<PAGE> 1
PACIFIC HORIZON INCOME FUNDS
ANNUAL REPORT
FEBRUARY 28, 1997
SHORT-TERM GOVERNMENT FUND
INVESTING FOR ALL
THE TIMES OF YOUR LIFE
NOT FDIC INSURED
<PAGE> 2
PACIFIC HORIZON FUNDS, INC.
3435 Stelzer Road, Columbus, OH 43219
1-800-332-3863
INVESTMENT ADVISER
Bank of America National Trust and Savings Association
555 California Street
San Francisco, CA 94104
ADMINISTRATOR
The BISYS Group, Inc.
3435 Stelzer Road
Columbus, OH 43219
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
FUND COUNSEL
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107
DISTRIBUTOR
Concord Financial Group, Inc.
3435 Stelzer Road
Columbus, OH 43219
FUND SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF, OR
OTHERWISE ENDORSED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENTAL AGENCY.
The Pacific Horizon Funds, Inc. are sponsored and distributed by Concord
Financial Group, Inc., which is unaffiliated with Bank of America. Bank of
America serves as investment adviser and receives fees for such services. From
time to time, Bank of America may provide other services to the Funds for
additional fees, as disclosed in the Funds' prospectuses.
This material must be preceded or accompanied by a current prospectus.
- --------------------------------------------------------------------------------
INVESTMENTS IN PACIFIC HORIZON FUNDS, INC. ARE NOT
BANK DEPOSITS AND ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, BANK OF AMERICA OR ANY AFFILIATES. AN
INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISKS, NOT
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT FDIC
INVESTED. INSURED
================================================================================
<PAGE> 3
Contents
<TABLE>
<S> <C>
FUND FACTS 2-3
UNDERSTANDING YOUR SHAREHOLDER REPORT 4-6
ECONOMIC REVIEW FROM THE INVESTMENT
ADVISER 8-9
FUND OVERVIEW AND INTERVIEW
WITH YOUR INVESTMENT MANAGER 10-13
PACIFIC HORIZON SHORT-TERM GOVERNMENT
FUND
Portfolio of Investments 14
Statement of Assets
and Liabilities 15
Statement of Operations 16
Statements of Changes
in Net Assets 17
Notes to Financial Statements 18-22
Financial Highlights 23
Report of Independent Accountants 24
</TABLE>
<PAGE> 4
PACIFIC HORIZON FUND FACTS
The Pacific Horizon Family of Funds offers a variety of mutual funds with
different investment objectives to help you diversify your portfolio and meet
your investment goals. Some Funds offer greater growth potential, while others
such as the money market funds, strive to maintain a stable net asset value but
offer no growth potential.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
FUND NAME INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------
<S> <C>
International Equity Long-Term Capital Growth
.....................................................................................
Aggressive Growth Maximum Capital Appreciation
.....................................................................................
Blue Chip Long-Term Capital Appreciation
.....................................................................................
Capital Income Total Investment Return
.....................................................................................
Asset Allocation Long-Term Growth
.....................................................................................
Corporate Bond High Current Income
.....................................................................................
Intermediate Bond Income and Capital Appreciation
.....................................................................................
U.S. Government Securities High Level of Current Income
.....................................................................................
Short-Term Government High Current Income with Relative
Stability of Principal
.....................................................................................
National Municipal Bond* High Level of Federal Tax-Free
Current Income
.....................................................................................
California Tax-Exempt Bond* High Level of Federal and California
Tax-Free Current Income
.....................................................................................
Money Market Funds+ High Current Income Plus Principal
- Prime Stability
- Treasury
- Government
- Treasury Only
.....................................................................................
Tax-Exempt Money Market Funds*+
- Tax-Exempt Money High Level of Federal Tax-Free Current
Income Plus Principal Stability
- California Tax-Exempt Money Market High Level of Federal and California
Tax-Free Current Income Plus Principal
Stability
<FN>
- --------------------------------------------------------------------------------
* Certain investors may be subject to the federal Alternative Minimum Tax (AMT)
and to certain state and local taxes.
+ There can be no assurance that the Funds will be able to maintain a stable net
asset value of $1.00 per share. Fund shares are not insured or guaranteed by
the U.S. Government.
