement plan sponsors, including The Legend Group, and the Fund may in its
advertisements or sales literature include a discussion of certain attributes or
benefits to be derived from its relationship with such retirement plan sponsors.
With proper authorization, a Fund may reprint articles (or excerpts) written
regarding the Fund and provide them to prospective shareholders. Performance
information with respect to the Funds is generally available by calling (800)
346-2087.
YIELD CALCULATIONS. The yield for the respective share
classes of a Fund are calculated by dividing the net investment
income per share (as described below) earned by the Fund during a
-131-
<PAGE> 479
30-day (or one month) period by the maximum offering price per share (including
the maximum front-end sales charge of an A Share) on the last day of the period
and annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. The Fund's net investment income per share earned
during the period with respect to a particular class is based on the average
daily number of shares outstanding in the class during the period entitled to
receive dividends and includes dividends and interest earned during the period
attributable to that class minus expenses accrued for the period attributable to
that class, net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1) to the 6th power - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities is recognized by accruing 1/360 of the stated dividend rate of the
security each day. Except as noted below, interest earned on debt obligations is
calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held. For purposes of this calculation, it is
assumed that each month contains 30 days. The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization
-132-
<PAGE> 480
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) a Fund or Master Portfolio may elect either (i) to amortize the
discount and premium on the remaining security, based on the cost of the
security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if any, if the weighted
average maturity date is not available, or (ii) not to amortize discount or
premium on the remaining security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned income
is the net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. A Fund's maximum offering price per share
for purposes of the formula includes the maximum sales load imposed by the Fund
on A Shares -- currently 4.50% of the per share offering price.
The National Municipal Bond Fund's "tax-equivalent" yield for
a particular class is computed by dividing that portion of the National
Municipal Bond Fund's yield for a particular class (calculated as above) that
is tax-exempt by one minus a stated income tax rate and adding the product to
that portion, if any, of the National Municipal Bond Fund 's computed yield for
a particular class that is not tax-exempt. Tax-equivalent yields assume the
payment of Federal income taxes at the stated rate. The California Tax-Exempt
Bond Fund's "tax-equivalent" yield for a particular class is computed by: (a)
dividing the portion of the California Tax-Exempt Bond Fund's yield for a
particular
-133-
<PAGE> 481
class (calculated as above) that is exempt from both Federal and California
state income taxes by one minus a stated combined Federal and California State
income tax rate; (b) dividing the portion of the California Tax-Exempt Bond
Fund's yield for a particular class (calculated as above) that is exempt from
Federal income tax only by one minus a stated Federal income tax rate; and (c)
adding the figures resulting from (a) and (b) above to that portion, if any, of
the California Tax-Exempt Bond Fund's yield for a particular class that is not
exempt from Federal income tax. The combined Federal and California income tax
rate used in calculating the California Tax-Exempt Bond Fund's "tax equivalent"
yield for the 30-day period ended February 28, 1997 was 34.7%.
Based on the foregoing calculations, the 30-day yields of the
A Shares of the U.S. Government Securities, Capital Income, Intermediate Bond,
Asset Allocation, Short-Term Government and Corporate Bond Funds (after fee
waivers and expense reimbursements) for the 30-day period ended February 28,
1997 were as follows:
<TABLE>
<CAPTION>
YIELD
-----
<S> <C>
U.S. Government Securities Fund 6.62%
Capital Income Fund 3.08%
Intermediate Bond Fund 5.48%
Asset Allocation Fund 2.51%
Short-Term Government Fund 5.18%
Corporate Bond Fund 5.87%
</TABLE>
Based on the foregoing calculations, the A Shares of the
California Tax-Exempt Bond Fund's yield and tax-equivalent yield (after fee
waivers) and the A Shares of the National Municipal Bond Fund's yield and
tax-equivalent yield (after fee waivers and expense reimbursements) for the
30-day period ended February 28, 1997 were as follows:
<TABLE>
<CAPTION>
YIELD TAX-EQUIVALENT YIELD
<S> <C> <C>
California Tax-Exempt Bond Fund 4.30% 6.58%
National Municipal Bond Fund 4.63% 6.43%
Based on the foregoing calculations, the 30-day yields of the
K Shares of the U.S. Government Securities, Capital Income, Intermediate Bond,
Asset Allocation and Corporate Bond
</TABLE>
-134-
<PAGE> 482
Funds (after fee waivers and expense reimbursements) for the 30-day period ended
February 28, 1997 were as follows:
<TABLE>
<CAPTION>
YIELD
<S> <C>
U.S. Government Securities Fund 6.44%
Capital Income Fund 2.73%
Intermediate Bond Fund 5.24%
Asset Allocation Fund 2.16%
Corporate Bond Fund 5.67%
</TABLE>
Based on the foregoing calculations, the K Shares of the
California Tax-Exempt Bond Fund's yield and tax-equivalent yield (after fee
waivers) and the K Shares of the National Municipal Bond Fund's yield and
tax-equivalent yield (after fee waivers and expense reimbursements) for the
30-day period ended February 28, 1997 were as follows:
<TABLE>
<CAPTION>
YIELD TAX-EQUIVALENT YIELD
<S> <C> <C>
California Tax-Exempt Bond Fund 4.00% 6.13%
National Municipal Bond Fund 4.35% 6.04%
</TABLE>
No SRF Shares were issued or outstanding during the 30-day
period ended February 28, 1997.
TOTAL RETURN CALCULATIONS. The Funds compute their average
annual total returns separately for their separate share classes by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular share class to the ending
redeemable value of such investment in such class. This is done by dividing the
ending redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
-135-
<PAGE> 483
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
The Funds compute their aggregate total returns separately for
their separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all nonrecurring
charges at the end of the period covered by the computations. In addition, the
Funds' average annual total return and aggregate total return quotations reflect
the deduction of the maximum front-end sales load charged in connection with the
purchase of A Shares.
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A Shares of the
Aggressive Growth, Capital Income, U.S. Government Securities, California
Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset Allocation , National
Municipal Bond, Corporate Bond, Short-Term Government (aggregate total return
only) and International Equity (aggregate total return only) Funds for the years
or periods indicated were as follows:
-136-
<PAGE> 484
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Average Annual Total Returns
---------------------------------------------------------------------------------------------------------------------------
Period from
Commencement
One-Year Five-Year Ten-Year of
Period Period Period Operations
Ended Ended Ended through
February February February February
28, 1997 28, 1997 28, 1997 28, 1997*
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive 4.21% 7.38% 11.17% 18.37%
Growth Fund
---------------------------------------------------------------------------------------------------------------------------
Capital Income 13.22% 14.61% N/A 14.29%
Fund (after fee
waivers and
expense
reimbursements)
---------------------------------------------------------------------------------------------------------------------------
U.S. Government 0.54% 4.63% N/A 7.49%
Securities Fund
(after fee
waivers and
expense
reimbursements)
---------------------------------------------------------------------------------------------------------------------------
California Tax- -0.39% 5.81% 5.96% 7.86%
Exempt Bond
Fund (after fee
waivers)
---------------------------------------------------------------------------------------------------------------------------
Intermediate -0.76% N/A N/A 3.39%
Bond Fund
---------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 21.29% N/A N/A 19.31%
---------------------------------------------------------------------------------------------------------------------------
Asset 12.35% N/A N/A 12.25%
Allocation Fund
---------------------------------------------------------------------------------------------------------------------------
National 0.89% N/A N/A 4.38%
Municipal Bond
Fund (after
fee waivers and
expense
reimbursements)
---------------------------------------------------------------------------------------------------------------------------
Corporate Bond -0.56% 6.83% 5.35% 8.38%
Fund**
---------------------------------------------------------------------------------------------------------------------------
<FN>
- ------------------------
* The Aggressive Growth, Capital Income, U.S. Government Securities,
California Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset
Allocation and National Municipal Bond Funds commenced operations on
March 31, 1984, September 25, 1987, January 7, 1988, March 30, 1984,
January 24, 1994, January 13, 1994, January 18, 1994 and January 28,
1994, respectively.
** Total return for the Pacific Horizon Corporate Bond Fund from 1984
through April 25, 1994 reflects performance of the predecessor fund,
Bunker Hill Income Securities, Inc., a closed-end fund. Total return of
-137-
<PAGE> 485
the closed-end fund is calculated assuming a purchase of common stock
at market value on the opening of the first day of each period
reported. Total return for the closed-end fund does not reflect
brokerage commissions. The annual operating expenses of the predecessor
fund were less than the current operating expenses of the Pacific
Horizon Corporate Bond Fund. Had current expenses been reflected in the
predecessor fund's performance, such performance would have been
reduced.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
-------------------------------------------------------------------------------------------------
Period from
One-Year Five-Year Ten-Year Commencement
Period Period Period of Operations
Ended Ended Ended through
February February February February
28, 1997 28, 1997 28, 1997 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 4.21% 42.74% 188.34% 785.02%
Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Income 13.22% 97.72% N/A 252.76%
Fund
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government 0.54% 25.42% N/A 93.64%
Securities Fund
- ----------------------------------------------------------------------------------------------------------------------------------
California Tax- -0.39% 32.64% 78.47% 165.89%
Exempt Bond Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond -0.76% N/A N/A 10.89%
Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 21.29% N/A N/A 73.73%
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation 12.35% N/A N/A 43.32%
Fund
- ----------------------------------------------------------------------------------------------------------------------------------
National Municipal 0.89% N/A N/A 14.14%
Bond Fund (after
fee waivers and
expense
reimbursements)
- ----------------------------------------------------------------------------------------------------------------------------------
Corporate Bond -0.56 39.14% 68.47% 556.10%
Fund**
- ----------------------------------------------------------------------------------------------------------------------------------
Short-Term N/A N/A N/A -1.31%*
Government Fund
- ----------------------------------------------------------------------------------------------------------------------------------
International N/A N/A N/A -5.21%*
Equity Fund
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
- --------------------
* Inception dates of the Short-Term Government Fund and
International Equity Fund are August 2, 1996 and May 13,
1996, respectively.
-138-
<PAGE> 486
** Total return for the Pacific Horizon Corporate Bond Fund from 1984
through April 25, 1994 reflects performance of the predecessor fund,
Bunker Hill Income Securities, Inc., a closed-end fund. Total return of
the closed-end fund is calculated assuming a purchase of common stock
at market value on the opening of the first day of each period
reported. Total return for the closed-end fund does not reflect
brokerage commissions. The annual operating expenses of the predecessor
fund were less than the current operating expenses of the Pacific
Horizon Corporate Bond Fund. Had current expenses been reflected in the
predecessor fund's performance, such performance would have been
reduced.
</TABLE>
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the K Shares of the
Aggressive Growth, Capital Income, U.S. Government Securities, California
Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset Allocation, National
Municipal Bond, Corporate Bond (aggregate total return only) and International
Equity (aggregate total return only) Funds for the years or periods indicated
were as follows:
-139-
<PAGE> 487
<TABLE>
<CAPTION>
----------------------------------------------------------------
Average Annual Total Return
---------------------------------------------------------------------------------------------------------------------
Period from
Commencement
One-Year Five-Year Ten-Year of
Period Period Period Operations**
Ended Ended Ended through
February February February February 28,
28, 1997 28, 1997 28, 1997 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive 8.83% 8.31% 11.65% 18.77%
Growth Fund*
---------------------------------------------------------------------------------------------------------------------
Capital Income* 18.14% 15.59% N/A 14.81%
Fund (after
fee waivers and
expense
reimbursements)
---------------------------------------------------------------------------------------------------------------------
U.S. Government* 4.57% 5.47% N/A 7.96%
Securities Fund
(after fee
waivers and
expense
reimbursements)
---------------------------------------------------------------------------------------------------------------------
California Tax- 4.29% 6.78% 6.46% 8.24%
Exempt Bond*
Fund (after fee
waivers)
---------------------------------------------------------------------------------------------------------------------
Intermediate 3.80% N/A N/A 4.90%
Bond Fund*
---------------------------------------------------------------------------------------------------------------------
Blue Chip Fund* 26.84% N/A N/A 21.03%
---------------------------------------------------------------------------------------------------------------------
Asset 17.57% N/A N/A 13.91%
Allocation Fund*
---------------------------------------------------------------------------------------------------------------------
National 5.66% N/A N/A 5.94%
Municipal Bond
Fund* (after fee
waivers and
expense
reimbursements)
---------------------------------------------------------------------------------------------------------------------
Corporate Bond 4.03% 7.79% 5.83% 8.59%
Fund *+
---------------------------------------------------------------------------------------------------------------------
<FN>
- ------------------------
* Performance prior to October 25, 1996, October 21, 1996, November 20,
1996, February 28, 1997, November 20, 1996, November 11, 1996, November
11, 1996, February 28, 1997, November 20, 1996 and October 25, 1996 is
represented by performance of the A Shares of the Aggressive Growth,
Capital Income, U.S. Government Securities, California Tax Exempt Bond,
Intermediate Bond, Blue Chip, Asset Allocation, National Municipal
Bond, Corporate Bond and International Equity Funds, respectively. On
the foregoing dates, K Shares of the above-listed Funds commenced
operations.
-140-
<PAGE> 488
** The Aggressive Growth, Capital Income, U.S. Government Securities,
California Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset
Allocation and National Municipal Bond Funds commenced operations on
March 31, 1984, September 25, 1987, January 7, 1988, March 30, 1984,
January 24, 1994, January 13, 1994, January 18, 1994 and January 28,
1994, respectively.
+ Total return for the Pacific Horizon Corporate Bond Fund from 1984
through April 25, 1994 reflects performance of the predecessor fund,
Bunker Hill Income Securities, Inc., a closed-end fund. Total return of
the closed-end fund is calculated assuming a purchase of common stock
at market value on the opening of the first day of each period
reported. Total return for the closed-end fund does not reflect
brokerage commissions. The annual operating expenses of the predecessor
fund were less than the current operating expenses of the Pacific
Horizon Corporate Bond Fund. Had current expenses been reflected in the
predecessor fund's performance, such performance would have been
reduced.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
-------------------------------------------------------------------------------------------------
Period from
One-Year Five-Year Ten-Year Commencement
Period Period Period of Operations
Ended Ended Ended through
February February February February 28,
28, 1997 28, 1997 28, 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 8.83% 49.08% 201.05% 823.75%
Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Income 18.14% 106.32 N/A 267.97%
Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government 4.57% 30.49% N/A 101.50%
Securities Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
California Tax- 4.29% 38.83% 86.93% 178.22%
Exempt Bond Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond 3.80% N/A N/A 15.96%
Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund* 26.84% N/A N/A 81.68%
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation 17.57% N/A N/A 50.02%
Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
National Municipal 5.66% N/A N/A 19.51%
Bond Fund (after
fee waivers and
expense
reimbursements)*
- ----------------------------------------------------------------------------------------------------------------------------------
Corporate Bond 4.03% 45.52% 76.20% 586.38%
Fund*+
- ----------------------------------------------------------------------------------------------------------------------------------
International N/A N/A N/A -1.09%++
Equity Fund
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
- --------------------
-141-
<PAGE> 489
* Performance prior to October 25, 1996, October 21, 1996, November 20,
1996, February 28, 1997, November 20, 1996, November 11, 1996, November
11, 1996, February 28, 1997, November 20, 1996 and October 25, 1996 is
represented by performance of the A Shares of the Aggressive Growth,
Capital Income, U.S. Government Securities, California Tax Exempt Bond,
Intermediate Bond, Blue Chip, Asset Allocation, National Municipal
Bond, Corporate Bond and International Equity Funds, respectively. On
the foregoing dates, K Shares of the above-listed Funds commenced
operations.
+ Total return for the Pacific Horizon Corporate Bond Fund from 1984
through April 25, 1994 reflects performance of the predecessor fund,
Bunker Hill Income Securities, Inc., a closed-end fund. Total return of
the closed-end fund is calculated assuming a purchase of common stock
at market value on the opening of the first day of each period
reported. Total return for the closed-end fund does not reflect
brokerage commissions. The annual operating expenses of the predecessor
fund were less than the current operating expenses of the Pacific
Horizon Corporate Bond Fund. Had current expenses been reflected in the
predecessor fund's performance, such performance would have been
reduced.
++ Inception date of International Equity Fund is May 13, 1996.
</TABLE>
Based on the foregoing calculations, the 1) average
annual total returns, and 2) the aggregate total returns for the
SRF Shares of the Intermediate Bond, Blue Chip and Asset
Allocation Funds for the years or periods indicated were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Average Annual Return
- ------------------------------------------------------------------------------------------------------------------
One-Year Period Five-Year Period Period From Commencement
Ended Ended of Operations* through
February 28, 1997 February 28, 1997 February 28, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 3.74% 5.69% 7.53%
- ------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 27.42% 16.55% 16.12%
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 18.03% 11.98% 12.31%
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Aggregate Total Return
- ------------------------------------------------------------------------------------------------------------------
One-Year Period Five-Year Period Period From Commencement
Ended Ended of Operations* through
February 28, 1997 February 28, 1997 February 28, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 3.74% 31.89% 91.88%
- ------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 27.42% 115.11% 282.80%
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 18.03% 76.15% 181.60%
- ------------------------------------------------------------------------------------------------------------------
-142-
<PAGE> 490
<FN>
- -------------------------
* Performance of the SRF Shares for the years or periods between December
6, 1993 and February 28, 1997 is represented by the performance of the
shares of the Bond, Blue Chip and Asset Allocation Funds ("SeaFirst
Funds") of SeaFirst Retirement Funds ("SeaFirst") which were
reorganized into SRF Shares of the Company's Intermediate Bond, Blue
Chip and Asset Allocation Funds on June 23, 1997. The Company's
Intermediate Bond, Blue Chip and Asset Allocation Funds and their
corresponding SeaFirst Funds invest their assets in Master Investment
Trust, Series I. Seafirst is the successor to Collective Investment
Trust for Seafirst Retirement Accounts ("CIT"), a registered open-end
management company, pursuant to a reorganization consummated on
December 6, 1993. Prior to December 6, 1993, CIT offered funds ("CIT
Funds") which had substantially similar investment objectives, policies
and restrictions as those of the Seafirst Funds. The CIT Funds
commenced operations on March 9, 1988. Performance of the SRF Shares
for the period March 9, 1988 to December 6, 1993 is represented by the
performance of the CIT Funds.
</TABLE>
The Funds may also advertise total return data without
reflecting sales charges in accordance with the rules of the SEC. Quotations
which do not reflect such sales charges will, of course, be higher than
quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
Pacific Horizon is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. Pacific Horizon's
Charter authorizes the Board of Directors to issue up to four 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- one
classes of stock - Classes A through W Common Stock, $.001 par value per share,
representing interests in twenty-one separate investment portfolios. Class D
represents interests in the A Shares of the Aggressive Growth Fund, Class D --
Special Series 3 represents interests in the M Shares of the Aggressive Growth
Fund and Class D -- Special Series 5 represents interests in the K Shares of the
Aggressive Growth Fund; Class E represents interests in the A Shares of the U.S.
Government Securities Fund, Class E -- Special Series 3 represents interests in
the B Shares of the U.S. Government Securities Fund and Class E -- Special
Series 5 represents interests in the K Shares of the U.S. Government Securities
Fund; Class F represents interests in the A Shares of the Capital Income Fund,
Class F -- Special Series 3 represents interests in the M Shares of the
Capital Income Fund and Class F -- Special Series 5 represents interests in the
K Shares of the Capital Income Fund; Class G represents interests in the A
Shares of the California Tax-Exempt Bond Fund, Class G -- Special Series 3
represents interests in the M Shares of the California Tax-Exempt Bond Fund
and Class G -- Special Series 5 represents interests in the K Shares of the
California Tax-Exempt Bond Fund; Class M represents interests in the A Shares of
the Intermediate Bond Fund, Class M -- Special Series 3 represents interests in
the M Shares of the Intermediate Bond Fund; Class M -- Special Series 5
represents interests in the K Shares
-143-
<PAGE> 491
of the Intermediate Bond Fund, Class M -- Special Series 7 represents interests
in the SRF Shares of the Intermediate Bond Fund; Class N represents interests in
the A Shares of the Blue Chip Fund, Class N -- Special Series 3 represents
interests in the M Shares of the Blue Chip Fund ; Class N -- Special Series 5
represents interests in the K Shares of the Blue Chip Fund and Class N --
Special Series 7 represents interests in the SRF Shares of the Blue Chip Fund;
Class O represents interests in the A Shares of the Asset Allocation Fund, Class
O -- Special Series 3 represents interests in the M Shares of the Asset
Allocation Fund ; Class O -- Special Series 5 represents interests in the K
Shares of the Asset Allocation Fund and Class O -- Special Series 7 represents
interests in the SRF Shares of the Asset Allocation Fund; Class Q represents
interests in the A Shares of the National Municipal Bond Fund, Class Q --Special
Series 3 represents interests in the M Shares of the National Municipal Bond
Fund and Class Q -- Special Series 5 represents interests in the K Shares of the
National Municipal Bond Fund; Class T represents interests in the A Shares of
the International Equity Fund, Class T -- Special Series 3 represents
interests in the M Shares of the International Equity Fund and Class T --
Special Series 5 represents interests in the K Shares of the International
Equity Fund; Class U represents interests in the A Shares of the Short-Term
Government Fund, Class U - Special Series 3 represents interests in the M Shares
of the Short-Term Government Fund and Class U - Special Series 5 represents
interests in the K Shares of the Short-Term Government Fund; Class W represents
interests in the A Shares of the Corporate Bond Fund, Class W -- Special Series
3 represents interests in the M Shares of the Corporate Bond Fund and Class W
- -- Special Series 5 represents interests in the K Shares of the Corporate Bond
Fund. M Shares have not been offered to the public. Pacific Horizon's charter
also authorizes the Board of Directors to classify or reclassify any particular
class of Pacific Horizon's shares into one or more series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectuses, Pacific Horizon's shares will be fully
paid and non-assessable. For information concerning possible restrictions upon
the transferability of Pacific Horizon's shares and redemption provisions with
respect to such shares, see "Additional Purchase and Redemption Information."
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.
-144-
<PAGE> 492
Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as Pacific Horizon shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under Rule 18f-2
the approval of an investment advisory agreement or 12b-1 distribution plan or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Fund only if approved by a majority of the outstanding shares
of such Fund. However, the rule also provides that the ratification of
independent public accountants, the approval of principal underwriting contracts
and the election of directors may be effectively acted upon by shareholders of
Pacific Horizon voting without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of Pacific Horizon's common stock (or of the shares of a Fund
voting separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2 discussed above) or by
Pacific Horizon's Charter, Pacific Horizon may take or authorize such action
upon the favorable vote of the holders of more than 50% of the outstanding
common stock of Pacific Horizon voting without regard to class.
THE MASTER PORTFOLIOS
The Intermediate Bond Master Portfolio and Blue Chip Master
Portfolio are separate series of Master Investment Trust, Series I. The Master
Trust's Declaration of Trust authorizes its Board of Trustees to issue an
unlimited number of interests of beneficial interest and to establish and
designate any unissued interests of one or more additional series of interests.
Investors in the Master Portfolios are entitled to distributions arising from
the net investment income and net realized gains, if any, earned on investments
held by the Master Portfolio. Investors are also entitled to participate in the
net distributable assets of the Master Portfolio in which they hold beneficial
interests on liquidation. Beneficial interests have no preemptive rights,
conversion or exchange rights.
REPORTS
Shareholders will receive unaudited semi-annual reports
describing the Master Portfolio's and Fund's investment operations and annual
financial statements together with the reports of the independent accountants of
the Portfolios and the Funds.
-145-
<PAGE> 493
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York
10286, has been appointed custodian for the Non-Feeder Funds except the
Corporate Bond Fund, International Equity Fund and Asset Allocation Fund. PNC
Bank, National Association, 1600 Market Street, Philadelphia, PA 19103 has
been appointed custodian for the Feeder Funds and their corresponding Master
Portfolios and the Corporate Bond Fund, International Equity Fund and Asset
Allocation Fund. The Bank of New York (with respect to the California
Tax-Exempt Bond Fund, U.S. Government Securities Fund, Capital Income Fund and
Aggressive Growth Fund) and PFPC (with respect to the National Municipal Bond
Fund, Corporate Bond Fund, International Equity Fund, Short-Term Government Fund
and Asset Allocation Fund, and an off-shore affiliate of PFPC with respect to
the Intermediate Bond Fund and Blue Chip Fund and the corresponding Master
Portfolios) provide the Funds and Master Portfolios with certain accounting
services pursuant to Fund Accounting Services Agreements with the Administrator.