</TABLE>
2
<PAGE> 5
With the help of an investment professional, you can develop a strategy tailored
to meet your goals. To receive any of the Funds' prospectuses, which include
more complete information such as charges and expenses, call your Investment
Specialist or the Pacific Horizon Funds. Read the prospectus carefully before
investing or sending money.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PORTFOLIO CONSISTS PRIMARILY OF ... APPROPRIATE FOR INVESTORS WHO SEEK
- ------------------------------------------------------------------------------------
<S> <C>
Foreign Equity Securities Diversification into foreign equity markets with
associated risk.
................................................................................................
Small Capitalization Stocks Higher-than-average long-term growth potential with
higher-than-average risk.
................................................................................................
Blue Chip Stocks Long-term growth potential from investments in the
stocks of well-established companies.
................................................................................................
Convertible Bonds and Convertible Combined potential for current income and capital
Preferred Stocks appreciation.
................................................................................................
Stocks, Bonds and Cash Equivalents Long-term growth potential and current income from
stocks and bonds.
................................................................................................
Investment-Grade Corporate Debt High monthly income potential with reasonable
investment risk.
................................................................................................
Investment-Grade Corporate and U.S. Regular monthly income from a diversified portfolio
Government Securities of investment-grade securities.
................................................................................................
GNMAs and Other U.S. Government High monthly income potential and low credit risk.
Securities
................................................................................................
U.S. Government and Government Agency Monthly income and relative stability of investment.
Securities
................................................................................................
Investment-Grade Municipal Debt Monthly tax-free income.
Securities
................................................................................................
Investment-Grade California High monthly double tax-free income.
Municipal Securities
................................................................................................
High-Quality Corporate and/or U.S. A flexible, convenient way to manage or accumulate
Government Short-Term Obligations cash while waiting for other investment
opportunities.
................................................................................................
Short-Term Municipal Obligations A tax-free way to manage or accumulate cash while
waiting for other investment opportunities.
................................................................................................
Short-Term California Municipal A tax-free way to manage or accumulate cash while
Obligations waiting for other investment opportunities.
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE> 6
UNDERSTANDING YOUR SHAREHOLDER REPORT
As a mutual fund shareholder, you receive two financial reports a year that
contain important information about your investment. The Financial Statements
and Financial Highlights included in annual reports are audited by an
independent public accounting firm and cover the activity for the past fiscal
year. The independent public accountant provides an opinion letter in each
audited report. A semi-annual report is a six-month interim report that includes
financial statements that are generally not audited by an independent public
accounting firm.
This guide will help you extract the information from
the report.
The TABLE OF CONTENTS helps
you locate the information you
want.
The ECONOMIC REVIEW FROM THE
INVESTMENT ADVISER provides a
brief overview of the economy [GRAPHIC]
and how it affects the
financial markets.
The FUND OVERVIEW AND
INTERVIEW WITH YOUR INVESTMENT
MANAGER enables you to gain
insight into the Fund's
investments and learn more
about the Fund manager's
strategies.
Because a picture or chart can help clarify the
text, the investment management team may have
[GRAPHIC] illustrated the most important features of the Fund.
The illustrations may represent the portfolio
composition, the largest holdings or a
simplification of the investment adviser's
investment style.
4
<PAGE> 7
The Financial Statements summarize and describe the Fund's financial
transactions. They are broken down into four different statements, which are
illustrated below:
The PORTFOLIO OF INVESTMENTS lists each investment holding in the Fund as of the
date of the report. Investments may be grouped by category (by industry or
security type, for example). The percentage of the Fund's net assets represented
by these groupings is also disclosed.
TYPE OF SECURITY
INDUSTRY SECTOR AND PERCENTAGE OF THE FUND'S
[GRAPHIC] NET ASSETS REPRESENTED BY INVESTMENTS IN THAT
SECTOR (IF APPLICABLE)
ACTUAL PORTFOLIO HOLDINGS WITH SHARES AND
MARKET VALUE AS OF REPORT DATE
The STATEMENT OF ASSETS AND LIABILITIES lists all the assets and liabilities of
the Fund as of the date of the statement. This is an individual fund's "balance
sheet." Also disclosed in this statement are the Fund's net asset value per
share and its maximum offering price per share as of the date of the statement.
The statement also lists the accounts that comprise the Fund's
net assets (capital stock, undistributed
income, etc.).