Both PFPC, which is located at 103 Bellevue Parkway, Wilmington, DE 19809, and
PNC Bank, National Association are wholly owned subsidiaries of PNC Bancorp,
Inc., a bank holding company. Under separate Fund Accounting Services
Agreements, The Bank of New York and PFPC have agreed to provide certain
accounting, bookkeeping, pricing, dividend and distribution calculation services
with respect their respective Funds and Master Portfolios. The monthly fees
charged by The Bank of New York and PFPC under the Fund Accounting Agreements
are borne by the Funds and Master Portfolios. As custodians, The Bank of New
York and PNC Bank, N.A. each (i) maintain separate account or accounts in the
name of the respective Funds and/or Master Portfolios, as appropriate (ii) hold
and disburse portfolio securities; (iii) make receipts and disbursements of
money, (iv) collect and receive income and other payments and distributions on
account of portfolio securities, (v) respond to correspondence from security
brokers and others relating to their respective duties and (vi) make periodic
reports concerning their duties.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Funds and Master
Portfolios.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III,
Secretary of Pacific Horizon, is a partner), 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, serves as counsel to the Companies and will
pass upon the legality of the shares offered hereby. O'Melveny & Myers LLP acts
as counsel to Bank of America and as special California counsel for the
California Tax-Exempt Bond Fund and has reviewed the portions of the California
Tax-Exempt Bond Fund's Prospectus and this
-146-
<PAGE> 494
Statement of Additional Information concerning California taxes and the
description of the special considerations relating to California Municipal
Securities.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent accountants, with offices at
1177 Avenue of the Americas, New York, New York, has been selected as
independent accountants of each Fund and Master Portfolio for the fiscal year
ended February 28, 1998.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended
February 28, 1997 (the "Annual Reports") accompanies this Statement of
Additional Information. The financial statements and notes thereto in each
Annual Report are incorporated in this Statement of Additional Information by
reference, and have been audited by Price Waterhouse LLP, whose report thereon
also appears in each Annual Report and is also incorporated herein by reference.
No other parts of the Annual Report are incorporated by reference herein. Such
financial statements have been incorporated herein in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares or interests of a
Fund, a Master Portfolio or a particular series means the affirmative vote of
the lesser of (a) more than 50% of the outstanding shares or interests of such
Fund, Master Portfolio or series or (b) 67% of the shares or interests of such
Fund, Master Portfolio or series present at a meeting at which more than 50% of
the outstanding shares or interests of such Fund, Master Portfolio or series are
represented in person or by proxy.
At May 30, 1997, 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 Securities Inc.,
185 Berry Street, 3rd Floor, San Francisco, CA 94107, 68,019,301.47 shares
(32.37%); BA Investment Services, Inc., For the Benefit of Clients, Attn: Unit
#7852 -Bob Santilli, P.O. Box 7042, San Francisco, CA 94120, 115,811,976.99
shares (55.11%); Hare & Co., Bank of New York and Short-Term Investment Funds,
Attn: Bimal Saha, One Wall Street, New York, NY 10286, 18,564,856.67 shares
(8.83%); Bank of America National Trust and Savings Association, The Private
Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, 14,665,058.13 shares (63.88%);
-147-
<PAGE> 495
and City of Hope, Attn: Corporate Accounting; 1500 East Duarte Road, Duarte, CA
91010, 1,952,348.83 shares (8.50%); and City and County of San Francisco,
Mayor's Office of Community Development (MOCD), Attn: Pricilla Watts, 25 Van
Ness Avenue, Suite 700, San Francisco, CA 94102, 4,902,943.68 shares (21.36%).
At May 30, 1997, 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, 100 First Avenue, Suite 300, Pittsburgh, PA 15222, 42,378,318.42
shares (21.13%); Omnibus Account for the Shareholder Accounts Maintained By
Concord Financial Services, Inc., Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 64,192,825.27 shares (32.01%); Bank of America
National Trust and Savings Association, The Private Bank, Attn: Common Trust
Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051-1577,
62,881,591.27 shares (59.00%); BA Investment Services, Inc., Attn: Bob Santilli,
185 Berry Street, 3rd Floor, Unit 7852, San Francisco, CA 94107, 34,843,296.47
shares (32.70%); and Security Pacific Cash Management, c/o Bank of America -
6PO. M/C 5533, Attn: Regina Olsen, 1850 Gateway Blvd., Concord, CA 94520,
211,718,600.00 shares (33.22%); and Bank of America Southern Comm. Bank, Attn:
Cindy 2964, P.O. Box 98600, Las Vegas, NV 89193-8600, 147,702,252.22 shares
(23.18%).
At May 30, 1997, 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, 69,602,119.63 shares (20.13%); BA Investment Services, Inc., For
the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 223,833,671.16 shares (64.75%); Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051-1577,
218,751,508.19 shares (39.77%); Hare and Co., c/o Bank of New York, Attn: Frank
Notaro Spec. Proc. Dep., One Wail Street, 5th Floor, New York, NY
10286,88,408,186.13 shares (16.07%); and Clark Company Nevada & Tr., Attn: Mark
Aston, Treasurer, 520 South Grand Central Parkway, Las Vegas, NV 89155-1220,
30,000,000.00 shares (5.46%).
At May 30, 1997, 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, 172,238,456.01 shares (11.43%); and
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BISYS Fund Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 465,104,543.34 shares
(30.85%); and Bank of America National Trust and Savings Association, The
Private Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal
Annex, Los Angeles, CA 90051-1577, 219,164,704.13 shares (34.39%);
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class X
Shares of the Treasury Fund were as follows: BA Investment Services, Inc., fbo
Clients, Attn: Unit 7852- Dan Spillane, P.O. Box 7042, San Francisco, CA 94120,
10,739,687.25 shares (99.99%);
At May 30, 1997, 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, 75,391,887.45 shares (47.32%); BA Securities,
Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107, 30,015,417.74 shares
(18.84%); WALL Data Incorporated, 11332 NE 122nd Way, Kirkland, WA 98034,
15,984,662.30 shares (10.03%); Bank of America National Trust and Savings
Association, The Private Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box
513577, Terminal Annex, Los Angeles, CA 90051-1577, 3,711,365.97 shares (8.37%);
Sunquest Information Systems, Inc., Attn: Trena Couch, 1407 Eisenhower
Boulevard, Johnstown, PA 15904-3217, 16,600,997.97 shares (37.47%); First Trust,
NA as Escrow Agent, FBO Kaiser Aluminum & Chemical Corporation, Dept. of Labor,
AC#98925410, P.O. Box 64010, St. Paul, MN 55164-0010, 7,198,000.00 shares
(16.23%); Skinner Corporation, Attn: Debbie Sokvitne, 1326 Fifth Avenue, Suite
711, Seattle, WA 98101, 3,173,621.30 shares (7.16%); and Statek Corporation,
Attn: Brian McCarthy, 512 N. Main Street, Orange, CA 92868, 3,251,044.76 shares
(7.33%).
At May 30, 1997, 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: 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, 34,261.567.41 shares (14.32%); 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,
34,736,091.09 (14.51%); Viejas Bond of Kumeyaay Indians, a Federally recognized
Indian tribe, 5000 Willows Road, Alpine, CA 91901, 15,497,635.34 share (6.48%);
Bank of America National Trust and Savings Association, The Private Bank, Attn:
Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
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Angeles, CA 90051-1577, 27,977,885.64 shares (40.55%); and Bank of Nevada
Southern Comm Bank, Attn: Cindy 2964, P.O. Box 98600, Las Vegas, NV 89193-8600,
29,467,772.62 shares (42.71%).
At May 30, 1997, 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: Hare & Co, Bank of New York
and Short Term investment Funds, Attn: Binal Saha, One Wall Street, New York, NY
10286, 149,394,037.41 shares (6.78%); BA Investment Services, Inc. For the
Benefit of Clients, Attn: Unit 7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 1,749,802,842.05 shares (79.43%); and BA Securities, Inc.,
185 Berry Street, 3rd Floor, San Francisco, CA 94107, 201,016,335.34 shares
(9.12%).
At May 30, 1997, 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, 1,346,839,017.87 shares (46.24%); and BISYS Fund
Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 319,718,303.80 shares (10.98%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class X
Shares of the Prime Fund were as follows: BA Investment Services, Inc., fbo
Clients, Attn: Unit 7852- Dan Spillane, P.O. Box 7042, San Francisco, CA 94120,
302,342,053.89 shares (99.44%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Tax-Exempt Money Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 86,159,563.09 shares (93.62%); and
Bank of America National Trust and Savings Association , The Private Bank,
Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, 250,784,940.81 shares (97.77%).
At May 30, 1997, 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: BISYS Fund Services, Inc.
Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 22,522,433.57 shares (13.92%); and BISYS Fund
Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 115,386,215.41 shares (71.30%).
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At May 30, 1997 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 National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051 -1577,
115,386,215.41 shares (83.67%); and BA Investment Services, Inc., Attn: Bob
Santilli, 185 Berry St, 3rd Floor, Unit 7852, San Francisco, CA 94107,
21,291,069.77 shares (15.44%).
At May 30, 1997, the name, address and share ownership of
the entities which held as record owners more than 5% of the outstanding Horizon
Shares of the California Tax- Exempt Money market Fund were as follows:
BISYS Fund Services, Inc., Pittsburgh, fbo our sweep customers, First and
Market Building, Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 169,545,900.04 shares (36.95%); and BISYS Fund Services, Inc.
Pittsburgh, fbo our customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 213,083,138.26 shares (46.44%).
At May 30, 1997, 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, 201,984,699.03 shares (44.18%); BA Investment Services, Inc., For the
Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 237,034,467.39 shares (51.85%).
At May 30, 1997, 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:
Bank of America National Trust and Savings Association, The Private Bank, Attn:
Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA
90051-1577, 577,212,706,197.26 shares (55.59%); and BA Investment Services,
Inc., Attn: Bob Santilli, 185 Berry Street, 3rd Floor, Unit 7852, San Francisco,
CA 94107, 138,830,382.32 shares (36.28%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class X
Shares of the California Tax-Exempt Money Market Fund were as follows: BA
Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852- Dan
Spillane, P.O. Box 7042, San Francisco, CA 94120, 36,250,280.71 shares (100%).
At May 30, 1997, 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 California Tax-Exempt Bond Fund
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were as follows: Bank of America National Trust and Savings Association , The
Private Bank, Attn: Common Trust Funds Unit #38329, P.O. Box 3577, Terminal
Annex, Los Angeles, CA 90051, 2,174,529.37 shares (7.35%).
At May 30, 1997, 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: Bank of America National Trust and
Savings Association, The Private Bank, Attn: Common Trust Funds, Unit 38329,
P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, 409,252.52 shares (18.32%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Corporate Bond Fund were as follows: Corelink Financial Inc., P.O.
Box 4054, Concord, CA 94524, 14,251.35 shares (99.53%).
At May 30, 1997, 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 421981352, 185 Berry Street, 3rd Floor, Suite 2640, San
Francisco, CA 94104, 80,975.44 shares (6.21%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the National Municipal Bond Fund were as follows: BISYS Fund Services,
Inc., 3435 Stelzer Road, Suite 100, Columbus, Ohio 43219, 104,764 shares (100%).
At May 30, 1997, 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: PACO, Attn: Mutual
Funds, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 427,589.93 shares
(18.72%); and PACO, Attn: Mutual Funds , P.O. Box 3577, Terminal Annex, Los
Angeles, CA 90051, 542,804.32 shares (23.76%); and Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 681,085.08 shares
(29.82%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the International Equity Fund were as follows: Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524, 22,466.70 shares (99.55%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Aggressive Growth Fund were as
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follows: Corelink Financial Inc., P.O. Box 4054, Concord, CA 94524, 37,286.30
shares (99.86%).
At May 30, 1997, 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 Intermediate Bond Fund were as follows: PACO, Attn: Mutual Funds,
P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, 187,640.73 shares (6.32%);
Bank of America National Trust and Savings Association, The Private Bank,
Attn: Common Trust Funds Unit 38329, P.O. Box 3577, Terminal Annex, Los Angeles,
CA 90051, 1,623,599.96 shares (54.65%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Intermediate Bond Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, 43,333.53 shares (99.75%).
At May 30, 1997, 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 Blue Chip Fund were as follows: Bank of America National Trust and
Savings Association, The Private Bank, Attn: Common Trust Funds Unit 38329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 688,814.59 shares
(10.26%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Blue Chip Fund were as follows: Corelink Financial Inc., P.O. Box
4054, Concord, CA 94524, 81,570.10 shares (99.94%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Capital Income Fund were as follows: BA Investment Services, Inc.,
fbo 426275621, 185 Berry Street, 3rd Floor, Suite 2640, San Francisco, CA 94104,
5,831.48 shares (8.01%); Corelink Financial Inc., P.O. Box 4054, Concord, CA
94524, 65,302.16 shares (89.71%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the California Tax-Exempt Bond Fund were as follows: BISYS Fund
Services, Inc., Attn: Regulation and Compliance Department, 3435 Stelzer Road,
Suite 1000, Columbus, Ohio 43219, 144.47 shares (100%).
At May 30, 1997, 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 Asset Allocation Fund were as
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follows: Corelink Financial Inc., P.O. Box 4054, Concord, CA 94524, 114,739.11
shares (6.13%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Asset Allocation Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, 42,234.07 shares (99.86%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the U.S. Government Securities Fund were as follows: Corelink
Financial Inc., P.O. Box 4054, Concord, CA 94524, 48,196.66 shares (99.76%).
At May 30, 1997, 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 Short-Term Government Fund were as follows: Bank of America
National Trust and Savings Association, The Private Bank, Attn: Common Trust
Funds, Unit 38329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051,
2,075,151.21 shares (97.15%)
At such dates, no other person was known by the Company to
hold of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectuses relating to the Funds and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration statement,
including items omitted herein, may be obtained from the Commission by paying
the charges prescribed under its rules and regulations.
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APPENDIX A
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COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
<PAGE> 503
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and
other protection factors qualify issue as investment grade. Risk
A-2
<PAGE> 504
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the
likelihood of an untimely or incomplete payment of principal or
A-3
<PAGE> 505
interest of unsubordinated instruments having a maturity of one year or less
which are issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
A-4
<PAGE> 506
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating
A-5
<PAGE> 507
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes
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probable credit stature upon completion of construction or elimination of basis
of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
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strong ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest
expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse changes
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in business, economic or financial conditions are unlikely to increase
investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
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"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk.
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The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
----------
As stated in the Prospectuses, the Portfolios, may enter into
futures contracts and options for hedging purposes. Such transactions are
described in this Appendix B.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to
that which it hopes to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term bonds
and investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by a Fund, through using
futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by a Portfolio, as seller,
to deliver the specific type of financial instrument called for in the contract
at a specific future time for a specified price. A futures contract purchase
would create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
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Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board of
Trade and the Chicago Mercantile Exchange. The Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury bonds
and notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Portfolio may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
EXAMPLES OF FUTURES CONTRACT SALE. A Portfolio would engage in
an interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in a
Portfolio tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The investment adviser wishes
to fix the current market value of this portfolio security until some point in
the future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. Such Portfolio might enter into futures
contract sales of Treasury bonds for an equivalent of 98. If the market value of
the portfolio security
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does indeed decline from 100 to 95, the equivalent futures market price for the
Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of
interest rates and the equivalent futures market price could rise above 98. In
this case, the market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this increase would be
reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the
above example might incur a loss of 2 points (which might be reduced by an
off-setting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
EXAMPLES OF FUTURES CONTRACT PURCHASE. A Portfolio would
engage in an interest rate futures contract purchase when it is not fully
invested in long-term bonds but wishes to defer for a time the purchase of
long-term bonds in light of the availability of advantageous interim
investments, e.g., shorter-term securities whose yields are greater than those
available on long-term bonds. The Portfolio's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Portfolio would be endeavoring at the same time to eliminate the
effect of all or part of an expected increase in market price of the long-term
bonds that the Portfolio may purchase.
For example, assume that the market price of a long-term bond
that a Portfolio may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The investment adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Portfolio might enter into futures contracts purchases of Treasury
bonds for an equivalent price of 98. At the same time, the Portfolio would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an
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assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to 105,
the equivalent futures market price for Treasury bonds might also rise from 98
to 103. In that case, the 5-point increase in the price that the Portfolio pays
for the long-term bond would be offset by the 5-point gain realized by closing
out the futures contract purchase.
The investment adviser could be wrong in its forecast of
interest rates; long-term interest rates might rise to above 10%; and the
equivalent futures market price could fall below 98. If short-term rates at the
same time fall to 10% or below, it is possible that the Portfolio would continue
with its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Portfolio would discontinue its
purchase program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The benefit
of this continued incremental income will be reduced by the loss realized on
closing out the futures contract purchase. In each transaction, expenses would
also be incurred.
II. MUNICIPAL BOND INDEX FUTURES CONTRACTS
A municipal bond index assigns relative values to the bonds
included in the index and the index fluctuates with changes in the market values
of the bonds so included. The Chicago Board of Trade has designed a futures
contract based on the Bond Buyer Municipal Bond Index. This Index is composed of
a number of term revenue and general obligation bonds, and its composition is
updated regularly as new bonds meeting the criteria of the Index are issued and
existing bonds mature. The Index is intended to provide an accurate indicator of
trends and changes in the municipal bond market. Each bond in the Index is
independently priced by six dealer-to-dealer municipal bond brokers daily. The
prices are then averaged and multiplied by a coefficient. The coefficient is
used to maintain the continuity of the Index when its composition changes. The
Chicago Board of Trade, on which futures contracts based on this Index are
traded, as well as other U.S. commodities exchanges, are regulated by the
Commodity Futures Trading Commission. Transactions on such exchange are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
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The National Municipal Bond Fund will sell index futures
contracts in order to offset a decrease in market value of its portfolio
securities that might otherwise result from a market decline. The Portfolio may
do so either to hedge the value of its portfolio as a whole, or to protect
against declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the National Municipal Bond Fund will
purchase index futures contracts in anticipation of purchases of securities. In
a substantial majority of these transactions, the National Municipal Bond Fund
will purchase such securities upon termination of the long futures position, but
a long futures position may be terminated without a corresponding purchase of
securities.
Closing out a futures contract sale prior to the settlement
date may be effected by the National Municipal Bond Fund's entering into a
futures contract purchase for the same aggregate amount of the index involved
and the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the National Municipal Bond Fund is paid the difference and
thus realizes a gain. If the offsetting purchase price exceeds the sale price,
the National Municipal Bond Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
National Municipal Bond Fund's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the National
Municipal Bond Fund realizes a loss.
EXAMPLE OF A MUNICIPAL BOND INDEX FUTURES CONTRACT
Consider a portfolio manager holding $1 million par value of
each of the following municipal bonds on February 2 in a particular year.
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- ----- ------ ---------- ---- -----------
<S> <C> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
The current value of the portfolio is $5,003,750.
To hedge against a decline in the value of the portfolio,
resulting from a rise in interest rates, the portfolio manager can use the
municipal bond index futures contract. The
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current value of the Municipal Bond Index is 86-09. Suppose the portfolio
manager takes a position in the futures market opposite to his or her cash
market position by selling 50 municipal bond index futures contracts (each
contract represents $100,000 in principal value) at this price.
On March 23, the bonds in the portfolio have the following
values:
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
The bond prices have fallen, and the portfolio has sustained a
loss of $130,312. This would have been the loss incurred without hedging.
However, the Municipal Bond Index also has fallen, and its value stands at
83-27. Suppose now the portfolio manager closes out his or her futures position
by buying back 50 municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the
results of the hedge.
<TABLE>
<CAPTION>
CASH MARKET FUTURES MARKET
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
--------------------- -----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset
the loss in the cash market, the $8,437 loss is significantly lower than the
loss which would have been incurred without hedging.
The numbers reflected in this appendix do not take into
account the effect of brokerage fees or taxes.
III. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures
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contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value (which assigns relative values to the
common stocks included in the index) at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. No
physical delivery of the underlying stocks in the index is made. Some stock
index futures contracts are based on broad market indices, such as the Standard
& Poor's 500 or the New York Stock Exchange Composite Index. In contrast,
certain exchanges offer futures contracts on narrower market indices, such as
the Standard & Poor's 100 or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
The Aggressive Growth Fund and Capital Income Fund, Blue Chip
Master Portfolio, Asset Allocation Master Portfolio and International Equity
Master Portfolio will sell stock index futures contracts in order to offset a
decrease in market value of their respective portfolio securities that might
otherwise result from a market decline. The Portfolios may do so either to hedge
the value of their respective portfolios as a whole, or to protect against
declines, occurring prior to sales of securities, in the value of the securities
to be sold. Conversely, the Portfolios will purchase stock index futures
contracts in anticipation of purchases of securities. In a substantial majority
of these transactions, the Portfolios will purchase such securities upon
termination of the long futures position, but a long futures position may be
terminated without a corresponding purchase of securities.
In addition, the Aggressive Growth Fund and Capital Income
Fund, Blue Chip Master Portfolio, Asset Allocation Master Portfolio and
International Equity Master Portfolio may utilize stock index futures contracts
in anticipation of changes in the composition of their respective portfolio
holdings. For example, in the event that a Portfolio expects to narrow the range
of industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolios may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of their respective
portfolios will decline prior to the time of sale.
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The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
PORTFOLIO FUTURES
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Aggressive Growth Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 =
$62,500 Fund Beta Relative to the Index = 1.0
PORTFOLIO FUTURES
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that
is, market value decreased and a Portfolio had entered into an anticipatory
purchase hedge, or market value increased and a Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
PORTFOLIO FUTURES
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Aggressive Growth Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
PORTFOLIO FUTURES
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
IV. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Aggressive Growth Fund to hedge against exposure to fluctuations in exchange
rates between the U.S. dollar and other currencies arising from multinational
transactions.
V. MARGIN PAYMENTS
Unlike when a Portfolio purchases or sells a security, no
price is paid or received by the Portfolio upon the purchase or sale of a
futures contract. Initially, the Portfolio will be
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required to deposit with the broker or in a segregated account with the
Portfolio's custodian an amount of cash or cash equivalents, the value of which
may vary but is generally equal to 10% or less of the value of the contract.
This amount is known as initial margin. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Portfolio upon termination of the futures contract assuming all contractual
obligations have been satisfied. Subsequent payments, called variation margin,
to and from the broker, will be made on a daily basis as the price of the
underlying instruments fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as marking-to-market.
For example, when a Portfolio has purchased a futures contract and the price of
the contract has risen in response to a rise in the underlying instruments, that
position will have increased in value and the Portfolio will be entitled to
receive from the broker a variation margin payment equal to that increase in
value. Conversely, where a Portfolio has purchased a futures contract and the
price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any time
prior to expiration of the futures contract, the investment adviser may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Portfolio's position
in the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Portfolio, and the
Portfolio realizes a loss or gain.
VI. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures
in the Portfolios as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Portfolio would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price
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of the hedged securities, the Portfolio involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of securities being hedged
and movements in the price of futures contracts, a Portfolio may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the investment
adviser. Conversely, a Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the investment adviser.
It is also possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of securities held in the Portfolio may decline. If this occurred, the Portfolio
would lose money on the future and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities before a Portfolio is able to invest its
cash (or cash equivalents) in securities (or options) in an orderly fashion, it
is possible that the market may decline instead; if the Portfolio then concludes
not to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, the Portfolio will realize
a loss on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
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participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the investment adviser may
still not result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by a Portfolio is also subject to
the investment adviser's ability to predict correctly movements in the direction
of the market. For example, if a Portfolio has hedged against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part of all of the benefit to
the increased value of its securities which it has
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<PAGE> 527
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it may
have to sell securities to meet daily variation margin requirements. Such sales
of securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
VII. OPTIONS ON FUTURES CONTRACTS
Each Portfolio may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Portfolios because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
VIII. OTHER HEDGING TRANSACTIONS
The U.S. Government Securities Fund and Capital Income Fund
and the Blue Chip, Intermediate Bond, Asset Allocation and International Equity
Master Portfolios presently intend to use interest rate futures contracts, the
Aggressive Growth Fund and the Blue Chip, Asset Allocation and International
Equity Master Portfolios presently intend to use stock index futures contract
(and foreign currency futures contracts (and related options)
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with respect to the Aggressive Growth Fund and International Equity Master
Portfolio) in connection with their hedging activities. Nevertheless, each of
these Portfolios is authorized to enter into hedging transactions in any other
futures or options contracts which are currently traded or which may
subsequently become available for trading. Such instruments may be employed in
connection with the Portfolios' hedging strategies if, in the judgment of the
investment adviser, transactions therein are necessary or advisable.