SUMMARY OF THE FUND'S INVESTMENTS AND ALL
[GRAPHIC] OTHER ASSETS OWNED BY THE FUND, INCLUDING
AMOUNTS OWED TO THE FUND BY OUTSIDE PARTIES
SUMMARY OF ALL AMOUNTS OWED TO OUTSIDE PARTIES
BY THE FUND
NET RESULTS OF ASSETS LESS LIABILITIES
THE MARKET VALUE OF THE FUND'S TOTAL NET
ASSETS DIVIDED BY THE NUMBER OF SHARES
OUTSTANDING
THE CURRENT NET ASSET VALUE PER SHARE PLUS SALES CHARGE, IF ANY
5
<PAGE> 8
The STATEMENT OF OPERATIONS shows the amount of dividend and interest income
earned from the Fund's investments, the expenses incurred by the Fund from its
operations and any gains or losses realized and not yet realized by the Fund
from holding and/or selling any investments.
[GRAPHIC] ANY INCOME EARNED FROM THE FUND'S INVESTMENTS
OPERATING EXPENSES INCURRED BY THE FUND DURING
THE PERIOD
GAINS OR LOSSES REALIZED UPON THE SALE OF THE
FUND'S INVESTMENTS AND ANY CHANGE IN
UNREALIZED GAINS OR LOSSES ON FUND HOLDINGS
DURING THE PERIOD
NET CHANGE IN NET ASSETS DUE TO FUND
OPERATIONS
The STATEMENTS OF CHANGES IN NET ASSETS shows the changes in the net assets of
the Fund during each of the two most recent reporting periods. The changes in
net assets are generally broken down into four distinct sections:
OPERATIONS: SEE STATEMENT OF OPERATIONS
DIVIDENDS TO SHAREHOLDERS: TOTAL INCOME
[GRAPHIC] DIVIDENDS PAID TO SHAREHOLDERS DURING THE
PERIODS
DISTRIBUTIONS TO SHAREHOLDERS: TOTAL REALIZED
GAINS DISTRIBUTED TO SHAREHOLDERS DURING THE
PERIODS
FUND SHARE TRANSACTIONS: DOLLAR VALUE OF FUND
SHARES PURCHASED, REDEEMED OR REINVESTED
DURING THE PERIODS
The NOTES TO FINANCIAL STATEMENTS are footnotes to the statements listed above.
These notes include information on accounting methods used by the Fund,
contractual arrangements between the Fund and its service providers, certain
transactions effected by the Fund and other general information about the Fund.
The FINANCIAL HIGHLIGHTS shows, for a single share outstanding throughout each
period presented, the net investment income, the realized and unrealized gains
and losses and the dividends and distributions of the Fund. It also shows key
data and ratios, such as the total investment return for each period, the
portfolio turnover rate for Funds other than money market mutual funds, the
ratio of expenses to average net assets and the ratio of net investment income
to average net assets.
6
<PAGE> 9
[This page intentionally left blank.]
7
<PAGE> 10
ECONOMIC REVIEW
FROM THE INVESTMENT ADVISER
The Standard & Poor's Stock Index posted a total return of 26.18% during the 12
month period ended February 28, 1997, amply rewarding long-term investors who
rode out volatility early in the period.* The best performers were concentrated
among shares of large company stocks, which significantly outpaced shares of
smaller firms.
At the end of this period, however, the markets began to give serious
consideration to a possible tightening of monetary policy following Federal
Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony. Chairman
Greenspan's comments focused on current high levels of consumer confidence and
the potential for inflationary pressures to surface. His comments fueled renewed
volatility in the fixed-income markets, and the bellwether 30-year Treasury bond
ended the period with a 0.36% total return.**
THE CASE FOR
STOCKS AND BONDS
The stock market's gain raises some important issues. Late in the period, there
was considerable discussion concerning Federal Reserve Chairman Alan Greenspan's
comments of "irrational exuberance" in his reflections on the state of the U.S.
equity markets. Other observers felt that investors should be optimistic based
on the healthy business climate in the U.S., the moderate economic policies of
the current administration and the focus in Washington on balanced budgets.
Overall, the U.S. economy seems poised for continued moderate growth, which is
good news for stocks. The stock market's current price-to-earnings (P/E) ratio
of 17.8 times our 1997 earnings estimates is within the 16 to 19 times range of
the 1960s when we had similar inflation levels. We think it is reasonable to
expect P/E ratios to stay at current levels. That gives an estimated market
return over the next 12 months of 10% (8% from earnings growth and 2% from
dividend yield).