IX. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be
in accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts
held by a Portfolio at the close of the Portfolio's taxable year will be treated
for federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "marking-to-market." Forty percent
of any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60% of such gain or loss will be treated as
long-term capital gain or loss without regard to the length of time the
Portfolio holds the futures contract or option ("the 40-60 rule"). The amount
of any capital gain or loss actually realized by a Portfolio in a subsequent
sale or other disposition of those futures contracts or options will be adjusted
to reflect any capital gain or loss taken into account by a Portfolio in a prior
year as a result of the constructive sale of the contracts or options. With
respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by a Portfolio, losses as to such contracts to sell
will be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules, which
also will be applicable, the holding period of the securities forming part of
the straddle (if they have not been held for the long-term holding period) will
be deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts and related options, deductions for interest and
carrying charges will not be allowed. Notwithstanding the rules described above,
with respect to futures contracts to sell which are properly identified as such,
a Portfolio may make an election which will exempt (in whole or in part) those
identified futures contracts from being treated for federal income tax purposes
as sold on the last business day of the Portfolio's taxable year, but gains and
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losses will be subject to such short sales, wash sales and loss deferral rules
and the requirement to capitalize interest and carrying charges. Under Temporary
Regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, the 40-60 rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50 percent of any net gain may be treated as
long-term and no more than 40 percent of any net loss may be treated as
short-term.
Certain foreign currency contracts entered into by the
Aggressive Growth Fund may be subject to the "marking-to-market" process, but
gain or loss will be treated as 100% ordinary gain or loss. To receive such
federal income tax treatment, a foreign currency contract must meet the
following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under the
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Foreign currency contracts entered into by the Fund may result in
the creation of one or more straddles for federal income tax purposes, in which
case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
With respect to the Aggressive Growth Fund, and Capital Income
Fund and the Intermediate Bond, Asset Allocation and International Equity Master
Portfolios, some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument. However, regulated futures contracts and non-equity
options are generally
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not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the mark-to-market rules,
unless an election is made to have such currency rules apply. The disposition of
a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that such Funds may make or may enter
into will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
Qualification as a regulated investment company under the Code
requires that each Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of each
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is treated
for this purpose as derived with respect to the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust.
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The Short-Short test is an additional requirement for
qualification as a regulated investment company under the Code . With respect
to futures contracts and other financial instruments subject to the
mark-to-market rules, the Internal Revenue Service has ruled in private letter
rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the mark-to-market rules, and will be treated as being derived from a security
held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the Short-Short test is met for a taxable year, increases and
decreases in the value of each Fund's futures contracts and other investments
that qualify as part of a "designated hedge," as defined in the Code, may be
netted.
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<PAGE> 532
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Asset Allocation Fund
---------------------
<TABLE>
<CAPTION>
Part B
Item No. Heading
<S> <C>
10. Cover Page..................................................... Cover Page
11. Table of Contents.............................................. Table of Contents
12. General Information and History................................ The Company
13. Investment Objectives and Policies............................. Investment Objectives and
Policies
14. Management of the Fund......................................... Management
15. Control Persons and Principal Holders of
Securities..................................................... Management; Miscellaneous
16. Investment Advisory and Other Services ........................ Management-Investment Adviser;
Management-Administrator;
Management-Distributor and Plan
Payments; General Information-
Custodian, Accounting Agent and
Transfer Agent; General
Information-Independent
Accountants
17. Brokerage Allocation and Other Practices....................... Portfolio Transactions
18. Capital Stock and Other Securities............................. General Information-
Description of Shares
19. Purchase, Redemption and Pricing of Additional Purchase and
Securities Being Offered....................................... Redemption Information
20. Tax Status..................................................... Additional Information
Concerning Taxes
21. Underwriters................................................... Management-Distributor and Plan
Payments
22. Calculation of Performance Data................................ Yield and Total Return
</TABLE>
Part C
Information to be included in Part C is set forth under the appropriate Item, so
numbered in Part C to this Registration Statement.
<PAGE> 533
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
ASSET ALLOCATION FUND
June 24, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Company................................................................................. 2
Investment Objectives And Policies.......................................................... 2
Additional Purchase And Redemption Information.............................................. 25
Additional Information Concerning Taxes..................................................... 32
Management.................................................................................. 35
General Information......................................................................... 64
Appendix A.................................................................................. A-1
Appendix B.................................................................................. B-1
</TABLE>
This Statement of Additional Information applies to the A and K Shares
of the Pacific Horizon Asset Allocation Fund (the "Fund") of the Company. This
Statement of Additional Information is meant to be read in conjunction with the
Prospectus dated June 24, 1997, as it may from time to time be revised (the
"Prospectus"), and is incorporated by reference in its entirety into the
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, no investment in either A or K Shares of the Fund should be made
solely upon the information contained herein. Copies of the Prospectus relating
to the Fund may be obtained by calling Concord Financial Group, Inc. at
800-332-3863. Capitalized terms used but not defined herein have the same
meaning as in the Prospectus.
<PAGE> 534
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund commenced operations on January 24, 1994. Prior to June
23, 1997, the Asset Allocation Fund invested all of its assets in the Asset
Allocation Portfolio ( "Master Portfolio") of Master Investment Trust, Series I
("Master Trust I"), which had an identical investment objective. On June 23,
1997, the Asset Allocation Fund withdrew its assets from the Master Portfolio
and invested them directly in securities.
The Company also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Fund describes the investment objective of the
Fund . The following is a discussion of the various investments and techniques
employed by the Asset Allocation Fund. The following information supplements and
should be read in conjunction with the descriptions of the investment objective
and policies in the Prospectus for the Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in the Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions. For the fiscal years ended February 28,
1997 and February 29, 1996, the portfolio turnover rates for the Master
Portfolio were 116% and 157% , respectively.
Subject to the general control of the 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 Asset
Allocation Fund.
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<PAGE> 535
Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market, but the price includes
an undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of portfolio securities for the fixed
income portion of the Fund are normally principal transactions without brokerage
commissions.
For the fiscal years and period indicated, the Master
Portfolio paid the following brokerage commissions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, 1997 February 29, 1996 February 28,1995
--------------------------------------------------------------
<S> <C> <C> <C>
Master $152,720 $175,960 $152,778
Portfolio
</TABLE>
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 Company and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Investment Advisory Agreement authorizes Bank of America, subject
to the approval of the Board of Directors of the Fund 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 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
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<PAGE> 536
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 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 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 and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. The 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 Fund, 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 Pacific Horizon as of the close of its most recent fiscal
year. As of February 28, 1997: (a) the Treasury Fund held the following
securities: Repurchase Agreement with Dean Witter, Reynolds, Inc. in the
principal amount of $125,000,000; and Repurchase Agreement with Goldman Sachs &
Co. in the principal amount of $453,423,000; (b) the Government Fund held the
following security: Repurchase
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<PAGE> 537
Agreement with Dean Witter Reynolds, Inc. in the principal amount of
$50,000,000; (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. commercial paper in the principal amount of $25,000,000; Merrill
Lynch & Co., Inc. corporate debt in the principal amount of $25,000,000; Merrill
Lynch & Co., Inc. weekly variable rate obligation in the principal amount of
$50,000,000; Merrill Lynch & Co., Inc. weekly 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-Monthly Variable Rate Obligation in the principal amount of $25,000,000; Dean
Witter Discover & Co. corporate obligation in the principal amount of
$15,000,000; Goldman Sachs Group L.P. master note in the principal amount of
$300,000,000; Dean Witter Discover and Co., commercial paper in the principal
amount of $25,000,000, Dean Witter and Co., commercial paper in the principal
amount of $50,000,000; Morgan Stanley Group, Inc. master note in the principal
amount of $250,000,000, Bear Stearns Companies, Inc. monthly variable rate
obligation in the principal amount of $18,000,000; Bear Stearns Companies, Inc.
monthly variable rate note in the principal amount of $25,000,000; (d) the
Corporate Bond Fund held the following securities: Goldman Sachs Group corporate
obligation in the principal amount of $1,500,000; Lehman Brothers corporate
obligation in the principal amount of $1,000,000; Merrill Lynch & Co., Inc.
corporate obligation in the principal amount of $1,500,000; (e) the Intermediate
Bond Master Portfolio held the following security: Paine Webber Group medium
term note in the amount of $3,000,000; (f) the Asset Allocation Master Portfolio
held the following securities: Dean Witter common stock in the amount of
$2,701,600, Lehman Brothers corporate obligation in the principal amount of
$1,000,000; Morgan Stanley corporate obligation in the principal amount of
$3,800,000; Paine Webber Group medium term note in the principal amount of
$2,500,000; (g) the Capital Income Fund held the following security: Merrill
Lynch & Co., Inc. Structured Yield Product Exchangeable for Stock in the amount
of $3,575,000; (h) the Blue Chip Master Portfolio held the following security:
Dean Witter common stock in the amount of $6,220,588.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns
Co., Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc.,
Dean Witter Reynolds, Inc. , 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.
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Bank Certificates of Deposit, Bankers' Acceptances and Time
Deposits. Certificates of deposit, bankers' acceptances and time deposits are
eligible investments for the Fund as described in its Prospectus. Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' Acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of Deposit and Bankers
Acceptances may only be purchased from domestic or foreign banks and financial
institutions having total assets at the time of purchase in excess of $2.5
billion (including assets of both domestic and foreign branches). Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate. Obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank are not permissible investments for
the Fund.
Instruments issued by foreign banks or financial institutions
may be subject to investment risks that are different in some respects than the
risks associated with instruments issued by those U.S. domestic issuers. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which may
be made and interest rates which may be charged. In addition, the profitability
of the banking industry is dependent largely upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an
important part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels of
reserves, limited in the amount which they can loan to a single borrower, and
subject to other regulations designed to promote financial soundness. However,
such laws and regulations do not necessarily apply to foreign bank obligations.
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Commercial Paper and Short-Term Notes. The investment policies
of the Fund permit investment in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Except as noted below with respect to variable and floating rate instruments,
issues of commercial paper and short-term notes will normally have maturities of
less than 9 months and fixed rates of return, although such instruments may have
maturities of up to one year.
Commercial paper and short-term notes will consist of issues
rated at the time of purchase A-2 or higher by Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors Service,
Inc. ("Moody's"), or similarly rated by another nationally recognized
statistical rating organization ("NRSRO"); or if unrated, will be determined by
Bank of America to be of comparable quality under procedures established by the
Board of Directors of the Fund. These rating symbols are described in Appendix
A.
Other Investment Companies. In connection with the management
of its daily cash position, the Fund may invest in the securities of other
investment companies (including money market mutual funds advised by Bank of
America). The Fund is permitted to invest up to 5% of the value of its total
assets in the securities of another investment company; except with respect to
the investment in a money market mutual fund advised by Bank of America, the
Fund is permitted to invest the greater of 5% of its respective net assets or
$2.5 million. However, no more than 10% of the Fund's total assets may be
invested in the securities of other investment companies in the aggregate.
Securities of other investment companies will be acquired by the Fund within the
limits prescribed by the 1940 Act and the Fund's fundamental investment
limitations. As a shareholder of another investment company, the Fund would bear
along with other shareholders, its pro-rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that the Fund bears directly in connection
with its own operations. The 1940 Act generally prohibits the Fund from
investing more than 5% of the value of its total assets in any one investment
company, or more than 10% of the value of its total assets in investment
companies as a group, and also restricts its investment in any investment
company to 3% of the voting securities of such investment company. In addition,
no more than 10% of the outstanding voting stock of any one investment company
may be owned in the aggregate by the Fund and any other investment company
advised by the investment adviser.
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-
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dealers which 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. 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 a custodian or sub-custodian of the Fund or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to deliver instruments the value of which is 102% of
the repurchase price (excluding accrued interest), provided that notwithstanding
such requirement, the adviser shall require that the value of the collateral,
after transaction costs (including loss of interest) reasonably expected to be
incurred on a default, shall be equal to or greater than the resale price
(including interest) provided in the agreement. If the seller defaulted on its
repurchase obligation, the 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 is permitted to make
investments in U.S. Government obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes and bonds, and issues of such
entities as the Government National Mortgage Association, Export-Import Bank of
the United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and the Student Loan Marketing Association. Treasury bills
have maturities of one year or less, Treasury notes have maturities of one to
ten years and Treasury bonds generally have maturities of more than ten years.
Some of these obligations, such as those of the Government National Mortgage
Association, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary
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authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government sponsored
instrumentalities if it is not obligated to do so by law.
VARIABLE AND FLOATING RATE INSTRUMENTS. As described in the
Prospectus, the Fund may acquire variable and floating rate instruments and
master demand notes. Such instruments are frequently not rated by credit rating
agencies. However, in determining the creditworthiness of unrated variable and
floating rate instruments and their eligibility for purchase by the Fund , Bank
of America will consider the earning power, cash flow and other liquidity ratios
of the issuers of such instruments (which include financial, merchandising, bank
holding and other companies) and will continuously monitor their financial
condition. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by the Fund. The absence of such
an active secondary market could make it difficult to dispose of a variable or
floating rate instrument in the event the issuer of the instrument defaulted on
its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Investments in illiquid variable and
floating rate instruments (instruments which are not payable upon seven days'
notice and do not have active trading markets) are subject to the Fund's
fundamental 10% of net assets limitation on illiquid securities. Variable and
floating rate instruments may be secured by bank letters of credit.
REVERSE REPURCHASE AGREEMENTS. As described in the Prospectus,
the Fund is permitted to borrow funds for temporary purposes by entering into
reverse repurchase agreements with such financial institutions as banks and
broker-dealers in accordance with the investment limitations described therein.
Whenever the Fund enters into a reverse repurchase agreement, it will place in a
segregated account maintained with its custodian liquid assets such as cash,
U.S. Government securities or other liquid high grade debt securities having a
value equal to the repurchase price (including accrued interest) and Bank of
America will subsequently continuously monitor the account for maintenance of
such equivalent value. The Fund intends to enter into reverse repurchase
agreements to avoid otherwise having to sell securities during unfavorable
market conditions in order to meet redemptions. Reverse repurchase agreements
are considered to be borrowings by the Fund under the 1940 Act.
OPTIONS TRADING. The Fund may, under certain circumstances and
in accordance with investment limitations
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described in its prospectus, engage in options trading. Such options may relate
to U.S. and foreign securities or to various stock indices. The Fund presently
intends that the aggregate value of its assets subject to options will not
exceed 5% of the value of its net assets. The investment policies of the Fund
provide that the aggregate value of the Fund's assets subject to options may not
exceed 25% of the value of its net assets.
Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Regardless of how much the market price
of the underlying security or index increases or decreases, the option buyer's
risk is limited to the amount of the original premium paid for the purchase of
the option. However, options may be more volatile than the underlying
instruments, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves. A listed call option for a particular security gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. In contrast to an option on a particular security, an option on
a stock index provides the holder with the right to make or receive a cash
settlement upon exercise of the option. The amount of this settlement will be
equal to the difference between the closing price of the index at the time of
exercise and the exercise price of the option expressed in dollars, times a
specified multiple. Unlisted options are not subject to the protections afforded
purchases of options listed by the Options Clearing Corporation, which performs
the obligations of its members who fail to do so in connection with the purchase
or sale of options. Furthermore, it is the position of the staff of the SEC that
over-the-counter options are illiquid. To the extent that the Fund invests in
options that are illiquid (including over-the-counter options), such investment
will be subject to the Fund's limitations on illiquid securities.
The Fund will continue to receive interest or dividend income
on the securities underlying such puts until they are exercised by it. Any
losses realized by the Fund in connection with its purchase of put options will
be limited to the premiums paid by the Fund for the options plus any transaction
costs. A gain or loss may be wholly or partially offset by a change in the value
of the underlying security which the Fund owns.
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The Fund is permitted to write call options if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if the Fund maintains with its custodian cash or
cash equivalents equal to the contract value. A call option is also covered if
the Fund holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for the
premium, the covered option writer gives up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to an
option, the covered option writer has no control over when it may be required to
sell its securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer.
If the Fund desires to sell a particular security it owns, on
which it has written an option, the Fund will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, the Fund will enter into a "closing
purchase transaction" - the purchase of a call option on a security or stock
index with the same exercise price and expiration date as the call option which
it previously wrote on the same security or index.
When the Fund purchases a put or call option, the premium paid
by it is recorded as an asset of the Fund. When the Fund writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Fund is included in the liability section of the statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
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<PAGE> 544
prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by it on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. Moreover, because
increases in the market price of an option will generally reflect (although not
necessarily in direct proportion) increases in the market price of the
underlying security any loss resulting from a closing purchase transaction is
likely to be offset in whole or in part by appreciation of the underlying
security if such security is owned by the Fund. If an option written by the Fund
expires on the stipulated expiration date or if the Fund enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an option
written by the Fund is exercised, the proceeds of the sale will be increased by
the net premium originally received and the Fund will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, whether traded over-the-counter or on a national
securities exchange ("Exchange") may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an Exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a wellconceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
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FUTURES. The Fund may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options). A futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the value of a specified obligation or stock index (which
assigns relative values to the common stocks included in the index) at the close
of the last trading day of the contract and the price at which the futures
contract is originally struck. No physical delivery of the underlying securities
is normally made. The 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.
Successful use of futures contracts by the Fund is subject to
Bank of America's ability to predict correctly movements in the direction of the
stock market or interest rates. There are several risks in connection with the
use of futures contracts by the 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
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<PAGE> 546
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 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 of prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the Fund's assets.
By writing a call option, the Fund becomes obligated, in exchange for the
premium, to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures
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<PAGE> 547
contract generates a premium, which may partially offset an increase in the
price of securities that the Fund intends to purchase. However, the Fund becomes
obligated to purchase a futures contract, which may have a value lower than the
exercise price. Thus, the loss incurred by the Fund in writing options on
futures is potentially unlimited and may exceed the amount of the premium
received. The Fund will incur transaction costs in connection with the writing
of options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on the same
series. There is no guarantee that such closing transactions can be effected. A
Fund's ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
For additional information concerning Futures and options
thereon, please see Appendix B to this Statement of Additional Information.
FOREIGN INVESTMENTS. The Fund may invest in securities of
foreign issuers that may or may not be publicly traded in the United States.
Investments in foreign securities involve certain inherent
risks, such as political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
Foreign brokerage commissions and custodian fees are generally higher than in
the United States. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.
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<PAGE> 548
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Fund is uninvested and
no return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio securities, or, if the Fund has entered into
a contract to sell the securities, could result in possible liability to the
purchaser. Individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth or gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
In considering whether to invest in the securities of a
foreign company, Bank of America considers such factors as the characteristics
of the particular company, differences between economic trends and the
performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located. The
extent to which the Fund will be invested in foreign companies will fluctuate
from time to time within the percentage limits stated above depending on the
investment adviser's assessment of prevailing market, economic and other
conditions.
MUNICIPAL SECURITIES. The Fund may invest in Municipal
Securities. Municipal Securities are debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular federal income tax.
The Fund may purchase short-term Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes and other forms of short-term
tax-exempt loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. The Fund may also purchase tax-exempt commercial paper.
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<PAGE> 549
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's, S&P, Fitch Investors Service, Inc. ("Fitch") and Duff &
Phelps Credit Rating Co. ("D&P") represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and Municipal Securities with the
same maturity, interest rate and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by the Fund, an
issue of Municipal Securities may cease to be rated or its rating may be
reduced. The investment adviser will consider such an event in determining
whether the Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the federal Bankruptcy Code, and laws,
if any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. The power or ability of an issuer to meet
its obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities issued after August 15, 1986 (August 31, 1986 in the case of certain
bonds), the issuer must comply with certain rules formerly applicable only to
"industrial development bonds" which, if the issuer fails to observe them, could
cause interest on the Municipal Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of
Municipal Securities may be less available than about corporations a class of
whose securities is registered under the Securities Exchange Act of 1934.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to federal
tax legislation passed in 1986, interest on certain private activity bonds must
be included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income.
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<PAGE> 550
(See the Fund's Prospectus under "Tax Information.") Proposals to further
restrict or eliminate the tax benefits of municipal securities, while pending or
if enacted, might materially adversely affect the availability of Municipal
Securities for investment by the Fund and the liquidity and value of the Fund.
In such an event, the Fund would re-evaluate its investment objective and
policies and consider changes in its structure or possible dissolution.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When the Fund agrees to purchase securities on
a "when-issued," or "forward commitment" basis, its custodian will set aside
cash or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment. In such a case, the 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 and commitments
to purchase when-issued securities ever exceeded 25% of the value of the Fund's
assets.
The Fund will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When the Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the 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 whenissued
purchase or forward commitment transaction and any subsequent fluctuations in
their market value is taken into account when determining the market value of
the Fund starting
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<PAGE> 551
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.
The Portfolios may convert Convertible Securities during
periods when market conditions are unfavorable for their disposition or as a
result of developments such as the issuer's call or a decline in the market
liquidity for such Convertible Securities. The securities obtained upon the
conversion may be retained for temporary periods of not greater than two months
after conversion, and during such periods such securities will be considered to
be Convertible Securities for purposes of complying with this policy.
Conversions may also occur when necessary to permit orderly disposition of the
investment (for example, where a more substantial market exists for the
underlying security than for a relatively thinly traded Convertible Security) or
when a Convertible Security reaches maturity or has been called for redemption.
Securities Lending. The Fund may lend securities as described
in its Prospectus. Such loans will be secured by cash or securities of the U.S.
Government and its agencies and instrumentalities. The collateral must be at all
times equal to at least the market value of the securities loaned and is "marked
to market" daily. The Fund will continue to receive interest or dividends on the
securities it loans, and will also earn interest on the investment of any cash
collateral. Although voting rights, or rights to consent, attendant to
securities loaned pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by a fund if a material event
affecting the investment is to occur.
Asset-Backed and Mortgage-Related Securities. The Asset
Allocation Fund may invest in asset-backed securities, including mortgage-backed
securities representing an undivided ownership interest in a pool of mortgages,
such as certificates of the Government National Mortgage Association ("GNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"). These certificates are
in most cases pass-through instruments, through which the holder receives a
share of all interest and principal payments from the mortgages underlying the
certificate, net of certain fees. The average life of a mortgage-backed security
varies with the underlying mortgage instruments, which have maximum maturities
of 40 years. The average life is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as the result
of prepayments, mortgage refinancings or foreclosure. Mortgage prepayment rates
are affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular
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<PAGE> 552
monthly payments of principal and interest and have the effect of reducing
future payments.
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 the GNMA include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and 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 the FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned,
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Bank, 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 Asset Allocation Fund may also invest in non-mortgage
backed securities including interests in pools of receivables, such as motor
vehicle installment purchase obligations and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Non-mortgage backed securities may not be issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
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<PAGE> 553
however, the payment of principal and interest on such obligations may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution (such as a bank or insurance company)
unaffiliated with the issuers of such securities.
The purchase of non-mortgage backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in the respective obligations only by filing a financing statement and
by having the servicer of the obligations, which is usually the originator, take
custody thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most of the
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the cardholder.
The development of non-mortgage backed securities is at an
early stage compared to mortgage backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for mortgage
backed securities issued by certain private organizations and non-mortgage
backed securities is not as well developed as that for mortgage backed
securities guaranteed by government agencies or instrumentalities. Bank of
America intends to limit its purchases for the Corporate Bond
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<PAGE> 554
Fund of mortgage backed securities issued by certain private organizations and
non-mortgage backed securities to securities that are readily marketable at the
time of purchase.
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).
OTHER INVESTMENT LIMITATIONS
The Fund's investment objectives are fundamental. The
Prospectus for the Fund sets forth or summarizes certain fundamental policies
that may not be changed with respect to the Fund without the affirmative vote of
the holders of the majority of the Fund's outstanding shares or outstanding
interests (as defined below under "General Information Miscellaneous"). The
following enumerated additional fundamental policies, as well as the Fund's
investment objectives, may not be changed for the Fund without such a vote of
shareholders or interestholders.
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 or it would own more
than 10% of the voting securities of such issuer,
except that up to 25% of its total assets may be
invested without regard to these limitations; and
provided that all of its assets may be invested in
a diversified, open-end management investment
company, or a series thereof, with substantially
the same investment objectives, policies and
restrictions without regard to the limitations set
forth in this paragraph;
2. Pledge, mortgage or hypothecate the assets of the
Fund to any extent greater than 10% of the value
of the total assets of the Fund .
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<PAGE> 555
3. Make loans to other persons, except that the
Fund may make time or demand deposits with banks,
provided that time deposits shall not have an
aggregate value in excess of 10% of the Fund's
net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed,
may loan portfolio securities not in excess of 10%
of the value of the total assets of the Fund,
and may enter into repurchase agreements as long
as repurchase agreements maturing in more than
seven days do not exceed 10% of the value of the
total assets of the Fund;
4. Purchase or sell commodities contracts, except
that the Fund may purchase or sell futures
contracts on financial instruments, such as bank
certificates of deposit and U.S. Government
securities, foreign currencies and stock indexes
and options on any such futures if such options
are written by other persons and if (i) the
futures or options are listed on a national
securities or commodities exchange, (ii) the
aggregate premiums paid on all such options that
are held at any time do not exceed 20% of the
total net assets of the Fund, and (iii) the
aggregate margin deposits required on all such
futures or options thereon held at any time do not
exceed 5% of the total assets of the Fund;
5. Purchase any securities for the Fund that would
cause more than 25% of the value of the Fund's
total assets at the time of such purchase to be
invested in the securities of one or more issuers
conducting their principal activities in the same
industry; provided that there is no limitation
with respect to investments in obligations issued
or guaranteed by the United States Government, its
agencies and instrumentalities; and provided
further that the Fund may invest all its assets in
a diversified, open-end management investment
company, or a series thereof, with substantially
the same investment objectives, policies and
restrictions as the Fund without regard to the
limitations set forth in this paragraph (5).
6. Invest the assets of the Fund in nonmarketable
securities that are not readily marketable (including
repurchase agreements maturing in more than seven
days, securities described in restriction (2) in the
Prospectus, restricted securities, certain OTC
options and securities used as cover for such options
and stripped
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<PAGE> 556
mortgage-backed securities) to any extent greater
than 10% of the value of the total assets of the
Fund; provided, however, that the Fund may invest all
its assets in a diversified, open-end management
investment company, or a series thereof with
substantially the same investment objectives,
policies and restrictions as the Fund, without regard
to the limitations set forth in this paragraph (6).
7. Borrow money for the Fund except for temporary
emergency purposes and then only in an amount not
exceeding 5% of the value of the total assets of
the Fund. Borrowing shall, for purposes of this
paragraph, include reverse repurchase agreements.
Any borrowings, other than reverse repurchase
agreements, will be from banks. The Company will
repay all borrowings in the Fund before making
additional investments for the Fund and interest
paid on such borrowings will reduce income.
8. Issue senior securities.
9. Underwrite any issue of securities, provided,
however, that the Fund may invest all its assets in a
diversified, open-end management investment company,
or a series thereof, having substantially the same
investment objectives, policies and restrictions as
the Fund, without regard to the limitations set forth
in this paragraph (9).
10. Purchase or sell real estate or real estate mortgage
loans, but this shall not prevent investments in
instruments secured by real estate or interests
therein or in marketable securities of issuers that
engage in real estate operations.
11. Purchase on margin or sell short.
12. Purchase or retain securities of an issuer if
those members of the Board of the Company , each
of whom own more than 1/2 of 1% of such
securities, together own more than 5% of the
securities of such issuer, provided, however, that
the Fund may invest all its assets in a
diversified, open-end management investment
company, or a series thereof, having substantially
the same investment objectives, policies and
restrictions as the Fund, without regard to the
limitations set forth in this paragraph (12).
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<PAGE> 557
13. Purchase securities of any other investment
company (except in connection with a merger,
consolidation, acquisition or reorganization) if,
immediately after such purchase, the Company (and
any companies controlled by it) would own in the
aggregate (i) more than 3% of the total
outstanding voting stock of such investment
company, (ii) securities issued by such investment
company would have an aggregate value in excess of
5% of the value of the total assets of the
Company, or (iii) securities issued by such
investment company and all other investment
companies would have an aggregate value in excess
of 10% of the value of the total assets of the
Company provided, however, that the Fund may
invest all its assets in a diversified, open-end
management investment company, or a series
thereof, having substantially the same investment
objectives, policies and restrictions as the Fund,
without regard to the limitations set forth in
this paragraph (13).
14. Invest in or sell put, call, straddle or spread
options or interests in oil, gas or other mineral
exploration or development programs.
* * *
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
The Fund treats, in accordance with the current views of the
Staff of the SEC and as a matter of non-fundamental policy that may be changed
without a vote of shareholders or interestholders, all supranational
organizations as a single industry and each foreign government (and all of its
agencies) as a separate industry.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how
such shares are priced, is included in the Prospectus.
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<PAGE> 558
VALUATION OF THE ASSET ALLOCATION FUND
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers. Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the particular Board. Debt securities with remaining maturities
of 60 days or less are valued on an amortized cost basis unless the Board
determines that such basis does not represent fair value at the time. Under this
method, such securities are valued initially at cost on the date of purchase or,
in the case of securities purchased with more than 60 days to maturity, are
valued at their market or fair value each day until the 61st day prior to
maturity. Thereafter, absent unusual circumstances, a constant proportionate
amortization of any discount or premium is assumed until maturity of the
security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely solely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the particular Board. Valuation of options is
described above under "Investment Objectives and Policies Options Trading."
SUPPLEMENTARY PURCHASE INFORMATION - A SHARES
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
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<PAGE> 559
in economy of sales effort or expense. A "qualified group" must have more than
10 members, must be available to arrange for group meetings between
representatives of the Fund and the members, and must be able to arrange for
mailings to members at reduced or no cost to the Distributor. The value of
shares eligible for the Right of Accumulation privilege may also be used as a
credit toward completion of the Letter of Intent privilege. Such shares will be
valued at their offering price prevailing on the date of submission of the
Letter of Intent. Distributions on shares held in escrow pursuant to the Letter
of Intent privilege will be credited to the shareholder, but such shares are not
eligible for the Fund's Exchange Privilege.
The computation of the hypothetical offering price per share
of an A Share for the Fund based on the value of the Fund's net assets on
February 28, 1997 and the Fund's A Shares outstanding on such date is as
follows:
<TABLE>
<CAPTION>
Asset Allocation
Fund
----------------
<S> <C>
Net Assets $ 34,838,046
Outstanding Securities 1,795,743
Net Asset Value Per Share $ 19.40
Sales Charge, 4.50 percent
of offering price (4.71 percent
of net asset value per share) $ 0.91
Maximum Offering Price to Public $ 20.31
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: A AND K SHARES
A and K 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 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
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<PAGE> 560
will be redeemed as of the close of trading on such Exchange on the next day on
which shares of the Fund are priced and the proceeds will normally be wired in
federal funds on the next business day thereafter. Redemption proceeds 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 182090, Columbus, Ohio 43218-2090. Such request
must be signed by each shareholder, with each signature guaranteed as described
in the Fund's Prospectus. Guarantees must be signed by an authorized signatory
and "signature guaranteed" must appear with the signature. The Transfer Agent
may request further documentation from corporations, executors, administrators,
trustees or guardians, and will accept other suitable verification arrangements
from foreign investors, such as consular verification.
SUPPLEMENTARY PURCHASE INFORMATION
In General. As described in the Prospectus, A Shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") K Shares may only be purchased by: (a) businesses or other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; (c) accounts opened for IRA rollovers from a
401(k) plan in which the assets were held in any Pacific Horizon or Time Horizon
Fund and subsequent purchases into an IRA rollover account opened as described
above, so long as the original IRA rollover account remains open; (d) accounts
under Section 403(b)(7) of the Internal Revenue Code of 1986, as amended (the
"Code"); (e) deferred compensation plans under Section 457 of the Code; and (f)
certain other retirement plans. Bank of America and
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<PAGE> 561
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. SRF Shares of the Fund
are available for the investment of retirement funds held in eligible retirement
accounts as described in a separate SRF Share Prospectus.
A Shares in the Fund are sold with a sales load, except for
such exemptions as noted in the Prospectus. These exemptions to the imposition
of a sales load on A Shares are due to the nature of the investors and/or the
reduced sales efforts that will be necessary in obtaining such investments. A
Shares are also subject to a shareholder servicing fee. K Shares are offered at
net asset value with neither a front-end sales charge nor a contingent deferred
sales charge. K Shares are subject to a distribution plan fee and an
administrative and shareholder services fee. SRF Shares in each Fund are sold
without a sales load. SRF Shares are subject to Shareholder Servicing fees.
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 A and K shares into a new account may not
be made by wire. However, persons wishing to make a subsequent purchase of
Company shares into an already existing account by wire should telephone the
Transfer Agent at (800) 346- 2087. The investor's bank must be instructed to
wire federal funds to the Transfer Agent, referring in the wire to the
particular fund in which such investment is to be made; the investor's portfolio
account number; and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for
IRAs, payment of which could require the liquidation of shares. All fees charged
are described in the appropriate form. Shares may be purchased in connection
with these plans only by direct remittance to the Transfer Agent. Purchases for
IRA accounts will be effective only when payments received by the
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<PAGE> 562
Transfer Agent are converted into federal funds. Purchases for these plans may
not be made in advance of receipt of funds.
For processing redemptions, the Transfer Agent may request
further documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the
TeleTrade Privilege, any request for a wire redemption will be effected as a
TeleTrade transaction through the Automated Clearing House (ACH) system unless
more prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
Exchange Privileges for A and K Shares. 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 of any investment portfolio in the Pacific
Horizon Family of Funds or like shares of the Time
Horizon Funds acquired by a previous exchange
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<PAGE> 563
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.
C. 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.
D. 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.
E. K Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
other K Shares of any other investment portfolio in the
Pacific Horizon Family of Funds or for like shares of the Time
Horizon Funds.
Except as stated above, a sales load will be imposed when
shares of any investment portfolio in the Pacific Horizon Family of Funds that
were purchased or otherwise acquired without a sales load are exchanged for A
Shares of another investment portfolio in the Pacific Horizon Family or for like
shares of Time Horizon Funds which are sold with a sales load.
Exchange requests received on a business day prior to the time
shares of the investment portfolios involved in the 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
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<PAGE> 564
investment portfolios involved in the request are priced will be processed on
the next business day in the manner described above.
MISCELLANEOUS. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of
America or a Service Organization, certain purchasers may arrange with the
Company's custodian for sub-accounting services paid by the Company without
direct charge to the purchaser.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent at its Columbus office is a day
on which the New York Stock Exchange is open for trading. In 1997, the holidays
on which the New York Stock Exchange is closed are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or (d)
an emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will not
require a shareholder to redeem shares of 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.
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<PAGE> 565
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
The Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, the Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year the Fund does not qualify for
the special federal tax treatment afforded regulated investment companies, all
of the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
Fund and would be eligible for the dividends received deduction in the case of
corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, the Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
net short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss, if any), 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 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
-33-
<PAGE> 566
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of this requirement. However, any other income that is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. With respect to covered call
options, if the call is exercised by the holder, the premium and the price
received on exercise constitute the proceeds of sale, and the difference between
the proceeds and the cost of the securities subject to the call is capital gain
or loss. Premiums from expired call options written by the Fund and net gains
from closing purchase transactions are treated as short-term capital gains for
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses. See Appendix B -- "Accounting and Tax Treatment" for
a general discussion of the federal tax treatment of futures contracts, related
options thereon and other financial instruments, including their treatment under
the Short-Short Test.
Any distribution of the excess of net long-term capital gain
over net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholder has held the Fund's shares and
whether such gain is 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
marginal 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 gain is 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%.
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 net capital
gain over net capital loss). 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.
-34-
<PAGE> 567
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company 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 tax-exempt obligations or U.S.
government obligations which, if realized directly, would be exempt from such
income taxes. Shareholders are advised to consult their tax advisers because
state and local tax consequences may be different from the federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally affecting purchasers of Fund shares. No attempt is made
to present a detailed explanation of the federal income tax treatment of the
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential purchasers of Fund shares
should consult their tax advisers with specific reference to their own tax
situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
-35-
<PAGE> 568
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Thomas M. Collins 62 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Chairman of the
Board and Trustee, Master
Investment Trust, Series
I (registered investment
company) (since 1993);
President and Chairman of
the Board of Pacific
Horizon Funds, Inc. (1982
to August 31, 1995);
former Trustee, Master
Investment Trust, Series
II (registered investment
company) 1993 to April
1997; former Director,
Bunker Hill Income
Securities, Inc.
(registered investment
company) through 1991.
Douglas B. Fletcher 71 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisor,
Suite 100 Incorporated, (regis-
Newport Beach, CA 92660-2629 tered investment
advisor) 1991 to date;
Partner, Newport Partners
(private venture capital
firm), 1981 to date;
Chairman of the Board and
Chief Executive Officer,
First Pacific Advisors,
Inc. (registered
investment adviser) and
seven investment
companies under its
management, prior to
1983; former Allied
Member, New York Stock
Exchange; Chairman of the
Board of FPA Paramount
Fund, Inc. through 1984;
Director, TIS Mortgage
Investment Company (real
estate investment trust);
Trustee and former Vice
Chairman of the Board,
Claremont McKenna
College; Chartered
Financial Analyst.
</TABLE>
-36-
<PAGE> 569
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Robert E. Greeley 64 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from 1979
to 1991; Trustee, Master
Investment Trust, Series
I (since 1993); Director,
Morgan Grenfell Small Cap
Fund (since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989); former
Trustee, SunAmerica Fund
Group (previously Equitec
Siebel Fund Group) from
1984 to 1992; former
Trustee, Master
Investment Trust, Series
II from 1993 to February
1997 (registered
investment companies).
Kermit O. Hanson 80 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Shoreline, 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* 67 Chairman of President, Association
Association of American the Board and of American Universi-
Universities President ties, February 1993 to
1200 New York Avenue, NW date; Provost, 1982 to
Suite 550 January 1993, Senior
Washington, DC 20005 Vice President for
Academic Affairs, 1981 to
January 1993, University
of Southern California;
Trustee, Master
Investment Trust, Series
I (since 1995); former
Trustee , Master
Investment Trust, Series
II (October 1995 to
February 1997).
</TABLE>
-37-
<PAGE> 570
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
J. David Huber 9 Executive Employee of BISYS Fund
BISYS Fund Services Vice President Services, Inc.,
3435 Stelzer Road June 1987 to present;
Columbus, OH 43219 President of Master
Investment Trust, Series
I, Master Investment
Trust Series II (1996-
February 1997) and
Seafirst Retirement Funds
(since 1996).
Michael Brascetta 37 Vice President Senior Vice President
BISYS Fund Services of Shareholder Services,
3435 Stelzer Road BISYS Fund Services,
Columbus, OH 43219 Inc., April 1996 to present;
Employee, The Vanguard
Group, 1981 to April
1996.
Irimga McKay 36 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 (1996- February 1997)
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 37 Vice Director of Client
BISYS Fund Services President Services of the
3435 Stelzer Road Administrator, March
Columbus, OH 43219 1995 to date, prior thereto
Assistant Vice President
of the Administrator and
Distributor, October 1991
to March 1995; Vice
President (since 1996)
Seafirst Retirement Funds,
Master Investment
Trust, Series I and
Master Investment Trust,
Series II (1996- February
1997); Account Manager,
AT&T American Transtech,
Mutual Fund Division,
July 1989 to October
1991.
</TABLE>
-38-
<PAGE> 571
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Kevin L. Martin 35 Treasurer Vice President, Fund
BISYS Fund Services Accounting BISYS Fund
3435 Stelzer Road Services, Inc.
Columbus, OH 43219 February 1996 to Present;
Treasurer (since 1996),
Seafirst Retirement Funds
and Master Investment
Trust, Series II (1996-
February 1997); Senior
Audit Manager, Ernst &
Young LLP (1984 to
February 1996).
Lisa Ling 36 Assistant Employee, BISYS Fund
BISYS Fund Services Treasurer Services, Inc., November
3435 Stelzer Road 1995 to present;
Columbus, OH 43219 Assistant Treasurer (since
1996); Master Investment
Trust Series II (1996-
February 1997) and
Seafirst Retirement
Funds; employee,
Federated Investors,
October 1982 to November
1995.
W. Bruce McConnel, III 54 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath LLP.
Building, Suite 1100
Philadelphia, PA 19107
George O. Martinez 36 Assistant Senior Vice President
BISYS Fund Services Secretary and Director of
3435 Stelzer Road Administrative and
Columbus, OH 43219 Regulatory Services, of
the Administrator, since
April 1995; Assistant
Secretary (since 1995)
Seafirst Retirement Funds
and Master Investment
Trust, Series II
(1996-February 1997);
prior thereto, Vice
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 Services,
Columbus, OH 43219 BISYS Fund Services, Inc.,
June 1995 to present;
Assistant Secretary of
Seafirst Retirement Funds
(since 1996); Supervisor,
</TABLE>
-39-
<PAGE> 572
<TABLE>
<CAPTION>
Position
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Mutual Fund Legal
Department, Alliance
Capital Management, May
1989 to June 1995.
</TABLE>
==========================
* Dr. 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 in recognition of his years of service to the Company until February 28,
1997; each member of a Committee of the Board is entitled to receive $1,000 for
each Committee meeting they participate in (whether or not held on the same day
as a Board meeting); and each Chairman of a Committee of the Board shall be
entitled to receive an annual retainer of $1,000 for his services as Chairman of
the Committee. Effective September 1, 1996, Mr. Trefftzs became a director
emeritus of the Company and received 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 28, 1997, the Company
paid or accrued for the account of its directors as a group for services in all
capacities a total of $74,687. Of that amount, $857 of directors'
compensation was allocated to the Fund. Each director is also reimbursed for
out-of-pocket expenses incurred as a director. Drinker Biddle & Reath LLP, of
which Mr. McConnel is a partner, receives legal fees as counsel to the Company.
As of the date of this Statement of Additional Information, the directors and
officers of the Company, as a group, own less than 1% of the outstanding shares
of each of the Company's investment portfolios.
Under a retirement plan approved by the Board of Directors,
including a majority of its directors who are not "interested persons" of the
Company, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during
40
<PAGE> 573
the year of his/her death or resignation, or (ii) 50% of the annual director's
retainer then in effect for directors of the Company during the year of such
payment. A director who dies or resigns after nine years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 100% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 100% of the annual director's retainer
then in effect for directors of the Company during the year of such payment.
Further, the amount payable each year to a director who dies or resigns is
increased by $1,000 for each year of service that the director served as
Chairman of the Board.
Years of service for purposes of calculating the benefit
described above are based upon service as a director or Chairman after February
28, 1994. Retirement benefits in which a director has become vested may not be
reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits
paid by the Company within 45 days of the death or resignation of the director.
The present value of such benefits is to be calculated (i) based on the retainer
that was payable by the Company during the year of the director's death or
resignation (and not on any retainer payable to directors thereafter), and (ii)
using the interest rate in effect as of the date of the director's death or
resignation by the Pension Benefit Guaranty Corporation (or any successor
thereto) for valuing immediate annuities under terminating defined benefit
pension plans. A director's election to receive a single sum must be made in
writing within the 30 calendar days after the date the individual is first
elected as a director.
In addition to the foregoing, the Board of Directors may, in
its discretion and in recognition of a director's period of service before March
1, 1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit following the director's death or resignation (unless the
director has vested benefits as a result of completing nine years of service).
Any such action shall be approved by the Board and by a majority of the
directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
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
-41-
<PAGE> 574
benefits under the retirement plan has no priority or preference over the lawful
claims of the Company's creditors or shareholders, and the right to receive such
payments is not assignable or transferable by a director (or former director)
other than by will, by the laws of descent and distribution, or by the
director's written designation of a beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
- -----------------------------------------------------------
Prior to June 23, 1997 the Fund invested all of its assets in
the Master Portfolio of Master Trust I. The trustees and officers of Master
Trust I, their addresses, age, and principal occupations during the past five
years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C>
Thomas M. Collins 62 Chairman of See "Directors and
McDermott & Trayner the Board Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 59 Trustee of Master Chartered Accountant;
Victory House, Trust I Trustee, Master Invest-
Nelson Quay ment Trust, Series II
Governor's Harbour (1993 to February 1997);
Grand Cayman Retired Partner, KPMG Peat
Cayman Islands Marwick LLP
British West Indies
Robert E. Greeley 64 Trustee of Master See "Directors and
Page Mill Asset Trust I Officers of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee of Master Retired President, Laird
1200 Shenandoah Drive East Trust I Norton Trust Company,
Seattle, WA 98112 Chairman of the Board of
Advisors, Phoenix Venture
Funds; Trustee, Seafirst
Retirement Funds;
Trustee, Master
Investment Trust, Series
II (1993 to February
1997); former Supervisor,
Collective Investment
Trust for Seafirst
Retirement Accounts;
former Trustee, First
Funds of America
(registered investment
companies).
</TABLE>
-42-
<PAGE> 575
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C>
Cornelius J. Pings 67 Trustee of Master See "Directors and Officers of
Association of American Trust I the Company."
Universities
1200 New York Avenue, N.W.
Suite 550
Washington, DC 20005
J. David Huber 49 President of See "Directors and
BISYS Fund Services Master Trust I Officers of the Company."
3435 Stelzer Road
Columbus, OH 43219
Adrian J. Waters 32 Executive Vice Managing Director,
BISYS Fund Services President, Concord Management
Floor 2, Block 2 Treasurer and (Ireland) Ltd. since May
Harcourt Centre Assistant 1993; Manager in the
Dublin 2, Ireland Secretary of Investment Company Industry
Master Trust I Services Group, Price
Waterhouse 1989 to May 1993;
Member of Oliver Freaney and
Co./Spicer and Openheim
Chartered Accountants 1986-
1989.
Stephanie L. Blaha 37 Vice President of See "Directors and Officers of
BISYS Fund Services Master Trust I the Company."
3435 Stelzer Road
Columbus, OH 43219
W. Bruce McConnel, III 54 Secretary of See "Directors and
1345 Chestnut Street Master Trust I Officers of the Company."
Philadelphia, PA 19107
- -----------------------------
</TABLE>
* Mr. Nathane is an "interested trustee" of Master Trust I as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $3,000
($5,000 in the case of any trustee who is not also a Director or Trustee of a
feeder fund of one of the portfolios of Master Trust I) plus $500 per day for
each travel day and each day of a Board or committee meeting attended, for his
services as trustee of Master Trust I. Each trustee is also reimbursed for
out-of-pocket expenses incurred as a trustee. For its fiscal year ended February
28, 1997, Master Trust I paid or accrued for the account of its trustees as a
group for services in all capacities a total of $50,362; of that amount,
$14,942 was allocated to the Master Portfolio corresponding to the Asset
Allocation Fund (prior to June 23, 1997 the Asset Allocation Fund operated as
part of a master-feeder structure and invested all its assets in the Asset
Allocation Master Portfolio). The trustee's fees and reimbursements are
allocated among all of Master Trust I's portfolios based on their relative net
asset values. Drinker
-43-
<PAGE> 576
Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal fees as
counsel to Master Trust I.
The following chart provides certain information as of
February 28, 1997 about the fees received by directors of the Company as
directors and/or officers of the Company and as directors and/or trustees of the
Fund Complex:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS ESTIMATED REGISTRANT
AGGREGATE ACCRUED AS ANNUAL AND FUND
COMPENSATION PART OF BENEFITS COMPLEX**
NAME OF PERSON/ FROM THE FUND UPON PAID TO
POSITION COMPANY EXPENSES* RETIREMENT DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Coll $76,000 $ 0 $ 0 $86,125
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $37,000 $ 0 $ 0 $37,000
Vice Chairman of
the Board
- ---------------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley $33,000 $ 0 $ 0 $51,625
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $35,000 $ 0 $ 0 $43,000
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $78,500 $ 0 $ 0 $78,500
Director Emeritus
- ---------------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,000 $ 0 $ 0 $68,125
President and
Chairman of the
Board
- ---------------------------------------------------------------------------------------------------------------------------------
- ------------------------------
<FN>
* For the fiscal year ended February 28, 1997, the Company accrued on
the part of all of the directors an aggregate of $57,273 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. Fees from the Time Horizon Funds are for the
period from March 1, 1996 to February 28, 1997.