Congress and the Clinton Administration continue to entertain the prospect of a
Balanced Budget Amendment, mandating the end of federal deficits within five to
seven years. While an agreement has not passed to date, this shift in attitude
bodes well for both stocks and bonds, as a balanced budget facilitates lower
interest rates, encouraging earnings growth.
POTENTIAL RISKS
Given the length of the current economic expansion, history tells us that the
bulls will run out of steam. Slowing economic growth is a double-edged sword as
lower corporate earnings lead to both a decline in prices and a reallocation of
savings. Companies with disappointing earnings may quickly fall into disfavor.
Broad equity indices may then decline as investors reallocate their assets into
more stable stocks.
The U.S. bond market and, indirectly, the U.S. equity market have benefited from
strong purchases of U.S. Treasuries by foreign investors. Supported by an
appreciating dollar, foreign purchases of U.S. Treasuries in 1996 were $265
billion compared to $118 billion in net sales by domestic investors (for four
quarters ended December 31, 1996).*** If the dollar should decline, there would
be less incentive to buy dollar denominated assets.
LOOKING FORWARD
In our view, investors should approach the remainder of 1997 with rational
exuberance tempered by a knowledge of history. Under the best case scenario, the
U.S. economy will see a move toward sustainable growth, higher real interest
rates and an anticipated 8% to 9% increase in corporate profits. Given these
projections, most investment professionals expect equities to perform well in
1997, although below 1996 levels. Bonds at this juncture seem attractive,
especially given the recommended revisions to real rates of inflation and the
trend toward a balanced federal budget.
8
<PAGE> 11
History, however, usually repeats itself, and we would not be surprised to see
some corrections ahead. Thus, investors may want to review their portfolios,
bearing in mind the importance of diversification in controlling risk. We see
the most value in equities characterized by growth at reasonable P/E multiples,
and find relative value in intermediate-term bonds, rather than long duration
plays. Investors seeking long-term growth after inflation and taxes should
remain biased toward stocks and positive on bonds.
Sincerely,
/s/ Kirk Hartman
Kirk Hartman
Chief Investment Officer,
Bank of America NT&SA,
Investment Adviser to the
Pacific Horizon Funds
- ---------------
* The S&P 500 is an index that is representative of the large capitalization
U.S. equity market as a whole, and cannot be invested in directly.
** Source: Bloomberg using Merrill Lynch Taxable Bond Indices which reflects
the 30-year Treasury bond return.
*** Source: ISI Group
9
<PAGE> 12
PACIFIC HORIZON
SHORT-TERM GOVERNMENT FUND
[KIRK HARTMAN PHOTO]
KIRK HARTMAN
Chief Investment Officer
Bank of America NT&SA
The Pacific Horizon Income Funds are managed by a Bank of America NT&SA
investment team led by Kirk Hartman, Chief Investment Officer.
GOAL:
The Pacific Horizon Short-Term Government Fund seeks high current income
consistent with relative stability of principal.
INVESTMENTS:
The Fund invests in securities issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises.
APPROPRIATE FOR:
Investors who want income from securities issued or guaranteed by the U.S.
Government or its enterprises and relative stability of principal.
INCEPTION:
August 2, 1996
SIZE OF FUND AS OF
FEBRUARY 28, 1997:
Over $15 million
Q
HOW HAS THE FUND PERFORMED SINCE ITS INCEPTION IN AUGUST, 1996?
A
The Fund has performed well, delivering returns consistent with those of its
benchmark, the One-Year Treasury Bill Index. Since its inception on August 2,
1996, the Fund returned 3.33%* (without the sales charge), as of the period
ended February 28, 1997, compared to 3.35% for the One-Year Treasury Bill
Index.**
Q
HOW HAVE YOU MANAGED THE FUND SINCE ITS INCEPTION?
A
All our fixed-income Funds seek to use a duration-neutral philosophy.
Duration, which measures a bond's price sensitivity to interest rates, is a
principal component of risk and return. In terms of our Funds, the average
durations of the securities in the Funds' portfolios generally remain fairly
close to the durations of the Funds' respective benchmarks. We then attempt to
add value by investing in sectors and individual securities that offer good
value, and by identifying securities that provide yields that are attractive
relative to those securities with different maturities. Our relative value
methodology strategy enables us to compare and select opportunities that
represent some of the best values from the universe of available issues in the
market.