</TABLE>
INVESTMENT ADVISER
- ------------------
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to 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
-44-
<PAGE> 577
than the cost of securities, including brokerage commissions, if any, purchased
for the Fund. In rendering its advisory services, Bank of America may utilize
Bank officers from one or more of the departments of the Bank which are
authorized to exercise the fiduciary powers of Bank of America with respect to
the investment of trust assets. In some cases, these officers may also serve as
officers, and utilize the facilities, of wholly owned subsidiaries and other
affiliates of Bank of America or its parent corporation. In addition, the
agreement also provides that Bank of America may, in its discretion, provide
advisory services through its own employees or employees of one or more of its
affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation; provided such employees are under the management of
Bank of America.
Prior to June 23, 1997 the Fund invested all of its assets
in the Master Portfolio . On June 23, 1997 the Fund withdrew its assets from
the Master Portfolio and invested them directly in securities. In addition,
prior to June 23, 1997, Bank of America was entitled to receive an investment
advisory fee at the annual rate of 0.55% of the average daily net assets of
the Master Portfolio. Effective June 23, 1997 for the services provided and
expenses assumed pursuant to the investment advisory agreement, the Company has
agreed to pay Bank of America fees, accrued daily and payable monthly, at the
annual rate of .40% of the Fund's net assets. 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 voluntarily waive fees or
reimburse the Fund for expenses.
Except as noted below, for the fiscal years indicated Bank
of America waived its entire advisory fee with respect to the Master Portfolio
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, 1997 February 29, 1996 February 28, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Master $1,046,406(1) $913,660(1) $849,118
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
1. For the fiscal years ended February 28, 1997 and February 29, 1996, Bank of
America waived $735,797 and $720,259, respectively, in advisory fees with
respect to the Master Portfolio.
-45-
<PAGE> 578
<TABLE>
<CAPTION>
Additionally, for the fiscal years indicated Bank of America
assumed certain operating expenses of the Master Portfolio as follows:
-------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, 1997 February 29, 1996 February 28,
1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Master $0 $0 $245,718
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Advisory Agreement between Bank of America
and the Company will be in effect until October 31, 1997, and will continue in
effect with respect to the Fund 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 with respect to the Fund 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.
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Master
Portfolio.
The Investment Advisory Agreement for the Fund provides that
Bank of America shall not be liable for any error of judgment or mistake of law
or for any loss suffered in connection with the performance of the investment
advisory agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties or
from reckless disregard by it of its duties and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
- -----------------------------------------------
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities,
-46-
<PAGE> 579
although national and state-chartered banks generally are permitted to purchase
and sell securities upon the order and for the account of their customers. In
1971, the United States Supreme Court held in Investment Company Institute v.
Camp that the Glass-Steagall Act prohibits a national bank from operating a fund
for the collective investment of managing agency accounts. Subsequently, the
Board of Governors of the Federal Reserve System (the "Board of Governors")
issued a regulation and interpretation to the effect that the Glass-Steagall Act
and such decision forbid a bank holding company registered under the Federal
Bank Holding Company Act of 1956 (the "Holding Company Act") or any non-bank
affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
but do not prohibit such a holding company or affiliate from acting as
investment adviser, transfer agent and custodian to such an investment company.
In 1981, the United States Supreme Court held in BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM V. INVESTMENT COMPANY INSTITUTE that the Board of
Governors did not exceed its authority under the Holding Company Act when it
adopted its regulation and interpretation authorizing bank holding companies and
their non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
Bank of America believes that if the question was properly
presented, a court should hold that Bank of America may perform the services
for the Company contemplated by the Investment Advisory Agreement, the
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
Company or from continuing to purchase Fund shares for the accounts of its
customers.
For a discussion of the Glass-Steagall Act in connection with
the Company's Shareholder Services Plans, see "Plan Payments" in the Fund's
Prospectus.
On the other hand, as described herein, the Fund is currently
distributed by Concord Financial Group, Inc. The BISYS Group, Inc., through
its wholly-owned subsidiary, BISYS Fund Services, L.P., (the "Administrator" or
"BISYS") provides the Fund with administrative services. If current restrictions
under the Glass-Steagall Act preventing a bank from sponsoring,
-47-
<PAGE> 580
organizing, controlling, or distributing shares of an investment company were
relaxed, the Company expects that Bank of America would consider the possibility
of offering to perform some or all of the services now provided by BISYS or
Concord Financial Group, Inc. From time to time, legislation modifying such
restriction has been introduced in Congress which, if enacted, would permit a
bank holding company to establish a non-bank subsidiary having the authority to
organize, sponsor and distribute shares of an investment company. If this or
similar legislation were enacted, the Company 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 BISYS or Concord Financial Group, Inc. It is not possible, of
course, to predict whether or in what form such legislation might be enacted or
the terms upon which Bank of America or such a non-bank affiliate might offer to
provide services for consideration by the Company's Board of Directors .
ADMINISTRATOR
- --------------
The BISYS Group, Inc., through its wholly-owned subsidiary
BISYS Fund Services, L.P. (the "Administrator" or "BISYS"), serves as
administrator. Their offices are located at 150 Clove Road, Little Falls, New
Jersey 07424 and 3435 Stelzer Road, Columbus, Ohio 43219, respectively. The
Administrator also serves as administrator to several other investment
companies. Prior to November 1, 1996, Concord Holding Corporation, an indirect,
wholly-owned subsidiary of BISYS served as the Fund's administrator (the "Prior
Administrator").
The Fund's administration agreement will continue in effect
until October 31, 1997 and thereafter for successive periods of one year,
provided that such continuance is specifically approved at least annually (a) by
a vote of a majority of those members of the Board of Directors of the
Company who are not parties to the administration agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Directors of the Company
or by vote of a "majority of the outstanding voting securities" of the Fund.
The Company's administration agreement is terminable at any time with respect to
the Fund, without penalty, by its Board of Directors or by a vote of a
majority of its outstanding voting securities upon 60 days' notice to the
Administrator, or by the Administrator, upon 90 days' notice to the Company.
The Company has agreed to pay the Administrator a fee for its
services as Administrator, accrued daily and payable monthly, at the annual
rate of .15% of the average daily net assets of the Fund. The fee payable to
the Administrator is not subject to reduction as the value of the Fund's net
assets
-48-
<PAGE> 581
increases. From time to time, the Administrator may voluntarily waive fees or
reimburse the Fund for expenses. Prior to June 23, 1997, the Administrator or
Prior Administrator was entitled to receive an administration fee payable at the
annual rate of 0.15% of the Asset Allocation Fund's average daily net assets and
0.05% of the Asset Allocation Master Portfolio's average daily net assets.
Except as noted below, for the fiscal years indicated, the
Administrator or Prior Administrator waived its entire administration fee with
respect to the Fund and the Master Portfolio as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, February 29, February 28,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset $41,432(1) $19,909 $ 4,703
Allocation Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Master $94,685(1) $83,060(2) $79,573
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------
<FN>
1. For the fiscal year ended February 28, 1997, the Administrator or
Prior Administrator waived $41,432 and $66,954 with respect to the
Asset Allocation Fund and Asset Allocation Master Portfolio,
respectively.
2. For the fiscal year ended February 29, 1996 the Prior Administrator
waived $65,491 in administration fees with respect to the Master
Portfolio.
</TABLE>
Additionally, for the fiscal years indicated , the
Administrator or Prior Administrator reimbursed the Fund for its operating
expenses as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, February 29, February 28,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset $31,598 $192,545 $ 0
Allocation Fund
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Administrator will bear all expenses in connection with
the performance of its services under the administration
-49-
<PAGE> 582
agreement with the exception of the fees charged by PFPC, for certain fund
accounting services which are borne by the Fund. See "General
Information--Custodian and Transfer Agent" below. Expenses borne by the Fund
include taxes, interest, brokerage fees and commissions, if any, fees of Board
members who are not officers, directors, partners, employees or holders of 5% or
more of the outstanding voting securities of Bank of America or the
Administrator or any of their affiliates, SEC fees and state securities
qualification fees, advisory fees, administration fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
outside auditing and legal expenses, costs of maintaining corporate existence,
costs attributable to investor services, including without limitation telephone
and personnel expenses, costs of preparing and printing prospectuses and
Statements of Additional Information for regulatory purposes, cost of
shareholders' and interestholders' reports and corporate meetings and any
extraordinary expenses. Certain shareholder servicing fees in connection with
the Company's shares are also paid by the Company. See "Distributor and Plan
Payments."
The administration agreement provides that the Administrator
shall not be liable for any error of judgment or mistake of law or any loss
suffered by the Fund in connection with the performance of the administration
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.
PFPC provides the Fund with certain accounting services
pursuant to separate fund accounting services agreements with the Administrator.
Under the fund accounting services agreements, PFPC has agreed to provide
certain accounting, bookkeeping, pricing, dividend and distribution calculation
services with respect to the Fund. The monthly fees charged by PFPC under the
fund accounting services agreements are borne by the Fund .
DISTRIBUTOR AND PLAN PAYMENTS
- -----------------------------
Concord Financial Group, Inc. (the "Distributor"), a wholly
owned subsidiary of the Administrator, acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
the Company's shares although it is not obliged to sell any particular amount of
shares. The distribution agreement shall continue in effect with respect to the
Fund until October 31, 1997. 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
-50-
<PAGE> 583
Directors of the Company who are not parties to the distribution agreement or
"interested persons" of any such party, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Board of Directors of the
Company or by vote of a "majority of the outstanding voting securities" of the
Fund as to which the distribution agreement is effective; provided, however,
that the distribution agreement may be terminated by the Company at any time,
without the payment of any penalty, by vote of a majority of the entire Board of
Directors of the Company or by a vote of a "majority of the outstanding voting
securities" of the Fund on 60 days' written notice to the Distributor, or by the
Distributor at any time, without the payment of any penalty, on 90 days' written
notice to the Company. The agreement will automatically and immediately
terminate in the event of its "assignment."
For the fiscal years indicated the Distributor received
sales loads in connection with the purchase of shares of the Fund as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Amount of Total
Total Sales Amount Of Total Sales Load
Load Sales Load Retained By
Received By Retained Affiliates Of
Distributor By Distributor Bank of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ended $421,000 $47,026 $373,436
February 28, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended $642,818(1) $69,818 $569,332
February 29, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended $114,388 $30,504 $ 83,884
February 28, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------
<FN>
1. Balance was paid to selling dealers.
</TABLE>
The following table shows all sales loads, commissions and
other compensation received by the Distributor directly or indirectly from the
Fund during its fiscal year ended February 28, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Brokerage
Net Compensation Commissions
Underwriting on Redemption In Connection Other
Discounts and and With Fund Compensation(2)
Commissions(1) Repurchase Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset
Allocation
Fund $47,026 $ 0 $ 0 $47,026
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-51-
<PAGE> 584
- --------------------
(1) Represents amounts received from front-end sales charge on A
Shares.
(2) Represents the total of (i) amounts paid to the Administrator for
administrative services provided to the Fund (see "Management of the
Company-Administrator" above) and (ii) payments made under the
Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan (see discussion in next section) and retained
by the Distributor.
The Shareholder Services Plan. Pacific Horizon has adopted
separate Shareholder Services Plans (the "Plans") for SRF Shares and A Shares,
under which SRF Shares and A Shares of each Fund reimburse the Distributor for
shareholder servicing fees the Distributor pays to Service Organizations. The
fees paid under the Shareholder Services Plan for A Shares are in addition to
the sales loads on A Shares described above and in the Prospectus. Under the
Plans for A and SRF Shares, the Company pays the Distributor, with respect to
the Fund, for (a) nondistribution 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
-52-
<PAGE> 585
notices) to Clients; (viii) assisting in processing exchange and redemption
requests from Clients; (ix) assisting Clients in changing dividend options,
account designations and addresses; and (x) providing such other similar
services.
The Plan provides that the Distributor is entitled to receive
payments for expenses on a monthly basis, at an annual rate not exceeding .25%
of the average daily net assets of the SRF Shares or A Shares of the Fund, as
the case may be, 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 a Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
For the fiscal year ended February 28, 1997, the A Shares of
the Fund were charged the following amounts pursuant to the Plan:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Amount of
Amount of Amount of Total
Total Total Shareholder
Shareholder Shareholder Service Fee
Total Service Fee Service Fee Paid to
Shareholder Paid To Paid To Bank Affiliates of
Service Fee Distributor of America Bank of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $68,548 $2,735 $0 $64,576
Allocation
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 29, 1996, the A Shares of
the Fund were charged the following amounts pursuant to the Shareholder Service
Plan:
-53-
<PAGE> 586
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Amount of
Amount of Amount of Total
Total Total Shareholder
Shareholder Shareholder Service Fee
Total Service Fee Service Fee Paid to
Shareholder Paid To Paid To Bank Affiliates of
Service Fee Distributor of America Bank of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $33,182 $0 $0 $0
Allocation [$33,182
Fund waived]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 28, 1995, the A Shares of
the Fund were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Amount of
Amount of Amount of Total
Total Total Shareholder
Shareholder Shareholder Service Fee
Total Service Fee Service Fee Paid to
Shareholder Paid To Paid To Bank Affiliates of
Service Fee Distributor of America Bank of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $7,757 $0 $0 $0
Allocation [$7,757
Fund waived]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Payments for shareholder service expenses under the Plans
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.
-54-
<PAGE> 587
The Company's Board of Directors has concluded that the Plan
will benefit the Fund and its A shareholders. The Plan is subject to annual
reapproval by a majority of the Non-Interested Plan Directors and is terminable
at any time with respect to the Fund by a vote of a majority of such Directors
or by vote of the holders of a majority of the A Shares of the Fund. Any
agreement entered into pursuant to the Plan with a Service Organization is
terminable with respect to the Fund without penalty, at any time, by vote of a
majority of the Non-Interested Plan Directors, by vote of the holders of a
majority of the A Shares of the Fund, by the Distributor or by the Service
Organization. Each agreement will also terminate automatically in the event of
its assignment.
THE DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER
SERVICES PLAN. The Distributor is also entitled to payment from the Company for
distribution fees pursuant to the Distribution Plan adopted on behalf of K
Shares. Under the Distribution Plan, the Company may pay the Distributor for:
(a) direct out-of-pocket promotional expenses incurred by the Distributor in
advertising and marketing K Shares; (b) expenses incurred in connection with
preparing, printing, mailing, and distributing or publishing advertisements and
sales literature for K Shares; (c) expenses incurred in connection with printing
and mailing Prospectuses and Statements of Additional Information to other than
current K shareholders; (d) periodic payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, "a Distribution Organization") with respect to a Fund's K
Shares beneficially owned by customers for whom the Distribution Organization is
the Distribution Organization of record or holder of record of such K Shares;
(e) the direct or indirect cost of financing the payments or expenses included
in (a) and (d) above; or (f) for such other services as may be construed, by
any court or governmental agency or commission, including the SEC, to constitute
distribution services under the 1940 Act or rules and regulations thereunder.
With respect to K Shares, payments under the Distribution Plan are not intended
for distribution services to the extent they are not permitted under the
Employee Retirement Income Security Act of 1974, as amended.
Pursuant to the Administrative and Shareholder Services Plan
with respect to K Shares, the Company may also pay securities dealers, brokers,
financial institutions or other industry professionals, such as investment
advisors, accountants, and estate planning firms (severally, a "Service
Organization") for support services provided with respect to its Client's K
Shares. Administrative and shareholder services provided may include some or all
of the following: (i) processing dividend and distribution payments from a Fund
on behalf of its Clients; (ii) providing statements periodically to its Clients
showing their positions in K Shares; (iii) arranging for bank wires;
-55-
<PAGE> 588
(iv) responding to routine client inquiries concerning their investment; (v)
providing the information to the Fund necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its Clients;
(vii) aggregating and processing purchase, exchange, and redemption requests
from its Clients and placing net purchase, exchange, and redemption orders for
its Clients; (viii) establishing and maintaining accounts and records relating
to Clients; (ix) assisting Clients in changing dividend options, account
designations and addresses; or (x) other similar services if requested by the
Company.
The Distribution Plan provides that the Distributor is
entitled to receive payments on a monthly basis at an annual rate not exceeding
0.75% of the average daily net assets during such month of the outstanding K
Shares. In addition, under the Administrative and Shareholder Services Plan, the
Distributor is entitled to receive payments on a monthly basis for
administrative services and shareholder services at an annual rate not exceeding
0.75% and 0.25%, respectively, of the average daily net assets during such month
of the outstanding K Shares. The total of all 12b-1 fees, administrative service
and shareholder service fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average daily net assets of the Fund's K Shares. However, it is
expected that during the current Fiscal Year, such fees will not exceed 0.75% of
the average net assets of the K Shares.
Payments made out of or charged against the assets of a
particular class of shares of the Fund must be in payment for expenses incurred
on behalf of that class.
Payments for distribution expenses under the Distribution Plan
(the "12b-1 Plan") are subject to Rule 12b-1 (the "Rule") under the 1940 Act.
The Rule defines distribution expenses to include the cost of "any activity
which is primarily intended to result in the sale of [Company] shares." The Rule
provides, among other things, that an investment company may bear such expenses
only pursuant to a plan adopted in accordance with the Rule. In accordance with
the Rule, the 12b-1 Plan provides that a written report of the amounts expended
under the 12b-1 Plan, and the purposes for which such expenditures were
incurred, will be made to the Board of Directors for its review at least
quarterly. In addition, the 12b-1 Plan provides that it may not be amended to
increase materially the costs which the Fund may bear for distribution pursuant
to the 12b-1 Plan without shareholder approval and that other material
amendments of the 12b-1 Plan must be approved by a majority of the Board of
Directors, and by a majority of the directors who are neither "interested
persons" (as defined in the 1940 Act) of the Company
-56-
<PAGE> 589
nor have any direct or indirect financial interest in the operation of the 12b-1
Plan, or in any agreements entered into in connection with the 12b-1 Plan, by
vote cast in person at a meeting called for the purpose of considering such
amendments (the "Non-Interested Plan Directors"). The selection and nomination
of the directors of the Company who are not "interested persons" of the Company
have been committed to the discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan and the Administrative and Shareholder
Services Plan will benefit the Fund and its K shareholders. The 12b-1 Plan and
the Administrative and Shareholder Services Plan are subject to annual
reapproval by a majority of the Company's Board of Directors, including a
majority of the Non-Interested Plan Directors and are terminable without penalty
at any time with respect to the Fund by a vote of a majority of the
Non-Interested Plan Directors or by vote of the holders of a majority of the
outstanding K Shares of the Fund. Any agreement entered into pursuant to the
12b-1 Plan and the Administrative and Shareholder Services Plan with a Service
Organization is terminable with respect to the Fund without penalty, at any
time, by vote of a majority of the Non-Interested Plan Directors, by vote of the
holders of a majority of the outstanding K Shares of the Fund, or by the Service
Organization. Each agreement will also terminate automatically in the event of
its assignment.
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 a 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 a 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 a Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
For the fiscal year ended February 28, 1997, the K Shares of
the Fund were charged the following amounts pursuant to the Administrative
Shareholder Service Plan:
-57-
<PAGE> 590
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Amount of
Total
Amount of Amount of Administrative
Total Total and
Administrative Administrative Shareholder
Total and and Service Fee
Administrative Shareholder Shareholder Paid to
and Service Fee Service Fee Affiliates of
Shareholder Paid To Paid To Bank Bank of
Service Fee Distributor of America America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $1506 $0 $0 $0
Allocation
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 28, 1997, the K Shares of
the Fund were charged the following amounts pursuant to the Distribution Plan:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Amount of Amount of
Amount of Total 12b-1 Total 12b-1
Total 12b-1 Fee Paid To Fee Paid to
Total Fee Paid To Bank of Affiliates of
12b-1 Fee Distributor America Bank of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $1,000 $1,000 $0 $0
Allocation [$499 waived]
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
No K Shares were outstanding for the fiscal year ended
February 28, 1996 and February 28, 1995.
During the fiscal year ended February 28, 1997, all amounts
paid under the Distribution Plan were paid as compensation to broker/dealers.
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
-58-
<PAGE> 591
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 literature include a discussion of
certain attributes and benefits to be derived from its relationship which such
retirement plan sponsors. With proper authorization, the Fund may reprint
articles (or excerpts) written regarding the Fund and provide them to
prospective shareholders. Performance information with respect to the Fund is
generally available by calling (800) 346-2087.
YIELD CALCULATIONS. The yield for the respective share classes
of the Fund is calculated by dividing the net investment income per share (as
described below) earned by the Fund during a 30-day (or one month) period by the
maximum offering price per share (including the maximum front-end sales charge
of an A Share) on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period with respect to
a particular class
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<PAGE> 592
is based on the average daily number of shares outstanding in the class during
the period entitled to receive dividends and includes dividends and interest
earned during the period attributable to that class minus expenses accrued for
the period attributable to that class, net of reimbursements. This
calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)(raised to the power of 6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities is recognized by accruing 1/360 of the stated dividend rate of the
security each day. Except as noted below, interest earned on debt obligations is
calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held. For purposes of this calculation, it is
assumed that each month contains 30 days. The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations 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
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<PAGE> 593
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.
Based on the foregoing calculations, the 30-day yields of the
A Shares of the Fund (after fee waivers and expense reimbursements) for the 30
day period ended February 28, 1997 was 2.51%.
Based on the foregoing calculations, the 30-day yields of the
K Shares of the Fund (after fee waivers and expense reimbursements) for the
30-day period ended February 28, 1997 was 2.16%.
TOTAL RETURN CALCULATIONS. The Fund computes its average
annual total returns separately for its separate share classes by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular share class to the ending
redeemable value of such investment in the class. This is done by dividing the
ending redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to
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<PAGE> 594
one divided by the number of years (or fractional portionthereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
ERV (raised to the power of 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 separately for
its separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
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.
-62-
<PAGE> 595
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A Shares of the Fund
for the year or period indicated were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
Average Total Returns
------------------------------------------------------------
Period From
One-Year Commencement
Period Ended Of Operations (1)
February Through
28, February 28,
1997 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund 12.35% 12.25%
- ------------------------------------------------------------------------------------
- --------------------
<FN>
1. The Fund commenced investment operations on January 18,
1994.
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
Aggregate Total Returns
------------------------------------------------------------
Period From
One-Year Commencement
Period Ended Of Operations
February Through
28, February 28,
1997 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund 12.35% 43.32%
- ------------------------------------------------------------------------------------
</TABLE>
Based on the foregoing calculations, the 1) average
annual total returns, and 2) the aggregate total returns for the
K Shares of the Fund for the year or period indicated was as
follows:
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<PAGE> 596
<TABLE>
<CAPTION>
------------------------------------------------------------
Average Total Returns
------------------------------------------------------------
Period From
Commencement
One-Year Of Operations
Period Ended Through
February 28, February 28,
1997 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund 17.57% 13.91%
- ------------------------------------------------------------------------------------
- ------------------------
<FN>
* Performance prior to November 11, 1996 is represented by performance of
the A Shares of the Fund. On November 11, 1996, K Shares of the Fund
commenced operations.
** The Fund commenced operations on January 18, 1994.
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
Aggregate Total Returns
------------------------------------------------------------
Period From
Commencement
One-Year Of Operations
Period Ended Through
February 28, February 28,
1997 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund* 17.57% 50.02%
- ------------------------------------------------------------------------------------
- -------------------
<FN>
* Performance prior to November 11, 1996 is represented by performance of
the A Shares of the Funds. On November 11, 1996, K Shares of the Fund
commenced operations.
</TABLE>
The Fund may also advertise total return data without
reflecting sales charges in accordance with the rules of the SEC. Quotations
which do not reflect the sales load will, of course, be higher than quotations
which do.