The Fund invests in short duration securities issued by the United States
government and its agencies and attempts to replicate the duration of the one
year Treasury Bill. Investments include short maturity treasury bills, treasury
notes and well-structured agency Collateralized Mortgage Obligations, or CMOs.
Treasury investments are placed strategically along the yield curve to capture
the additional benefits of "rolling down the curve." Planned
10
<PAGE> 13
Amortization Class CMOs, or PAC CMOs, are used due to their higher yield spreads
(as compared with mortgage pass-throughs), relative stability, and high credit
quality.***
As the Fund builds towards a critical mass, the strategy of the Fund will likely
expand to include strategies involving longer duration assets, such as fixed and
adjustable rate mortgage-backed securities, and fixed and floating rate agency
CMOs. These longer duration investments will be hedged with short futures
positions or options to create synthetic investments with durations similar to
the benchmark. The concept of this strategy is to capture the additional yield
spread associated with the mortgage product and reduce the price sensitivity
with the short futures positions.
Q
WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE FUND IN THE YEAR AHEAD?
A
We believe that given the current conditions, the economy will continue to
grow at or near the non-inflationary growth rate of 2% to 2.5%. However,
considering the current tightness in the labor market and recent indications
from the Federal Reserve, the probability of rekindled inflation is increasing,
and we would therefore not be surprised to see the Federal Reserve raise
interest rates.****
We do not, however, see rates moving dramatically higher. We continue to believe
that interest rates will trade within a relatively tight range and that we are
currently in the middle of that range. We will continue to manage the Fund
within the context of our duration-neutral strategy, but will be alert to any
changes in the fixed-income markets that create opportunities for the Fund.
- ---------------
*Return figures for the Fund include change in share price, reinvestment of
dividends and capital gains distributions. Performance figures do not reflect
the maximum 4.50% front-end sales load, which applies to some investors. Fund
performance with the 4.50% maximum sales charge was -1.31% for the period. The
Fund is currently waiving a portion of the advisory, administrative and/or
shareholder servicing fee. This voluntary waiver may be modified or terminated
at any time, which would reduce the Fund's performance.
**Source: Bloomberg, using Merrill Lynch Taxable Bond Indices which reflects the
One-Year Treasury Bill return. The One-Year Treasury Bill Index is an unmanaged
index generally representative of the Treasury bond market as a whole, and
cannot be invested in directly.
***Information is as of February 28, 1997. The composition of the Fund's
holdings is subject to change.
****Note: This move occurred in late March of 1997, subsequent to the close of
the Fund year.
11
<PAGE> 14
PACIFIC HORIZON
SHORT-TERM GOVERNMENT FUND
(AS OF FEBRUARY 28, 1997)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
<TABLE>
<CAPTION>
MERRILL LYNCH
LIPPER SHORT- ONE-YEAR
MEASUREMENT PERIOD TERM GOVERNMENT TREASURY BILL
(FISCAL YEAR COVERED) A SHARES FUNDS AVERAGE INDEX
<S> <C> <C> <C>
8/2/96 9551.10 10000 10000
8/31/96 9575.68 10027.77 10019.38
2/28/97 9869.38 10370.84 10334.74
</TABLE>
HOW PERFORMANCE COMPARES
The chart compares the Pacific
Horizon Short-Term Government Fund to
the Merrill Lynch One-Year Treasury
Bill Index, which is an unmanaged
index typically used as a performance
benchmark for short-term fixed income
investments.
The average of short-term government funds as reported by Lipper Analytical
Services, Inc. measures the performance of other funds with investment
objectives and policies similar to those of the Pacific Horizon Short-Term
Government Fund. An initial $10,000 investment in the Fund made on August 2,
1996, would now be worth $9,869. The same investment made in the Lipper
Short-Term Government Funds Average would now be worth $10,370.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. Return figures for the Fund include change in share
price, reinvestment of dividends, and capital gain distributions, if any, and
the effect of the maximum 4.50% sales charge.
Lipper Analytical Services, Inc. is an independent mutual fund-monitoring
organization. Neither the Lipper Short-Term Government Funds Average, nor the
Merrill Lynch One-Year Treasury Bill Index may be invested in directly. The
hypothetical investment in the Merrill Lynch One-Year Treasury Bill Index does
not reflect any sales or management fees that would be incurred if an investor
were to actually purchase individual securities or mutual funds, while the
performance of the Funds reflects all expenses and management fees and the
effect of the maximum sales charge.
<TABLE>
<CAPTION>
- ----------------------------------
SHORT-TERM GOVERNMENT FUND
AVERAGE ANNUAL RETURN
- --------------------------------------
A SHARES
Without With
Sales Sales
Charge Charge
- --------------------------------------
<S> <C> <C>
Since Inception 3.33% -1.31%
(8/2/1996)
- --------------------------------------
</TABLE>
<PAGE> 15
PACIFIC HORIZON
SHORT-TERM GOVERNMENT FUND
(AS OF FEBRUARY 28, 1997)
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION*
(PERCENTAGE BASED ON ASSETS)
<S> <C>
U.S. TREASURY NOTES 92.0
CASH EQUIVELENTS 2.0
U.S GOVERNMENT
AGENCY OBLIGATION 6.0
<FN>
- --------
* The composition of the Fund's
holdings is subject to change.
</TABLE>
QUALITY
Investing in Short-Term U.S.
Government Securities
The Pacific Horizon Short-Term
Government Fund has a policy that it
will invest primarily in securities
issued or guaranteed by the U.S.
Government, and its agencies,
instrumentalities or sponsored
enterprises. The flexibility to
invest in different types of
securities can help to increase
performance, while diversification
can help to reduce risk. By
investing primarily in high-quality
U.S. Government securities, the Fund
seeks to stabilize short-term
performance.
13
<PAGE> 16
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PRINCIPAL VALUE
DESCRIPTION RATE DATE AMOUNT (NOTE 2)
- --------------------------------------------------- ------- --------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATION -- 6.4%
Federal Home Loan Mortgage Corp................... 5.50% 4/15/14 $1,000,000 $ 996,357
-----------
Total U.S. Government Agency Obligation
(Cost $995,340)................................... 996,357
-----------
U.S. TREASURY OBLIGATIONS -- 93.0%
U.S. Treasury Note................................ 6.50% 5/15/97 1,550,000 1,553,642
U.S. Treasury Note................................ 7.25% 2/15/98 2,375,000 2,407,371
U.S. Treasury Note................................ 5.13% 2/28/98 5,200,000 5,169,216
U.S. Treasury Note................................ 7.88% 4/15/98 1,000,000 1,022,240
U.S. Treasury Note................................ 5.88% 4/30/98 2,000,000 2,001,900
U.S. Treasury Note................................ 6.25% 6/30/98 1,100,000 1,105,687
U.S. Treasury Note................................ 5.63% 11/30/98 1,200,000 1,193,112
-----------
Total U.S. Treasury Obligations
(Cost $14,463,139)................................ 14,453,168
-----------
TOTAL INVESTMENTS -- 99.4%
(COST $15,458,479) (a)............................ 15,449,525
Other assets in excess of liabilities -- 0.6%..... 91,950
-----------
NET ASSETS -- 100.0%............................... $15,541,475
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $15,541,475.
(a) Represents cost for federal income tax and book purposes and differs from
value by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation ..................................... $ 2,449
Unrealized depreciation ..................................... (11,403)
----------
Net unrealized appreciation ................................. $ (8,954)
===========
</TABLE>
See Notes to Financial Statements.