-64-
<PAGE> 597
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 four hundred billion full and
fractional common shares. Pursuant to the authority granted in the Charter, the
Board of Directors has authorized the issuance of twenty-two classes of stock,
Classes A through W Common Stock, $.001 par value per share, representing
interests in twenty-two separate investment portfolios. Class O represents
interests in the A Shares of the Asset Allocation Fund, Class O -- Special
Series 3 represents interests in the M Shares of the Asset Allocation Fund ;
Class O -- Special Series 5 represents interests in the K Shares of the
Asset Allocation Fund and Class O -- Special Series 7 represents interests in
the SRF Shares of the Asset Allocation 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
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<PAGE> 598
rule also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts and the election of directors may
be effectively acted upon by shareholders of the Company voting without regard
to particular Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of the Fund voting
separately as a class) in connection with any 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, ACCOUNTING AGENT AND TRANSFER AGENT
The Company has appointed PNC Bank, National Association,
1600 Market Street, Philadelphia, PA 19103 ("PNC") as custodian for the Fund.
PFPC, Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, DE
19809, provides the Fund with certain accounting services pursuant to Fund
Accounting Services Agreements with the Administrator. Under the fund accounting
services agreements, PFPC has agreed to provide certain accounting, bookkeeping,
pricing, dividend and distribution calculation services with respect to the
Company . The monthly fees charged by PFPC under the fund accounting servicing
agreements are borne by the Fund . As custodian of the assets of the Fund ,
PNC (i) maintains a separate account or accounts in the name of the Fund , (ii)
holds and disburses portfolio securities; (iii) makes receipts and disbursements
of money, (iv) collects and receives income and other payments and distributions
on account of portfolio securities, (v) responds to correspondence from security
brokers and others relating to their respective duties and (vi) makes periodic
reports concerning its respective duties.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Fund .
COUNSEL
Drinker Biddle & Reath LLP (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.
-66-
<PAGE> 599
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, 1998.
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 or interests of
the Fund means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in fundamental investment policy, the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares or
interests of the Fund or (b) 67% of the shares or interests of the Fund
present at a meeting at which more than 50% of the outstanding shares or
interests of the Fund are represented in person or by proxy.
At May 30, 1997, 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 Securities Inc.,
185 Berry Street, 3rd Floor, San Francisco, CA 94107, 68,019,301.47 shares
(32.37%); BA Investment Services, Inc., For the Benefit of Clients, Attn: Unit
#7852 -Bob Santilli, P.O. Box 7042, San Francisco, CA 94120, 115,811,976.99
shares (55.11%); Hare & Co., Bank of New York and Short-Term Investment Funds,
Attn: Bimal Saha, One Wall Street, New York, NY 10286, 18,564,856.67 shares
(8.83%); Bank of America National Trust and Savings Association, The Private
Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, 14,665,058.13 shares (63.88%); and City of Hope, Attn:
Corporate Accounting; 1500 East Duarte Road, Duarte, CA 91010, 1,952,348.83
shares (8.50%); and City and County of San Francisco, Mayor's Office of
Community Development (MOCD), Attn: Pricilla Watts, 25 Van Ness Avenue, Suite
700, San Francisco, CA 94102, 4,902,943.68 shares (21.36%).
At May 30, 1997, 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, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
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<PAGE> 600
42,378,318.42 shares (21.13%); Omnibus Account for the Shareholder Accounts
Maintained By Concord Financial Services, Inc., Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 64,192,825.27 shares (32.01%); Bank of
America National Trust and Savings Association, The Private Bank, Attn: Common
Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA
90051-1577, 62,881,591.27 shares (59.00%); BA Investment Services, Inc., Attn:
Bob Santilli, 185 Berry Street, 3rd Floor, Unit 7852, San Francisco, CA 94107,
34,843,296.47 shares (32.70%); and Security Pacific Cash Management, c/o Bank of
America - 6PO. M/C 5533, Attn: Regina Olsen, 1850 Gateway Blvd., Concord, CA
94520, 211,718,600.00 shares (33.22%); and Bank of America Southern Comm. Bank,
Attn: Cindy 2964, P.O. Box 98600, Las Vegas, NV 89193-8600, 147,702,252.22
shares (23.18%).
At May 30, 1997, 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, 69,602,119.63 shares (20.13%); BA Investment Services, Inc., For
the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 223,833,671.16 shares (64.75%); Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051-1577,
218,751,508.19 shares (39.77%); Hare and Co., c/o Bank of New York, Attn: Frank
Notaro Spec. Proc. Dep., One Wail Street, 5th Floor, New York, NY
10286,88,408,186.13 shares (16.07%); and Clark Company Nevada & Tr., Attn: Mark
Aston, Treasurer, 520 South Grand Central Parkway, Las Vegas, NV 89155-1220,
30,000,000.00 shares (5.46%).
At May 30, 1997, 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, 172,238,456.01 shares (11.43%); and BISYS
Fund Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100
First Avenue, Suite 300, Pittsburgh, PA 15222, 465,104,543.34 shares (30.85%);
and Bank of America National Trust and Savings Association, The Private Bank,
Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, 219,164,704.13 shares (34.39%);
At May 30, 1997, the name, address and share ownership of
the entities which held as record owners more than 5% of the outstanding Class
X Shares of the Treasury Fund were as follows: BA Investment Services, Inc.,
fbo Clients, Attn:
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<PAGE> 601
Unit 7852- Dan Spillane, P.O. Box 7042, San Francisco, CA 94120,
10,739,687.25 shares (99.99%);
At May 30, 1997, 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, 75,391,887.45 shares (47.32%); BA Securities,
Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107, 30,015,417.74 shares
(18.84%); WALL Data Incorporated, 11332 NE 122nd Way, Kirkland, WA 98034,
15,984,662.30 shares (10.03%); Bank of America National Trust and Savings
Association, The Private Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box
513577, Terminal Annex, Los Angeles, CA 90051-1577, 3,711,365.97 shares (8.37%);
Sunquest Information Systems, Inc., Attn: Trena Couch, 1407 Eisenhower
Boulevard, Johnstown, PA 15904-3217, 16,600,997.97 shares (37.47%); First Trust,
NA as Escrow Agent, FBO Kaiser Aluminum & Chemical Corporation, Dept. of Labor,
AC#98925410, P.O. Box 64010, St. Paul, MN 55164-0010, 7,198,000.00 shares
(16.23%); Skinner Corporation, Attn: Debbie Sokvitne, 1326 Fifth Avenue, Suite
711, Seattle, WA 98101, 3,173,621.30 shares (7.16%); and Statek Corporation,
Attn: Brian McCarthy, 512 N. Main Street, Orange, CA 92868, 3,251,044.76 shares
(7.33%).
At May 30, 1997, 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: 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, 34,261.567.41 shares (14.32%); 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,
34,736,091.09 (14.51%); Viejas Bond of Kumeyaay Indians, a Federally recognized
Indian tribe, 5000 Willows Road, Alpine, CA 91901, 15,497,635.34 share (6.48%);
Bank of America National Trust and Savings Association, The Private Bank, Attn:
Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA
90051-1577, 27,977,885.64 shares (40.55%); and Bank of Nevada Southern Comm
Bank, Attn: Cindy 2964, P.O. Box 98600, Las Vegas, NV 89193-8600, 29,467,772.62
shares (42.71%).
At May 30, 1997, 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: Hare & Co, Bank of New
York and Short Term investment Funds, Attn: Binal Saha, One Wall Street, New
York, NY 10286, 149,394,037.41 shares (6.78%); BA Investment Services, Inc. For
the Benefit of Clients, Attn: Unit 7852 - Bob Santilli, P.O. Box
-69-
<PAGE> 602
7042, San Francisco, CA 94120, 1,749,802,842.05 shares (79.43%); and BA
Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
201,016,335.34 shares (9.12%).
At May 30, 1997, 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, 1,346,839,017.87 shares (46.24%); and BISYS Fund
Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 319,718,303.80 shares (10.98%).
At May 30, 1997, the name, address and share ownership of
the entities which held as record owners more than 5% of the outstanding Class
X Shares of the Prime Fund were as follows: BA Investment Services, Inc., fbo
Clients, Attn: Unit 7852- Dan Spillane, P.O. Box 7042, San Francisco, CA 94120,
302,342,053.89 shares (99.44%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Tax-Exempt Money Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 86,159,563.09 shares (93.62%); and
Bank of America National Trust and Savings Association , The Private Bank,
Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, 250,784,940.81 shares (97.77%).
At May 30, 1997, 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: BISYS Fund Services, Inc.
Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 22,522,433.57 shares (13.92%); and BISYS Fund
Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 115,386,215.41 shares (71.30%).
At May 30, 1997 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 National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051 -1577,
115,386,215.41 shares (83.67%); and BA Investment Services, Inc., Attn: Bob
Santilli, 185 Berry St, 3rd Floor, Unit 7852, San Francisco, CA 94107,
21,291,069.77 shares (15.44%).
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<PAGE> 603
At May 30, 1997, the name, address and share ownership of
the entities which held as record owners more than 5% of the outstanding Horizon
Shares of the California TaxExempt Money market Fund were as follows: BISYS Fund
Services, Inc., Pittsburgh, fbo our sweep customers, First and Market Building,
Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
169,545,900.04 shares (36.95%); and BISYS Fund Services, Inc. Pittsburgh, fbo
our customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 213,083,138.26 shares (46.44%).
At May 30, 1997, 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, 201,984,699.03 shares (44.18%); BA Investment Services, Inc., For the
Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 237,034,467.39 shares (51.85%).
At May 30, 1997, 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:
Bank of America National Trust and Savings Association, The Private Bank, Attn:
Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA
90051-1577, 577,212,706,197.26 shares (55.59%); and BA Investment Services,
Inc., Attn: Bob Santilli, 185 Berry Street, 3rd Floor, Unit 7852, San Francisco,
CA 94107, 138,830,382.32 shares (36.28%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class X
Shares of the California Tax-Exempt Money Market Fund were as follows: BA
Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852- Dan
Spillane, P.O. Box 7042, San Francisco, CA 94120, 36,250,280.71 shares (100%).
At May 30, 1997, 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 California Tax-Exempt Bond Fund were as follows: Bank of America
National Trust and Savings Association , The Private Bank, Attn: Common Trust
Funds Unit #38329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
2,174,529.37 shares (7.35%).
At May 30, 1997, 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: Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box
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3577 Terminal Annex, Los Angeles, CA 90051, 409,252.52 shares (18.32%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Corporate Bond Fund were as follows: Corelink Financial Inc., P.O.
Box 4054, Concord, CA 94524, 14,251.35 shares (99.53%).
At May 30, 1997, 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 421981352, 185 Berry Street, 3rd Floor, Suite 2640, San
Francisco, CA 94104, 80,975.44 shares (6.21%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the National Municipal Bond Fund were as follows: BISYS Fund Services,
Inc., 3435 Stelzer Road, Suite 100, Columbus, Ohio 43219, 104,764 shares (100%).
At May 30, 1997, 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: PACO, Attn: Mutual
Funds, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 427,589.93 shares
(18.72%); and PACO, Attn: Mutual Funds , P.O. Box 3577, Terminal Annex, Los
Angeles, CA 90051, 542,804.32 shares (23.76%); and Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 681,085.08 shares
(29.82%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the International Equity Fund were as follows: Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524, 22,466.70 shares (99.55%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Aggressive Growth Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, 37,286.30 shares (99.86%).
At May 30, 1997, 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 Intermediate Bond Fund were as follows: PACO, Attn: Mutual Funds,
P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, 187,640.73 shares (6.32%);
Bank of America National Trust and Savings Association, The Private Bank,
Attn: Common Trust Funds Unit 38329, P.O. Box 3577,
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Terminal Annex, Los Angeles, CA 90051, 1,623,599.96 shares (54.65%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Intermediate Bond Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, 43,333.53 shares (99.75%).
At May 30, 1997, 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 Blue Chip Fund were as follows: Bank of America National Trust and
Savings Association, The Private Bank, Attn: Common Trust Funds Unit 38329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 688,814.59 shares
(10.26%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Blue Chip Fund were as follows: Corelink Financial Inc., P.O. Box
4054, Concord, CA 94524, 81,570.10 shares (99.94%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Capital Income Fund were as follows: BA Investment Services, Inc.,
fbo 426275621, 185 Berry Street, 3rd Floor, Suite 2640, San Francisco, CA 94104,
5,831.48 shares (8.01%); Corelink Financial Inc., P.O. Box 4054, Concord, CA
94524, 65,302.16 shares (89.71%).
At May 30, 1997, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the California Tax-Exempt Bond Fund were as follows: BISYS
Fund Services, Inc., Attn: Regulation and Compliance Department, 3435 Stelzer
Road, Suite 1000, Columbus, Ohio 43219, 144.47 shares (100%).
At May 30, 1997, 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 Asset Allocation Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, 114,739.11 shares (6.13%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class K
Shares of the Asset Allocation Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, 42,234.07 shares (99.86%).
At May 30, 1997, the name, address and share ownership of the
entities which held as record owners more than 5% of the
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outstanding Class K Shares of the U.S. Government Securities Fund were
as follows: Corelink Financial Inc., P.O. Box 4054, Concord, CA 94524,
48,196.66 shares (99.76%).
At May 30, 1997, 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 Short-Term Government Fund were as follows: Bank of America
National Trust and Savings Association, The Private Bank, Attn: Common Trust
Funds, Unit 38329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051,
2,075,151.21 shares (97.15%).
At such date, no other person was known by the Company to hold
of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectus relating to the Fund and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration statement,
including items omitted herein, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report for the Fund for the fiscal year ended
February 28, 1997 (the "Annual Report") accompanies this Statement of Additional
Information. The financial statements and notes thereto in the Annual Report are
incorporated in this Statement of Additional Information by reference, and have
been audited by Price Waterhouse LLP, whose report thereon also appears in such
Annual Report and is also incorporated herein by reference. No other parts of
the Annual Report are incorporated by reference herein. Such financial
statements have been incorporated herein in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions
are considered to have a strong capacity for repayment of short-
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term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D- 1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used by
Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
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"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also
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used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
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likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the bonds. The
rating may be revised prior to delivery if changes occur in the legal documents
or the underlying credit quality of the bonds.
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The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
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"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation
of investment risk. Capacity for timely repayment of principal
and interest is strong, although adverse changes in business,
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
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"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Asset Allocation Fund may
enter into futures contracts and options for hedging purposes. Such transactions
are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
-------------------------------
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the 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.
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Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the 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
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does indeed decline from 100 to 95, the equivalent futures market price for the
Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of
interest rates and the equivalent futures market price could rise above 98. In
this case, the market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this increase would be
reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the 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
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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 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. STOCK INDEX FUTURES CONTRACTS
-----------------------------
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value (which assigns relative values to the common stocks included in the
index) at the close of the last trading day of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100 or
indices based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each
contract.
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The Fund will sell stock index futures contracts in order to
offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. The Fund may do so either to hedge the
value of its portfolios as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Fund will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Fund will purchase such securities upon termination of the
long futures position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Fund may utilize stock index futures
contracts in anticipation of changes in the composition of its portfolio
holdings. For example, in the event that the Fund expects to narrow the range
of industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Fund may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of the
securities to be sold as part of the restructuring of its portfolio will decline
prior to the time of sale.
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Asset Allocation Fund Futures
--------------------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Asset Allocation Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Asset Allocation Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000 Value of Futures Contract = 125 x $500 =
$62,500 Fund Beta Relative to the Index = 1.0
Asset Allocation Fund Futures
--------------------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Asset Allocation Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Asset Allocation Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that
is, market value decreased and the Fund had entered into an anticipatory
purchase hedge, or market value increased and the Fund had hedged its stock
portfolio, the results of the Fund's transactions in stock index futures would
be as set forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Asset Allocation Fund Futures
--------------------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Asset Allocation Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Blue Chip Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
Asset Allocation Fund Futures
--------------------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Asset Allocation Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Asset Allocation Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
III. 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
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<PAGE> 626
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
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.
IV. 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
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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 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
B-9
<PAGE> 628
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 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.
V. OPTIONS ON FUTURES CONTRACTS
The Fund may purchase options on the futures contracts
described above. A futures option gives the holder, in
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<PAGE> 629
return for the premium paid, the right to buy (call) from or sell (put) to the
writer of the option a futures contract at a specified price at any time during
the period of the option. Upon exercise, the writer of the option is obligated
to pay the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing, an option of the
same series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the 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.
VI. OTHER HEDGING TRANSACTIONS
The Fund presently intends to use interest rate futures
contracts and, additionally, the Fund presently intends to use stock index
futures contract 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.
VII. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be
in accordance with generally accepted accounting principles.
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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 "mark-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital gain
or loss and 60% of such gain or loss will be treated as long-term capital gain
or loss without regard to the length of time the 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 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.
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With respect to the Fund, some investments may be subject to
special rules which govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option or similar financial instrument. However,
regulated futures contracts and non-equity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the marking-to-market rules, unless an
election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the marking-to-market or loss deferral rules
under the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that such Funds may make or may enter
into will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
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
B-13
<PAGE> 632
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.
The Short-Short Test is an additional requirement for
qualification as a regulated investment company under the Code. With respect to
futures contracts and other financial instruments subject to the mark-to-market
rules, the Internal Revenue Service has ruled in private letter rulings that a
gain realized from such a futures contract or financial instrument will be
treated as being derived from a security held for three months or more
(regardless of the actual period for which the contract or instrument is held)
if the gain arises as a result of a constructive sale under the mark-to-market
rules, and will be treated as being derived from a security held for less than
three months only if the contract or instrument is terminated (or transferred)
during the taxable year (other than by reason of mark-to-market) and less than
three months have elapsed between the date the contract or instrument is
acquired and the termination date. In determining whether the 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.
B-14
<PAGE> 633
FORM N-1A
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(1) Included in Part A hereof:
Financial Highlights for:
Corporate Bond Fund
Intermediate Bond Fund
U.S. Government Securities Fund
International Equity Fund
Asset Allocation Fund
National Municipal Bond Fund
California Tax-Exempt Bond Fund
Capital Income Fund
Blue Chip Fund
Aggressive Growth Fund
Short-Term Government Fund
(2) Incorporated by reference in Part B hereof:
- The Audited Financial Statements and
related notes thereto as well as the
Auditor's reports thereon for each of the
Corporate Bond, Intermediate Bond, U.S.
Government Securities, International Equity,
Asset Allocation, National Municipal Bond,
California Tax-Exempt Bond, Capital
Income, Blue Chip, Aggressive Growth and
Short-Term Government Funds for the fiscal
year ended February 28, 1997 as filed with
the Securities and Exchange Commission on
May 8, 1997 pursuant to Rule 30b2-1 of the
Investment Company Act of 1490 (Nos. 2-81110
and 811-4293).
(b) Exhibits:
(1) (a) Restated Articles of Incorporation filed
November 22, 1983 are incorporated by
reference to Exhibit 1(a) to Post-
Effective Amendment No. 45 to the
Registration Statement of the Registrant
on Form N-1A (Nos. 2-81110/811-4293)
1
<PAGE> 634
filed February 23, 1996 ("Post-Effective
Amendment No. 45").
(b) Articles Supplementary filed January 9,
1986 are incorporated by reference to
Exhibit 1(b) to Post-Effective Amendment
No. 45.
(c) Articles Supplementary to increase
authorized capital stock filed August 31,
1989 are incorporated by reference to
Exhibit 1(c) to Post- Effective Amendment
No. 45.
(d) Articles Supplementary classifying shares
filed August 31, 1989 are incorporated by
reference to Exhibit 1(d) to
Post-Effective Amendment No. 45.
(e) Articles Supplementary classifying shares
filed June 3, 1991 are incorporated by
reference to Exhibit 1(e) to
Post-Effective Amendment No. 45.
(f) Articles Supplementary classifying and
reclassifying shares filed August 1, 1991
are incorporated by reference to Exhibit
1(f) to Post-Effective Amendment No. 45.
(g) Articles Supplementary to increase
authorized capital stock filed August 16,
1991 are incorporated by reference to
Exhibit 1(g) to Post-Effective Amendment
No. 45.
(h) Articles Supplementary classifying shares
filed August 16, 1991 are incorporated by
reference to Exhibit 1(h) to
Post-Effective Amendment No. 45.
(i) Articles Supplementary classifying shares
filed November 25, 1991 are incorporated
by reference to Exhibit 1(i) to
Post-Effective Amendment No. 45.
(j) Articles Supplementary classifying shares
filed May 11, 1992 are incorporated by
reference to Exhibit 1(j) to
Post-Effective Amendment No. 45.
2
<PAGE> 635
(k) Articles Supplementary reclassifying
shares filed May 15, 1992 are
incorporated by reference to Exhibit 1(k)
to Post-Effective Amendment No. 45.
(l) Articles Supplementary classifying shares
filed July 20, 1992 are incorporated by
reference to Exhibit 1(l) to
Post-Effective Amendment No. 45.
(m) Articles Supplementary to increase
authorized capital stock filed August 6,
1992 are incorporated by reference to
Exhibit 1(m) to Post-Effective Amendment
No. 45.
(n) Articles Supplementary classifying shares
filed August 6, 1992 are incorporated by
reference to Exhibit 1(n) to
Post-Effective Amendment No. 45.
(o) Articles Supplementary classifying shares
filed March 3, 1993 are incorporated by
reference to Exhibit 1(o) to
Post-Effective Amendment No. 45.
(p) Articles Supplementary reclassifying
shares filed May 12, 1993 are
incorporated by reference to Exhibit 1(p)
to Post-Effective Amendment No. 45.
(q) Articles of Amendment eliminating
restriction on number of classes of
shares filed May 8, 1990 are incorporated
by reference to Exhibit 1(q) to
Post-Effective Amendment No. 45.
(r) Articles of Amendment reclassifying
shares filed on July 9, 1993 are
incorporated by reference to Exhibit 1(r)
to Post-Effective Amendment No. 45.
(s) Articles Supplementary classifying shares
filed November 18, 1993 are incorporated
by reference to Exhibit 1(s) to
Post-Effective Amendment No. 45.
(t) Articles Supplementary reclassifying
shares filed November 18, 1993 are
incorporated by reference to Exhibit 1(t)
to Post-Effective Amendment No. 45.
3
<PAGE> 636
(u) Articles Supplementary reclassifying
shares filed January 21, 1994 are
incorporated by reference to Exhibit 1(u)
to Post-Effective Amendment No. 45.
(v) Articles Supplementary classifying shares
filed October 30, 1995 are incorporated
by reference to Exhibit 1(v) to
Post-Effective Amendment No. 47 to the
Registration Statement of the Registrant
on Form N-1A (Nos. 2- 81110/811-4293)
filed April 30, 1996 ("Post-Effective
Amendment No. 47").
(w) Articles of Amendment cancelling shares
filed on January 26, 1996 are
incorporated by reference to Exhibit 1(v)
to Post-Effective Amendment No. 45.
(x) Articles Supplementary classifying shares
filed on January 26, 1996 are
incorporated by reference to Exhibit 1(w)
to Post-Effective Amendment No. 45.
(y) Articles Supplementary reclassifying
shares filed on January 26, 1996 are
incorporated by reference to Exhibit 1(x)
to Post-Effective Amendment No. 45.
(z) Articles Supplementary reclassifying
shares filed on April 12, 1996 are
incorporated by reference to Exhibit 1(z)
to Post-Effective Amendment No. 51 to the
Registration Statement of the Registrant
on Form N-1A (Nos. 2- 81110/811-4293)
filed November 13, 1996 ("Post-Effective
Amendment No. 51").
(aa) Articles Supplementary reclassifying
shares filed on June 25, 1996 are
incorporated by reference to Exhibit 1(z)
to Post-Effective Amendment No. 50 to the
Registration Statement of the Registrant
on Form N-1A (Nos. 2- 81110/811-4293)
filed July 29, 1996 ("Post-Effective
Amendment No. 50.").
(bb) Articles Supplementary reclassifying
shares filed on June 25, 1996 are
incorporated by reference to Exhibit
1(aa) to Post-Effective Amendment No. 50.
4
<PAGE> 637
(cc) Articles Supplementary reclassifying
shares filed on June 25, 1996 are
incorporated by reference to Exhibit
1(bb) to Post-Effective Amendment No. 50.
(dd) Articles Supplementary reclassifying
shares filed on March 5, 1997 are
incorporated by reference to Exhibit
1(dd) to Post-Effective Amendment No. 54
to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed April 16, 1997
("Post-Effective Amendment No. 54.").
(ee) Articles Supplementary reclassifying
shares filed on April 11, 1997 are
incorporated by reference to Exhibit
1(ee) to Post-Effective Amendment No. 54.
(ff) Articles Supplementary to increase
authorized capital stock filed on June
11, 1997 are incorporated by reference to
Exhibit 1(ff) to the Registration
Statement of the Registrant on Form N-1A
(Nos. 2-81110/811-4293) filed June 16,
1997 ("Post-Effective Amendment No. 56).
(gg) Articles Supplementary reclassifying
shares filed on June 11, 1997 are
incorporated by reference to Exhibit
1(gg) to Post-Effective Amendment No. 56
.