14
<PAGE> 17
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (cost $15,458,479)............................ $15,449,525
Cash............................................................................. 27,105
Interest receivable.............................................................. 235,657
Receivable from investment adviser............................................... 27,204
Deferred organization costs...................................................... 20,565
-----------
Total Assets...................................................................... 15,760,056
-----------
LIABILITIES:
Dividends payable................................................................ 61,504
Payable for capital shares redeemed.............................................. 62,910
Custodian and fund accounting fees payable....................................... 21,610
Transfer agent fees payable...................................................... 6,983
Audit fees payable............................................................... 27,622
Reports to shareholders payable.................................................. 25,104
Registration fees payable........................................................ 11,847
Other accrued expenses........................................................... 1,001
-----------
Total Liabilities................................................................. 218,581
-----------
NET ASSETS........................................................................ $15,541,475
===========
Shares Outstanding ($0.001 par value, 150 million shares authorized):............. 1,553,943
===========
NET ASSET VALUE
Redemption price per share....................................................... $10.00
======
Maximum Sales Charge............................................................. 4.50%
Maximum Offering Price
(Net Asset Value/(100%-Maximum Sales Charge)).................................... $10.47
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par................................................... $ 1,554
Additional paid-in capital....................................................... 15,550,442
Net unrealized depreciation on investments....................................... (8,954)
Distributions in excess of net realized gains on investment transactions......... (1,567)
-----------
NET ASSETS, FEBRUARY 28, 1997..................................................... $15,541,475
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
15
<PAGE> 18
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the period ended February 28, 1997(a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................................ $ 274,819
--------
EXPENSES:
Investment advisory fees............................................................ 12,022
Administration fees................................................................. 9,617
Shareholder service fees............................................................ 12,022
Custodian and fund accounting fees.................................................. 27,943
Transfer agent fees................................................................. 7,050
Legal fees.......................................................................... 120
Audit fees.......................................................................... 33,711
Reports to shareholders............................................................. 34,451
Registration fees................................................................... 12,373
Other expenses...................................................................... 4,249
--------
Total Expenses................................................................ 153,558
Less: Fee waivers and expense reimbursements........................................ (148,076)
--------
Total Net Expenses.................................................................. 5,482
--------
NET INVESTMENT INCOME................................................................ 269,337
--------
NET REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investment transactions........................................ 6,933
Net change in unrealized (depreciation) on investments.............................. (8,954)
--------
Net realized/unrealized losses on investments....................................... (2,021)
--------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................................... $ 267,316
========
</TABLE>
- ---------------
(a) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
See Notes to Financial Statements.
16
<PAGE> 19
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Period ended February 28, 1997(a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.................................................... $ 269,337
Net realized gains on investment transactions............................ 6,933
Net change in unrealized depreciation on investments..................... (8,954)
-----------
Change in net assets resulting from operations............................ 267,316
-----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................... (269,337)
Net realized gains on investment transactions............................ (6,933)
Excess of net realized gains on investment transactions.................. (1,567)
-----------
Change in net assets from shareholder distributions....................... (277,837)
-----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued.............................................. 17,406,395
Dividends reinvested..................................................... 646
Cost of shares redeemed.................................................. (1,855,045)
-----------
Change in net assets from capital share transactions...................... 15,551,996
-----------
Change in net assets...................................................... 15,541,475
NET ASSETS
Beginning of period...................................................... --
-----------
End of period............................................................ $ 15,541,475
===========
</TABLE>
- ---------------
(a) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
See Notes to Financial Statements.
17
<PAGE> 20
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
Pacific Horizon Funds, Inc. (the "Company"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
an open-end management investment company. At February 28, 1997, the Company
operated as a series company comprised of seventeen funds. The accompanying
financial statements and notes are those of the Pacific Horizon Short-Term
Government Fund (the "Fund"). The Fund commenced operations on August 2, 1996.
The Fund offers A Shares only.
The Fund seeks to provide investors with a high level of current income,
consistent with relative stability of principal.
Bank of America National Trust and Savings Association ("Bank of America"),
a subsidiary of BankAmerica Corporation, serves as the Fund's investment
adviser. The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary
BISYS Fund Services, Limited Partnership, serves as the Fund's administrator.
Concord Financial Group, Inc. (the "Distributor"), an indirect, wholly-owned
subsidiary of BISYS, serves as the distributor of the Fund's shares. BISYS Fund
Services, Inc. ("BISYS Ohio"), also a wholly-owned subsidiary of BISYS, serves
as transfer agent and dividend disbursing agent of the Fund.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
PORTFOLIO VALUATIONS:
The Fund values portfolio securities (other than debt securities with
remaining maturities of 60 days or less) at the last reported sales price on the
securities exchange on which such securities are primarily traded or at the last
sales price on the NASDAQ National Securities Market. Securities not listed on
an exchange or the NASDAQ National Securities Market or securities for which
there were no transactions are valued at the mean between the current quoted bid
and ask prices on the date of valuation. Bid price is used when no ask price is
available. The Fund may also use an independent pricing service, approved by the
Board of Directors, to value certain of its securities. Such prices reflect
market values which may be established through the use of electronic data
processing techniques and matrix systems. Restricted securities and securities
for which market quotations are not readily
18
<PAGE> 21
available, if any, are valued at fair value using methods approved by the Board
of Directors. Debt securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value.