(2) (a) Amended and Restated By-Laws as
approved by Registrant's Board of
Directors on July 23, 1996 are
incorporated by reference to Exhibit 2(f)
to Post- Effective Amendment No. 50.
(3) None.
(4) See Article VI, Section (2) of Article
VII, Article VIII and Section (2) and (4)
of Article X of the Restated Articles of
Incorporation incorporated by reference
to Exhibit 1(a) of Post- Effective
Amendment No. 45 and Article I, Section 1
and 10 of Article II, Article IV and
Section 1 of Article VI of the Amended
and Restated By-laws
5
<PAGE> 638
incorporated by reference to Exhibit 2(f)
of Post-Effective Amendment
No. 50.
(5) (a) Investment Advisory Agreement
dated as of April 22, 1992 between
Registrant and Bank of America
National Trust and Savings
Association (Money Market Funds) is
incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 45.
(b) Investment Advisory Agreement dated as of
April 22, 1992 between Registrant and
Bank of America National Trust and
Savings Association (Non-Money Market
Funds) is incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment
No. 45.
(c) Addendum to Investment Advisory Agreement
dated as of March 1, 1993 between
Registrant and Bank of America National
Trust and Savings Association (Money
Market Funds - Prime Value Fund) is
incorporated by reference to Exhibit 5(c)
to Post-Effective Amendment No. 45.
(d) Addendum to Investment Advisory Agreement
dated as of March 1, 1993 between
Registrant and Bank of America National
Trust and Savings Association (Money
Market Funds - Government and Treasury
Only Funds) is incorporated by reference
to Exhibit 5(d) to Post- Effective
Amendment No. 45.
(e) Investment Advisory Agreement dated
November 1, 1994 between Registrant and
Bank of America National Trust & Savings
Association with respect to the Capital
Income Fund is incorporated by reference
to Exhibit 5(e) to Post-Effective
Amendment No. 45.
(f) Investment Advisory Agreement dated as of
July 1, 1996 between Registrant and Bank
of America National Trust & Savings
Association with respect to the National
Municipal Bond Fund is incorporated by
reference to Exhibit 5(f) to Post-
Effective Amendment No. 51.
6
<PAGE> 639
(g) Investment Advisory Agreement dated as of
July 30, 1996 between Registration and
Bank of America National Trust and
Savings Association with respect to the
International Equity and Short-Term
Government Funds is incorporated by
reference to Exhibit 5(g) to Post-
Effective Amendment No. 51.
(h) Investment Advisory Agreement dated as of
September 1, 1996 between Registrant and
Bank of America National Trust & Savings
Association with respect to the Corporate
Bond Fund is incorporated by reference to
Exhibit 5(h) to Post- Effective Amendment
No. 52 to the Registration Statement of
the Registrant on Form N-1A (Nos.
2-81110/811-4293) filed January 31, 1997
("Post-Effective Amendment No. 52").
(i) Amended and Restated Investment Advisory
Agreement dated as of January 1, 1997
between Registrant and Bank of America
National Trust & Savings Association with
respect to the International Equity Fund
is incorporated by reference to Exhibit
5(i) to Post-Effective Amendment No. 52.
(j) Sub-Investment Advisory Agreement dated
as of January 1, 1997 between Bank of
America National Trust & Savings
Association and Wellington Management
Company, LLP with respect to the
International Equity Fund is incorporated
by reference to Exhibit 5(j) to
Post-Effective Amendment No. 52.
(k) Form of Investment Advisory Agreement
dated as of ___________ between
Registrant and Bank of America National
Trust & Savings Association with respect
to the Asset Allocation Fund is
incorporated by reference to Exhibit 5(k)
to Post-Effective Amendment No. 53 to the
Registration Statement on Form N- 1A
(Nos. 2-81110/811-4293) filed February 7,
1997 ("Post-Effective Amendment No. 53").
7
<PAGE> 640
(6) (a) Amended and Restated Distribution
Agreement between the Registrant and
Concord Financial Group, Inc. is
incorporated by reference to Exhibit 6(a)
to Post-Effective Amendment No. 51.
(b) Form of Broker/Dealer Agreement is
incorporated by reference to Exhibit 6(c)
to Post-Effective Amendment No. 45.
(c) Form of Bank Agreement is incorporated by
reference to Exhibit 6(d) to Post-
Effective Amendment No. 45.
(7) Board Guidelines on Significant
Governance Issues (which includes a
description of the Board of Director's
retirement policy and benefit) are
incorporated by reference to Exhibit 7 to
Post-Effective Amendment No. 45.
(8) (a) Custody Agreement between Registrant and
The Bank of New York dated as of April 3,
1989 is incorporated by reference to
Exhibit 8(a) to Post- Effective Amendment
No. 45.
(b) Amendment No. 1 to Custody Agreement
between Registrant and The Bank of New
York dated as of March 30, 1990 is
incorporated by reference to Exhibit 8(b)
to Post-Effective Amendment No. 45.
(c) Amendment No. 2 to Custody Agreement
between Registrant and The Bank of New
York dated as of February 26, 1993 is
incorporated by reference to Exhibit 8(c)
to Post-Effective Amendment No. 49 to the
Registration Statement of the Registrant
on Form N-1A (Nos. 2-81110/811-4293)
filed June 28, 1996 ("Post-Effective
Amendment No. 49").
(d) Amendment No. 3 to Custody Agreement
between Registrant and The Bank of New
York dated as of April 24, 1996 is
incorporated by reference to Exhibit 8(d)
to Post-Effective Amendment No. 49.
(e) Amendment No. 4 to Custody Agreement
between Registrant and The Bank of New
York dated as of July 1, 1996 is
8
<PAGE> 641
incorporated by reference to Exhibit 8(e)
to Post-Effective Amendment No. 51.
(f) Custodian Services Agreement between
Registrant and PNC Bank, N.A is
incorporated by reference to Exhibit 8(c)
to Post-Effective Amendment No. 45.
(g) Transfer Agency Agreement between
Registrant and BISYS Fund Services, Inc.
is incorporated by reference to Exhibit
8(d) to Post-Effective Amendment No. 47.
(h) Amendment No. 1 to Transfer Agency
Agreement between Registrant and BISYS
Fund Services, Inc. is incorporated by
reference to Exhibit 8(h) to Post-
Effective Amendment No. 52.
(i) Sub-Custodian Agreement between
Registrant, The Bank of New York, and
Security Pacific National Bank is
incorporated by reference to Exhibit 8(e)
to Post-Effective Amendment No. 45.
(j) Sub-Custodian Agreement between The Bank
of New York and Citibank, N.A. dated May
18, 1988 is incorporated by reference to
Exhibit 8(f) to Post-Effective Amendment
No. 45.
(k) Form of Sub-Custody Agreement between The
Bank of New York and Bank of America
National Trust and Savings Association is
incorporated by reference to Exhibit
(8)(i) to Post-Effective Amendment No.
37.
(9) (a) Basic Administrative Services Agreement
between Registrant and The BISYS Group,
Inc. (Money Market Funds) dated as of
November 1, 1996 is incorporated by
reference to Exhibit 9(a) to Post-
Effective Amendment No. 52.
(b) Administration Agreement between
Registrant and The BISYS Group, Inc.
(Non-Money Market Funds) dated as of
November 1, 1996 is incorporated by
reference to Exhibit 9(b) to Post-
Effective Amendment No. 52.
9
<PAGE> 642
(c) Amendment No. 1 to the Administration
Agreement between Registrant and The
BISYS Group, Inc. (Asset Allocation Fund)
dated as of November 1, 1996 is
incorporated by reference to Exhibit 9(c)
to Post-Effective Amendment No. 54.
(d) Cash Management and Related Services
Agreement between Registrant and The Bank
of New York (Horizon Shares and Horizon
Service Shares) dated as of May 1, 1990
is incorporated by reference to Exhibit
9(s) to Post-Effective Amendment No. 45.
(e) Amendment to Cash Management and Related
Services Agreement between Registrant and
The Bank of New York dated as of June 21,
1993 is incorporated by reference to
Exhibit 9(t) to Post-Effective Amendment
No. 45.
(f) Accounting Services Agreement between the
Registrant and Provident Financial
Processing Corp is incorporated by
reference to Exhibit 9(u) to Post-
Effective Amendment No. 45.
(10)(1) Opinion of counsel that shares are
validly issued, fully paid and
non-assessable.
(11) (a) Consent of Drinker Biddle &
Reath LLP.
(b) Consent of Price Waterhouse LLP.
(c) Consent of O'Melveny & Myers LLP
(12) None
(13) (a) Purchase Agreement between Registrant and
The Dreyfus Corporation is incorporated
by reference to Exhibit 13(a) to
Post-Effective Amendment No. 45.
- ---------------------------
1 Filed with the Securities and Exchange Commission ("SEC") on April 29,
1997 under Rule 24f-2 as part of Registrant's 24f- 2 Notice.
10
<PAGE> 643
(b) Purchase Agreement between Registrant and
Hambrecht & Quist Group, Inc. dated March
31, 1988 is incorporated by reference to
Exhibit 13(b) to Post-Effective
Amendment No. 45.
(c) Investment Letter of Concord Financial
Group, Inc. to The Horizon Funds is
incorporated by reference to Exhibit
13(c) to Post-Effective Amendment No. 45.
(d) Purchase Agreement between Pacific
Horizon Tax-Exempt Money Market
Portfolio, Inc. and Hambrecht & Quist
Group, Inc. is incorporated by reference
to Exhibit 13(d) to Post-Effective
Amendment No. 45.
(e) Purchase Agreement between Pacific
Horizon Tax-Exempt Money Market
Portfolio, Inc. and Pacific Horizon Tax-
Exempt Funds, Inc. is incorporated by
reference to Exhibit 13(e) to Post-
Effective Amendment No. 45.
(f) Purchase Agreement between Pacific
Horizon Tax-Exempt Money Market
Portfolio, Inc. and The Dreyfus
Corporation is incorporated by reference
to Exhibit 13(f) to Post-Effective
Amendment No. 45.
(g) Purchase Agreement between Pacific
Horizon California Tax-Exempt Bond
Portfolio, Inc. and Hambrecht & Quist
Group, Inc. is incorporated by reference
to Exhibit 13(g) to Post-Effective
Amendment No. 45.
(h) Purchase Agreement between Pacific
Horizon California Tax-Exempt Bond
Portfolio, Inc. and The Dreyfus
Corporation is incorporated by reference
to Exhibit 13(h) to Post-Effective
Amendment No. 45.
(i) Purchase Agreement between Pacific
Horizon California Tax-Exempt Bond
Portfolio, Inc. and Pacific Horizon Tax-
Exempt Funds, Inc. is incorporated by
11
<PAGE> 644
reference to Exhibit 13(i) to Post-
Effective Amendment No. 45.
(j) Investment Letter of Concord Financial
Group, Inc. to The Horizon Capital Funds
is incorporated by reference to Exhibit
13(j) to Post-Effective Amendment No. 45.
(14) (a) Individual Retirement Account and
accompanying Custodial Agreement,
Disclosure Statement, IRA Application and
IRA Transfer/Rollover Request Form is
incorporated by reference to Exhibit
14(a) to Post-Effective Amendment No. 45.
(b) Appointment of Successor Custodian for
Individual Retirement Account dated as of
August 3, 1990 is incorporated by
reference to Exhibit 14(b) to Post-
Effective Amendment No. 45.
(15) (a) Shareholder Services Plan for Non-Money
Market Funds is incorporated by reference
to Exhibit 15(a) to Post- Effective
Amendment No. 45.
(b) Shareholder Services Plan for Horizon
Service Shares as modified by
Registrant's Board of Directors on
January 29, 1993 is incorporated by
reference to Exhibit 15(b) to Post-
Effective Amendment No. 45.
(c) Revised Shareholder Servicing Agreement
is incorporated by reference to Exhibit
15(c) to Post-Effective Amendment No. 45.
(d) Revised Shareholder Service Agreement as
modified by Registrant's Board of
Directors on January 29, 1993 is
incorporated by reference to Exhibit
15(d) to Post-Effective Amendment No. 45.
(e) Revised Shareholder Servicing Agreement
for Non-Money Market Funds is
incorporated by reference to Exhibit
15(e) to Post-Effective Amendment No. 45.
12
<PAGE> 645
(f) Special Management Services Plan and
related Special Management Services
Agreement for Pacific Horizon Shares of
Registrant's Money Market Funds is
incorporated by reference to Exhibit
15(f) to Post-Effective Amendment No. 51.
(g) Distribution and Services Plan and
related Administrative Servicing
Agreement and Distribution Agreement with
respect to Registrant's "B" Shares is
incorporated by reference to Exhibit
15(g) to Post-Effective Amendment No. 51.
(h) Distribution and Services Plan and
related Distribution and Administrative
Servicing Agreement with respect to
Registrant's "S" Shares, "X" Shares and
"Y" Shares is incorporated by reference
to Exhibit 15(h) to Post-Effective
Amendment No. 56.
(i) Distribution Plan and related
Distribution Agreement with respect to
Registrant's "K" Shares is incorporated
by reference to Exhibit 15(i) to Post-
Effective Amendment No. 51.
(j) Administrative and Shareholder Services
Plan and related Administrative and
Shareholder Services Agreement with
respect to Registrant's "K" Shares is
incorporated by reference to Exhibit
15(j) to Post-Effective Amendment No. 51.
(k) Shareholder Service Plan and related
Shareholder Servicing Agreement for SRF
Shares is incorporated by reference to
Exhibit 15(k) to Post-Effective Amendment
No. 53.
(16) (a) Schedule for Computation of
Performance Quotations with respect to
the Treasury Fund, Prime Fund, Government
Fund, Treasury Only Fund, Tax-Exempt
Money Fund and California Tax-Exempt
Money Market Fund are incorporated by
reference to Exhibit 16 to Post-
Effective Amendment No. 56.
13
<PAGE> 646
(16) (b) Schedule for Computation of Performance
Quotations with respect to the Agressive
Growth Fund, California Tax-Exempt Bond
Fund, U.S. Government Securities Fund
(formerly known as the GNMA Extra Fund)
and Capital Income Fund (formerly known
as the Convertible Securities Fund) is
incorporated by reference to Exhibit
16(a) to Post-Effective Amendment No. 45.
(c) Schedule for Computation of Performance
Quotations with respect to the Corporate
Bond Fund, Intermediate Bond Fund
(formerly known as the Flexible Bond
Fund), Blue Chip Fund, Asset Allocation
Fund and National Municipal Bond Fund is
incorporated by reference to Exhibit
16(c) to Post-Effective Amendment No. 45.
(d) Schedule for Computation of Performance
Quotations with respect to the
International Equity Fund is
incorporated by reference to Exhibit
16(d) to Post-Effective Amendment No. 51.
(e) Schedule for Computation of Performance
Quotations with respect to the Short-
Term Government Fund is incorporated by
reference to Exhibit 16(e) to Post-
Effective Amendment No. 52.
(17) Financial Data Schedules with respect to
the Corporate Bond Fund, Intermediate
Bond Fund, U.S. Government Securities
Fund, International Equity Fund, Asset
Allocation Fund, National Municipal Bond
Fund, California Tax-Exempt Bond Fund,
Capital Income Fund, Blue Chip Fund,
Aggressive Growth Fund and Short-Term
Government Fund.
(18) Amended and Restated Plan Pursuant to
Rule 18f-3 for Operation of a Multi-
Class System is incorporated by reference
to Exhibit 18 to Post-Effective
Amendment No. 56.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
Registrant is controlled by its Board of Directors.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MAY 30, 1997
-------------- ------------
<S> <C>
Class A Common Stock 337
Class A Common Stock -
Special Series 1 1206
Class A Common Stock -
Special Series 2 70
Class A Common Stock -
Special Series 3 0
Class A Common Stock -
Special Series 4 2
Class B Common Stock 1564
Class B Common Stock -
Special Series 1 2219
</TABLE>
14
<PAGE> 647
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MAY 30, 1997
Class B Common Stock -
Special Series 2 277
Class B Common Stock -
Special Series 3 2
Class B Common Stock -
Special Series 4 7
Class D Common Stock 16501
Class D Common Stock -
Special Series 3 0
Class D Common Stock -
Special Series 5 2
Class E Common Stock 2541
Class E Common Stock -
Special Series 3 0
Class E Common Stock -
Special Series 5 2
Class F Common Stock 18374
Class F Common Stock -
Special Series 3 0
Class F Common Stock -
Special Series 5 4
Class G Common Stock 3902
Class G Common Stock -
Special Series 3 0
Class G Common Stock -
Special Series 5 1
Class H Common Stock 0
Class I Common Stock 140
Class I Common Stock -
Special Series 1 46
Class I Common Stock -
Special Series 2 11
Class J Common Stock 224
Class J Common Stock -
Special Series 1 313
Class J Common Stock -
Special Series 2 5
Class J Common Stock -
Special Series 4 2
Class K Common Stock 57
Class K Common Stock -
Special Series 1 1241
Class K Common Stock -
Special Series 2 19
Class L Common Stock 114
Class L Common Stock -
Special Series 1 207
Class L Common Stock -
15
<PAGE> 648
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MAY 30, 1997
-------------- ------------
Special Series 2 30
Class M Common Stock 521
Class M Common Stock -
Special Series 3 0
Class M Common Stock -
Special Series 5 2
Class M Common Stock -
Special Series 7 0
Class N Common Stock 12212
Class N Common Stock -
Special Series 3 0
Class N Common Stock -
Special Series 5 2
Class N Common Stock -
Special Series 7 0
Class O Common Stock 2240
Class O Common Stock -
Special Series 3 0
Class O Common Stock -
Special Series 5 2
Class O Common Stock -
Special Series 7 0
Class Q Common Stock 378
Class Q Common Stock -
Special Series 3 0
Class Q Common Stock -
Special Series 5 1
Class R Common Stock 0
Class R Common Stock -
Special Series 3 0
Class R Common Stock -
Special Series 5 0
Class S Common Stock 0
Class S Common Stock -
Special Series 3 0
Class S Common Stock -
Special Series 5 0
Class T Common Stock 733
Class T Common Stock -
Special Series 3 0
Class T Common Stock -
Special Series 5 2
Class U Common Stock 6
Class U Common Stock -
Special Series 3 0
Class U Common Stock -
Special Series 5 0
Class V Common Stock 0
16
<PAGE> 649
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MAY 30, 1997
-------------- ------------
Class V Common Stock -
Special Series 3 0
Class V Common Stock -
Special Series 5 0
Class W Common Stock 2432
Class W Common Stock -
Special Series 3 0
Class W Common Stock -
Special Series 5 2
ITEM 27. INDEMNIFICATION
Article VII, Section 3, of Registrant's Restated Articles of
Incorporation, incorporated herein by reference as Exhibit (1)(a) hereto, and
Article VI, Section 2, of Registrant's Amended and Restated By-Laws,
incorporated herein by reference as Exhibit (2)(a) hereto, provide for the
indemnification of Registrant's directors and officers. Indemnification of the
Fund's sub-adviser, principal underwriter, custodians, sub-custodians, transfer
agent and sub-transfer agent is provided for, respectively, in Section 8 of the
Sub-Advisory Agreement incorporated herein by reference as Exhibit (5)(j),
Article V of the Amended and Restated Distribution Agreement, incorporated
herein by reference as Exhibit (6)(a), Article XV, Section 15 of the Custody
Agreement incorporated herein by reference as Exhibit (8)(a) hereto, Article
XII, Section 14 of the Sub-Custodian Agreement incorporated herein by reference
as Exhibit (8)(i) hereto, Article III, Section 4 of the Sub-Custodian Agreement
incorporated herein by reference as Exhibit (8)(j) hereto, Section 8 of the form
of Sub-Custody Agreement incorporated herein by reference as Exhibit (8)(k),
Article VII, Section 7, of the Transfer Agency Agreement incorporated herein by
reference as Exhibit (8)(g), and Article VI, Section 3, of the Cash Management
and Related Services Agreement incorporated herein by reference as Exhibit
(9)(d) hereto. Registrant has obtained from a major insurance carrier a
directors and officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its directors, officers,
employees or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith or gross negligence
in the performance of his duties or by reason of his reckless disregard of the
duties involved in the conduct of his office or under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release 11330 under the Investment Company Act of 1940 in connection
with any indemnification.
17
<PAGE> 650
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. (A) BUSINESS AND OTHER CONNECTIONS OF INVESTMENT
ADVISER
Bank of America National Trust and Savings Association ("Bank
of America") performs investment advisory services for Registrant. Bank of
America and its predecessors have been in the business of managing the
investments of fiduciary and other accounts since 1904. In addition to its trust
business, Bank of America provides commercial and consumer banking services.
To the knowledge of Registrant, none of the directors or
officers of Bank of America, except those set forth below, is or has been, at
any time during the past two calendar years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers of Bank of America also hold various positions with, and
engage in business for, BankAmerica Corporation, which owns all the outstanding
stock of Bank of America, or other subsidiaries of BankAmerica Corporation. Set
forth below are the names and principal businesses of the directors of Bank of
America and the directors and certain of the senior executive officers of Bank
of America who are engaged in any other business, profession, vocation or
employment of a substantial nature, other than with BankAmerica Corporation.
18
<PAGE> 651
<TABLE>
<CAPTION>
<S> <C> <C> <C>
POSITION WITH
BANK OF AMERICA
NATIONAL TRUST
AND SAVINGS PRINCIPAL TYPE OF
ASSOCIATION NAME OCCUPATION BUSINESS
- ----------- ---- ---------- --------
Director...................Joseph F. Alibrandi Chairman of the Manufacturer of
Board and CEO, Aerospace and
Whittaker Communication
Corporation Products
Director...................Jill Elikann Barad President and Chief Toy manufacturer
Executive Officer, and distributor
Mattel, Inc.
Director...................Peter B. Bedford Chairman and CEO, California based
Bedford Property Real Estate
Investors, Inc. Investment Trust
Director . . . Richard A. Retired Chairman of Utility Company
Clarke the Board, Pacific
Gas and Electric
Company
Chairman. . . David A. Coulter Chairman of the Banking
Board, Chief
Executive Officer
and President, Bank
America Corporation
and Bank of
America National
Trust & Savings
Association
Director. . . . Timm F. Crull Chairman, Hallmark Greeting cards
International
Director. . . . Kathleen Feldstein President, Economic
Economics Consulting
Studies, Inc.
Director . . . . Donald E. Guinn Chairman Emeritus, Telecommuni-
Pacific Telesis cations and
Group Diversified
Holding Com-
pany
Director . . . . Frank L. Hope, Jr. Consulting Architectural
Architect and Engineering
Consulting
Director . . . . Walter E. Massey, President, Higher
Ph.D. Morehouse Education
College
Director. . . . John M. Richman Of Counsel, Law firm
Wachtell, Lipton,
Rosen & Katz
</TABLE>
19
<PAGE> 652
<TABLE>
<CAPTION>
POSITION WITH
BANK OF AMERICA
NATIONAL TRUST
AND SAVINGS PRINCIPAL TYPE OF
ASSOCIATION NAME OCCUPATION BUSINESS
- ----------- ---- ---------- --------
<S> <C> <C> <C>
Director. . . Richard M. Retired; Chairman Banking
Rosenberg of the Board and
CEO, Bank America
Corporation and Bank
of America National
Trust & Savings
Association
Director. . . . A. Michael Spence Dean of the Higher
Graduate School of Education
Business, Stanford
University
Director. . . . Solomon D. President and CEO, Telecommunica-
Trujillo U.S. West tions
Communications
Group
</TABLE>
(B) BUSINESS AND OTHER CONNECTIONS OF SUB-ADVISER
Wellington Management Corporation, LLP, ("Wellington") is an
investment adviser registered under the Investment Advisers Act of 1940 (the
"Advisers Act").
The list required by this Item 28 of the partners of
Wellington, together with information as to any business profession, vocation or
employment of substantial nature engaged in by such partners during the past two
years, is incorporated herein by references to Schedules A and D of Form ADV
filed by Wellington pursuant to the Advisers Act (SEC File No. 801-15908).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Principal underwriter (exclusive distributor) also acts as
principal underwriter or exclusive distributor for Time Horizon Funds.
(b) For information as to the business, profession, vocation
or employment of a substantial nature of each of the principal underwriter, its
officers and directors, reference is made to their Form BD File No. 8-37601
filed by the principal underwriter. For information, as to the positions or
offices of each of the principal underwriter, its officers and directors,
reference is made to the section entitled "Management" in the Statement of
Additional Information. Both the principal underwriter's Form BD and the
Registrants Statements of Additional Information are incorporated herein by
reference.
(c) Not Applicable.
20
<PAGE> 653
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
(1) The BISYS Group, Inc., 150 Clove Road, Little Falls, New
Jersey 07424 (records relating to the administrator).
(2) Concord Financial Group, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219 (records relating to the distributor).
(3) Concord Management (Ireland) Limited, Floor 2, Block 2,
Harcourt Centre, Dublin 2, Ireland (records relating to the
administrator for the Funds it services).
(4) Bank of America National Trust and Savings Association, 555
California Street, San Francisco, California 94104 (records
relating to the investment adviser).
(5) Wellington Management Company, LLP, 75 State Street, Boston,
Massachusetts 02109 (records relating to the investment
sub-adviser for the International Equity Fund)
(6) Bank of America National Trust and Savings Association, 555
California Street, San Francisco, California 94104 (records
relating to the Sub- Custodian for the Funds it services).
(7) The Bank of New York, 90 Washington Street, New York, New
York 10286 (records relating to the custodian for the Funds
it services).
(8) BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 (records relating to the transfer agent for the Funds
it services).
(9) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496 (Registrant's Charter, By- Laws and Minute
Books).
(10) PNC Bank, National Association, 1600 Market Street, 28th
Floor, Philadelphia, PA 19103, (records relating to the
custodian for the Funds it services).
(11) PFPC, Inc. 103 Bellevue Parkway, Wilmington, DE 19809,
(records relating to the sub-administrator for the Funds it
services).
21
<PAGE> 654
ITEM 31. MANAGEMENT SERVICES
-------------------
Inapplicable.
ITEM 32. UNDERTAKINGS
------------
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940, as amended, as though such
provisions were applicable to it.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom a prospectus
is delivered.
22
<PAGE> 655
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certified that it meets all
of the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Philadelphia, and the Commonwealth of
Pennsylvania, on this 23rd day of June, 1997.
PACIFIC HORIZON FUNDS, INC.
Registrant
*/Cornelius John Pings
----------------------
Cornelius John Pings
President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
*/Cornelius John Pings Chairman of the June 23, 1997
- ----------------------
Cornelius John Pings Board and President
/s/Kevin L. Martin Treasurer (Chief June 23, 1997
- ----------------------
Kevin L. Martin Accounting and
Financial Officer)
*/Thomas M. Collins Director June 23, 1997
- ----------------------
Thomas M. Collins
*/Douglas B. Fletcher Director June 23, 1997
- ----------------------
Douglas B. Fletcher
*/Robert E. Greeley Director June 23, 1997
- ----------------------
Robert E. Greeley
*/Kermit O. Hanson Director June 23, 1997
- ----------------------
Kermit O. Hanson
</TABLE>
*By: /s/W. Bruce McConnel, III
W. Bruce McConnel, III
Attorney-in-fact
23
<PAGE> 656
SIGNATURES
Master Investment Trust, Series I has duly caused this
Amendment to the Registration Statement of the Pacific Horizon Funds, Inc. as it
relates to the Intermediate Bond (formerly, Flexible Bond) and Blue Chip Funds
only, to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Philadelphia, and the Commonwealth of Pennsylvania on this 23rd
day of June, 1997.
MASTER INVESTMENT TRUST, SERIES I
/s/ J. David Huber
------------------
J. David Huber
President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement of Pacific Horizon Funds, Inc. has
been signed below by the Trustees and Principal Officers of Master Investment
Trust, Series I on the
Dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ J. David Huber President June 23, 1997
- ----------------------
J. David Huber
*/ Thomas M. Collins Chairman of the Board June 23, 1997
- ---------------------
Thomas M. Collins
/s/ Adrian J. Waters Executive Vice President,
Adrian J. Waters Assistant Secretary and
Treasurer (Chief Accounting
and Financial Officer) June 23, 1997
*/Michael Austin Trustee June 23, 1997
Michael Austin
*/Robert A. Nathane Trustee June 23, 1997
Robert A. Nathane
*/Robert E. Greeley Trustee June 23, 1997
Robert E. Greeley
*/Cornelius J. Pings Trustee June 23, 1997
Cornelius J. Pings
*By: /s/ W. Bruce McConnel, III
W. Bruce McConnel, III
Attorney-in-fact
</TABLE>
24
<PAGE> 657
PACIFIC HORIZON FUNDS, INC.
Certificate of Secretary
The following resolution was duly adopted by the Board of
Directors of Pacific Horizon Funds, Inc. on April 30, 1997 and remains in effect
on the date hereof:
FURTHER RESOLVED, that the directors and officers of
Pacific Horizon who may be required to execute any amendments
to Pacific Horizon's Registration Statement be, and each
hereby is, authorized to execute a power of attorney
appointing W. Bruce McConnel, III and Cornelius J. Pings their
true and lawful attorney or attorneys, to execute in their
name, place and stead, in their capacity as director or
officer, or both, of Pacific Horizon any and all amendments to
the Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with
the SEC; and either of said attorneys shall have the power to
act thereunder with or without the other said attorney and
shall have full power of substitution and resubstitution; and
to do in the name and on behalf of said directors and
officers, or any or all of them, in any and all capacities,
every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as each of
said directors or officers, or any or all of them, might or
could do in person, said acts of said attorneys, being hereby
ratified and approved.
IN WITNESS WHEREOF, I have hereunto set my hand this 23rd day
of June, 1997.
PACIFIC HORIZON FUNDS, INC.
/s/ W. Bruce McConnel III
-------------------------
W. Bruce McConnel, III
Secretary
<PAGE> 658
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Cornelius John Pings, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable Pacific Horizon
Funds, Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a director and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/ Cornelius John Pings
--------------------------
Cornelius John Pings
Date: December 6, 1995
<PAGE> 659
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Thomas M. Collins, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable Pacific Horizon
Funds, Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a director and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Thomas M. Collins
---------------------
Thomas M. Collins
Date: December 7, 1995
<PAGE> 660
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Douglas B. Fletcher, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable Pacific Horizon
Funds, Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a director and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Douglas B. Fletcher
-------------------------
Douglas B. Fletcher
Date: December 7, 1995
<PAGE> 661
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Robert E. Greeley, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable Pacific Horizon
Funds, Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a director and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Robert E. Greeley
---------------------
Robert E. Greeley
Date: December 7, 1995
<PAGE> 662
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
-----------------
Kermit O. Hanson, whose signature appears below, does hereby constitute
and appoint Cornelius John Pings and W. Bruce McConnel, III, and either of them
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Pacific Horizon Funds,
Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a director and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Kermit O. Hanson
---------------------
Kermit O. Hanson
Date: December 6, 1995
<PAGE> 663
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Thomas M. Collins, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of 1940,
as amended and/or the Securities Act of 1933, as amended (the "Acts") and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of (i) the
Trust's Registration Statement and (ii) the Registration Statement of any
management investment company which invests or intends to invest substantially
all of its assets in the Trust (collectively, the "Registration Statements") and
any and all amendments to the Registration Statements (including post-effective
amendments) pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Trust the
Registration Statements and any and all amendments thereto filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorney and agent shall do or cause to be done by virtue hereof.
/s/ Thomas M. Collins
----------------------
Thomas M. Collins
Date: October 6, 1993
<PAGE> 664
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
------------------
Michael Austin, whose signature appears below, does hereby constitute
and appoint Thomas M. Collins and W. Bruce McConnel, III, and either of them,
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of 1940,
as amended and/or the Securities Act of 1933, as amended (the "Acts") and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of (i) the
Trust's Registration Statement and (ii) the Registration Statement of any
management investment company which invests or intends to invest substantially
all of its assets in the Trust (collectively, the "Registration Statements") and
any and all amendments to the Registration Statements (including post-effective
amendments) pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Trust the
Registration Statements and any and all amendments thereto filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or either of them, shall do or cause to be
done by virtue hereof.
/s/ Michael Austin
------------------
Michael Austin
Date: October 6, 1993
<PAGE> 665
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Robert A. Nathane, whose signature appears below, does hereby
constitute and appoint Thomas M. Collins and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of 1940,
as amended and/or the Securities Act of 1933, as amended (the "Acts") and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of (i) the
Trust's Registration Statement and (ii) the Registration Statement of any
management investment company which invests or intends to invest substantially
all of its assets in the Trust (collectively, the "Registration Statements") and
any and all amendments to the Registration Statements (including post-effective
amendments) pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Trust the
Registration Statements and any and all amendments thereto filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or either of them, shall do or cause to be
done by virtue hereof.
/s/ Robert A. Nathane
---------------------
Robert A. Nathane
Date: October 6, 1993
<PAGE> 666
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Robert E. Greeley, whose signature appears below, does hereby
constitute and appoint Thomas M. Collins and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of 1940,
as amended and/or the Securities Act of 1933, as amended (the "Acts") and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of (i) the
Trust's Registration Statement and (ii) the Registration Statement of any
management investment company which invests or intends to invest substantially
all of its assets in the Trust (collectively, the "Registration Statements") and
any and all amendments to the Registration Statements (including post-effective
amendments) pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Trust the
Registration Statements and any and all amendments thereto filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or either of them, shall do or cause to be
done by virtue hereof.
/s/Robert E. Greeley
---------------------
Robert E. Greeley
Date: October 6, 1993
<PAGE> 667
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
-----------------
Cornelius John Pings, whose signature appears below, does hereby
constitute and appoint Thomas M. Collins and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of 1940,
as amended and/or the Securities Act of 1933, as amended (the "Acts") and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of (i) the
Trust's Registration Statement and (ii) the Registration Statement of any
management investment company which invests or intends to invest substantially
all of its assets in the Trust (collectively, the "Registration Statements") and
any and all amendments to the Registration Statements (including post-effective
amendments) pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Trust the
Registration Statements and any and all amendments thereto filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or either of them, shall do or cause to be
done by virtue hereof.
/s/ Cornelius John Pings
------------------------
Cornelius John Pings
Date: December 6, 1995
<PAGE> 668
EXHIBIT INDEX
EXHIBITS
11 (a) Consent of Drinker Biddle & Reath LLP.
11 (b) Consent of Price Waterhouse LLP.
11 (c) Consent of O'Melveny & Myers LLP.
17 Financial Data Schedules.
<PAGE> 1
EXHIBIT 11 (a)
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference
to our Firm under the caption "Counsel" in the Statements of Additional
Information that are included in Post-Effective Amendment No. 57 to the
Registration Statement (No. 2-81110) on Form N-1A under the Securities Act of
1933 and the Investment Company Act of 1940, as amended, of Pacific Horizon
Funds, Inc. This consent does not constitute a consent under section 7 of the
Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under said section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/DRINKER BIDDLE & REATH LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
June 23, 1997
<PAGE> 1
Exhibit 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 57 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated April 21, 1997, relating to the financial
statements and financial highlights appearing in the February 28, 1997 Annual
Report to Shareholders of the Pacific Horizon Aggressive Growth Fund, Pacific
Horizon Capital Income, Pacific Horizon U.S. Government Securities Fund,
Pacific Horizon California Tax-Exempt Bond Fund, Pacific Horizon National Bond
Fund, Pacific Horizon Short-Term Government Fund, Pacific Horizon International
Equity Fund, Pacific Horizon Corporate Bond Fund, Pacific Horizon Blue Chip
Fund, Pacific Horizon Asset Allocation Fund, and Pacific Horizon Intermediate
Bond Fund, eleven of the portfolios comprising the Pacific Horizon Funds, Inc.,
and our reports dated April 21, 1997 relating to the financial statements and
supplementary data appearing in the February 28, 1997 Annual Reports to
Investors of the Asset Allocation Portfolio, Blue Chip Portfolio and Investment
Grade Bond Portfolio, which financial statements, financial highlights and
supplementary data are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in the Prospectus and under the headings "Independent Accountants"
and "Financial Statements and Experts" in the Statements of Additional
Information.
Price Waterhouse LLP
New York, New York
June 18, 1997
<PAGE> 1
Exhibit 11 (c)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statement of Additional Information included
in Post-Effective Amendment No. 57 to the Registration Statement (No. 2-81110 on
Form N-1A under the Securities Act of 1933, as amended, of Pacific Horizon
Funds, Inc.
/s/ O'Melveny & Myers LLP
-------------------------
O'MELVENY & MYERS LLP
Los Angeles, California
June 20, 1997
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<FN>
<F1>K Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 161
<NAME> CORPORATE BOND
<S> <C>
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<FN>
<F1>A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUND
<SERIES>
<NUMBER> 162
<NAME> CORPORATE BOND
<S> <C>
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<PER-SHARE-GAIN-APPREC> 0.24<F1>
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<FN>
<F1>K Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 171
<NAME> INTERNATIONAL EQUITY
<S> <C>
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<PER-SHARE-NII> (0.01)<F1>
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<FN>
<F1>A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 172
<NAME> INTERNATIONAL EQUITY
<S> <C>
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<FN>
<F1>K Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 181
<NAME> SHORT-TERM GOVERNMENT FUND
<S> <C>
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000913961
<NAME> MASTER INVESTMENT TRUST, SERIES I
<SERIES>
<NUMBER> 011
<NAME> ASSET ALLOCATION PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000913961
<NAME> MASTER INVESTMENT TRUST - SERIES I
<SERIES>
<NUMBER> 021
<NAME> BLUE CHIP PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
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<PERIOD-END> FEB-28-1997
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000913961
<NAME> MASTER INVESTMENT TRUST, SERIES I
<SERIES>
<NUMBER> 031
<NAME> INVESTMENT GRADE BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
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<NET-ASSETS> 139,156,919
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<NET-INVESTMENT-INCOME> 5,575,868
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<NUMBER-OF-SHARES-SOLD> 8,214,755
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<GROSS-EXPENSE> 617,528
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<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.35
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000910681
<NAME> SEAFIRST RETIREMENT FUNDS
<SERIES>
<NUMBER> 011
<NAME> SEAFIRST ASSET ALLOCATION FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
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<SHARES-COMMON-STOCK> 10,907
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<ACCUMULATED-NII-CURRENT> 63
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<NET-ASSETS> 173,822
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 1,041
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<REALIZED-GAINS-CURRENT> 19,788
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<NUMBER-OF-SHARES-SOLD> 922
<NUMBER-OF-SHARES-REDEEMED> 1,663
<SHARES-REINVESTED> 1,056
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<PER-SHARE-NAV-BEGIN> 14.96
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> 2.13
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<PER-SHARE-NAV-END> 15.94
<EXPENSE-RATIO> 0.95
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000910681
<NAME> SEAFIRST RETIREMENT FUNDS
<SERIES>
<NUMBER> 021
<NAME> SEAFIRST BLUE CHIP FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
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<SHARES-COMMON-PRIOR> 9,779
<ACCUMULATED-NII-CURRENT> 550
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 33,987
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<ACCUM-APPREC-OR-DEPREC> 49,708
<NET-ASSETS> 274,220
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 3,912
<EXPENSES-NET> 703
<NET-INVESTMENT-INCOME> 3,209
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<APPREC-INCREASE-CURRENT> 9,802
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<PER-SHARE-NAV-BEGIN> 21.09
<PER-SHARE-NII> 0.31
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<PER-SHARE-NAV-END> 24.64
<EXPENSE-RATIO> 0.92
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000910681
<NAME> SEAFIRST RETIREMENT FUNDS
<SERIES>
<NUMBER> 031
<NAME> SEAFIRST BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 46
<ASSETS-OTHER> 39,388
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<TOTAL-ASSETS> 39,434
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84
<TOTAL-LIABILITIES> 84
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,920
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<SHARES-COMMON-PRIOR> 4,330
<ACCUMULATED-NII-CURRENT> 42
<OVERDISTRIBUTION-NII> 0
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<ACCUM-APPREC-OR-DEPREC> (185)
<NET-ASSETS> 39,350
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 2,498
<EXPENSES-NET> 272
<NET-INVESTMENT-INCOME> 2,226
<REALIZED-GAINS-CURRENT> (428)
<APPREC-INCREASE-CURRENT> (328)
<NET-CHANGE-FROM-OPS> 1,470
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,207
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 242
<NUMBER-OF-SHARES-REDEEMED> 1,085
<SHARES-REINVESTED> 192
<NET-CHANGE-IN-ASSETS> (7,712)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,988
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 343
<AVERAGE-NET-ASSETS> 42,659
<PER-SHARE-NAV-BEGIN> 10.87
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> (0.18)
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<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.70
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 061
<NAME> CALIFORNIA TAX-EXEMPT BOND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 207,748,971
<INVESTMENTS-AT-VALUE> 217,218,630
<RECEIVABLES> 5,428,770
<ASSETS-OTHER> 443
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 222,647,843
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,537,005
<TOTAL-LIABILITIES> 1,537,005
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 211,459,412
<SHARES-COMMON-STOCK> 30,085,974<F1>
<SHARES-COMMON-PRIOR> 29,699,227<F1>
<ACCUMULATED-NII-CURRENT> 188,743
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6,976
<ACCUM-APPREC-OR-DEPREC> 9,469,659
<NET-ASSETS> 221,110,838
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,381,614
<OTHER-INCOME> 0
<EXPENSES-NET> 1,933,241
<NET-INVESTMENT-INCOME> 10,448,373
<REALIZED-GAINS-CURRENT> 358,663
<APPREC-INCREASE-CURRENT> (1,868,867)
<NET-CHANGE-FROM-OPS> 8,938,169
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,448,345<F1>
<DISTRIBUTIONS-OF-GAINS> 1,489,041<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 6,008,542
<NUMBER-OF-SHARES-REDEEMED> 6,548,045
<SHARES-REINVESTED> 926,391
<NET-CHANGE-IN-ASSETS> (30,509)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,293,978
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 857,206
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,363,955
<AVERAGE-NET-ASSETS> 214,316,877<F1>
<PER-SHARE-NAV-BEGIN> 7.45<F1>
<PER-SHARE-NII> .36<F1>
<PER-SHARE-GAIN-APPREC> (0.05)<F1>
<PER-SHARE-DIVIDEND> .36<F1>
<PER-SHARE-DISTRIBUTIONS> .05<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 7.35<F1>
<EXPENSE-RATIO> 0.9<F1>
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 062
<NAME> CALIFORNIA TAX-EXEMPT BOND
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> JUL-22-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 207,748,971
<INVESTMENTS-AT-VALUE> 217,218,630
<RECEIVABLES> 5,428,770
<ASSETS-OTHER> 443
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 222,647,843
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,537,005
<TOTAL-LIABILITIES> 1,537,005
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 211,459,412
<SHARES-COMMON-STOCK> 142<F1>
<SHARES-COMMON-PRIOR> 0<F1>
<ACCUMULATED-NII-CURRENT> 188,743
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6,976
<ACCUM-APPREC-OR-DEPREC> 9,469,659
<NET-ASSETS> 221,110,838
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,381,614
<OTHER-INCOME> 0
<EXPENSES-NET> 1,933,241
<NET-INVESTMENT-INCOME> 10,448,373
<REALIZED-GAINS-CURRENT> 358,663
<APPREC-INCREASE-CURRENT> (1,868,867)
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 28<F1>
<DISTRIBUTIONS-OF-GAINS> 7<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 6,008,542
<NUMBER-OF-SHARES-REDEEMED> 6,548,045
<SHARES-REINVESTED> 926,391
<NET-CHANGE-IN-ASSETS> (30,509)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,293,978
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 857,206
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,363,955
<AVERAGE-NET-ASSETS> 1,032<F1>
<PER-SHARE-NAV-BEGIN> 7.25<F1>
<PER-SHARE-NII> .20<F1>
<PER-SHARE-GAIN-APPREC> .15<F1>
<PER-SHARE-DIVIDEND> .20<F1>
<PER-SHARE-DISTRIBUTIONS> .05<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 7.35<F1>
<EXPENSE-RATIO> 1.21<F1>
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>K Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 041
<NAME> CAPITAL INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 280,980,709
<INVESTMENTS-AT-VALUE> 300,569,395
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<TOTAL-ASSETS> 311,340,980
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 980,520
<TOTAL-LIABILITIES> 980,520
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 266,805,846
<SHARES-COMMON-STOCK> 17,822,748<F1>
<SHARES-COMMON-PRIOR> 15,027,480<F1>
<ACCUMULATED-NII-CURRENT> 1,897,430
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 22,068,498
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,588,686
<NET-ASSETS> 310,360,460
<DIVIDEND-INCOME> 6,051,292
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<OTHER-INCOME> 0
<EXPENSES-NET> 3,211,994
<NET-INVESTMENT-INCOME> 9,227,095
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<APPREC-INCREASE-CURRENT> (10,670,170)
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<DISTRIBUTIONS-OF-INCOME> 9,043,759<F1>
<DISTRIBUTIONS-OF-GAINS> 22,450,057<F1>
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<NUMBER-OF-SHARES-SOLD> 4,435,615
<NUMBER-OF-SHARES-REDEEMED> 3,373,968
<SHARES-REINVESTED> 1,794,414
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<ACCUMULATED-NII-PRIOR> 1,389,768
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (3,462,130)
<GROSS-ADVISORY-FEES> 1,220,622
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,239,217
<AVERAGE-NET-ASSETS> 271,377,664<F1>
<PER-SHARE-NAV-BEGIN> 16.42<F1>
<PER-SHARE-NII> 0.57<F1>
<PER-SHARE-GAIN-APPREC> 2.34<F1>
<PER-SHARE-DIVIDEND> 0.57<F1>
<PER-SHARE-DISTRIBUTIONS> 1.41<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 17.35<F1>
<EXPENSE-RATIO> 1.18<F1>
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 042
<NAME> CAPITAL INCOME FUND
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> JUL-22-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 280,980,709
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 980,520
<TOTAL-LIABILITIES> 980,520
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 266,805,846
<SHARES-COMMON-STOCK> 60,792<F1>
<SHARES-COMMON-PRIOR> 0<F1>
<ACCUMULATED-NII-CURRENT> 1,897,430
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<ACCUMULATED-NET-GAINS> 22,068,498
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<NET-ASSETS> 310,360,460
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<INTEREST-INCOME> 6,387,797
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<NUMBER-OF-SHARES-SOLD> 4,435,615
<NUMBER-OF-SHARES-REDEEMED> 3,373,968
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<OVERDIST-NET-GAINS-PRIOR> (3,462,130)
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<GROSS-EXPENSE> 3,239,217
<AVERAGE-NET-ASSETS> 265,033<F1>
<PER-SHARE-NAV-BEGIN> 16,24<F1>
<PER-SHARE-NII> 0.32<F1>
<PER-SHARE-GAIN-APPREC> 2.43<F1>
<PER-SHARE-DIVIDEND> 0.28<F1>
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<PER-SHARE-NAV-END> 17.30<F1>
<EXPENSE-RATIO> 1.66<F1>
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>K Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 031
<NAME> AGGRESSIVE GROWTH FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 192,809,543
<INVESTMENTS-AT-VALUE> 198,061,069
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<PAYABLE-FOR-SECURITIES> 1,659,557
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 641,509
<TOTAL-LIABILITIES> 2,301,066
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188,373,699
<SHARES-COMMON-STOCK> 10,303,402<F1>
<SHARES-COMMON-PRIOR> 7,676,762<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,622,955
<OVERDISTRIBUTION-GAINS> (1,417)
<ACCUM-APPREC-OR-DEPREC> 5,251,526
<NET-ASSETS> 202,246,763
<DIVIDEND-INCOME> 245,805
<INTEREST-INCOME> 93,579
<OTHER-INCOME> 0
<EXPENSES-NET> 2,938,241
<NET-INVESTMENT-INCOME> (2,598,857)
<REALIZED-GAINS-CURRENT> 53,488,080
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<F1>A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
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<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 032
<NAME> AGGRESSIVE GROWTH FUND
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<F1>K Shares
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000711663
<NAME> PACIFIC HORIZON FUNDS
<SERIES>
<NUMBER> 051
<NAME> U.S. GOVERNMENT SECURITIES
<S> <C>
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<FN>
<F1>A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
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<CIK> 0000711663
<NAME> PACIFIC HORIZON SECURITIES
<SERIES>
<NUMBER> 052
<NAME> U.S. GOVERNMENT SECURITIES
<S> <C>
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<FN>
<F1>K Shares
</FN>
</TABLE>