SECURITIES TRANSACTIONS AND RELATED INCOME:
The Fund records security transactions on a trade date basis. Interest
income, including accretion of discount and amortization of premium, is accrued
daily. Realized gains and losses from securities transactions are recorded on
the identified cost basis.
EXPENSES:
The Company accounts separately for the assets, liabilities and operations
of each fund. Direct expenses of a fund are charged to that fund while general
Company expenses are allocated among the Company's respective portfolios.
The fund incurred certain costs in connection with its organization. Such
costs have been deferred and are being amortized by the fund on a straight line
basis over five years.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund's net investment income is declared daily and paid monthly as a
dividend to shareholders of record at the close of business on record date. Net
realized gains on portfolio securities, if any, are distributed at least
annually. However, to the extent that net realized gains of the Fund can be
offset by capital loss carryovers of the Fund, such gains will not be
distributed. Dividends and distributions are recorded by the Fund on the
ex-dividend date.
The amount of dividends from net investment income and of distributions from
net realized gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the composition of net assets based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized gains. To the extent they exceed net
investment income and net realized gains for tax purposes, they are reported as
distributions of capital.
FEDERAL INCOME TAXES:
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
timely, all of its net
19
<PAGE> 22
investment company taxable income and net capital gains to shareholders.
Therefore, no federal income tax provision is required.
Capital losses incurred after October 31 for the Fund are deemed to arise on
the first business day of the following fiscal year for tax purposes. The Fund
has incurred and will elect to defer such capital losses of $1,567 after October
31, 1996.
NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement with Bank of America, an
Administration Agreement with BISYS and a Distribution Agreement with the
Distributor. Pursuant to the terms of the Investment Advisory Agreement, Bank of
America is entitled to a fee from the Fund, which is accrued daily and payable
monthly, at an annual rate of 0.25% of the Fund's average daily net assets.
Pursuant to the terms of the Administration Agreement, BISYS is entitled to a
fee from the Fund, which is accrued daily and payable monthly, at an annual rate
of 0.20% of the Fund's average daily net assets. For the period from August 2,
1996, (commencement of operations) through February 28, 1997, Bank of America
and BISYS voluntarily waived fees from the Fund of $12,022 and $9,617,
respectively. During the same period Bank of America reimbursed $114,415 in
operating expenses of the Fund.
For the period ended February 28, 1997, the Distributor advised the Fund
that it retained no commissions on sales of the Fund's shares. For the same
period, Bank of America and its affiliates advised the Fund that they retained
no commissions on sales of the Fund's shares.
The Fund has a Shareholder Services Plan (the "Plan") under which the Fund
pays the Distributor for shareholder servicing expenses incurred in connection
with A Shares of the Fund. Under the Plan, payments by the Fund for shareholder
servicing expenses may not exceed 0.25% of each Fund's average daily net assets.
For the period ended February 28, 1997, shareholder service fees incurred
pursuant to the Plan totaled $12,022. The Plan provides that if, in any month,
the fees paid to the Distributor are less than the costs incurred by the
Distributor, the excess costs will be included in future computations of the
fee, provided that any excess costs will not be carried forward beyond the end
of the fiscal year in which such excess costs were incurred. The Distributor
waived the shareholder servicing fees of $12,022 during the period ending
February 28, 1997.
BISYS Ohio serves the Fund as transfer agent and dividend disbursing agent.
In these capacities, BISYS Ohio earned $7,050 for the period from August 2, 1996
through February 28, 1997. For the period January 1, 1996 to December 31, 1996,
BISYS Ohio agreed to voluntarily limit aggregate transfer agency fees. Absent
this voluntary limit the Fund would have incurred an additional cost of $12,868.
For the period ended February 28, 1997, the Fund incurred legal charges
totaling $120 which were earned by a law firm, a partner of which serves as
Secretary of the Company.
20
<PAGE> 23
Certain officers of the Company are affiliated with BISYS. Such persons are
not paid directly by the Company for serving in these capacities.
NOTE 4 -- DIRECTORS' COMPENSATION
Each Director of the Company is entitled to an annual retainer of $25,000,
plus $1,000 for each day the director participates in all or part of a Board or
Committee meeting, and the Chairman of each Committee receives a retainer of
$1,000 for services as Chairman of the Committee. In addition, the Company's
President is entitled to an annual salary of $20,000 for services as President.
The former President and Chairman of the Company received an additional $40,000
per year through February 28, 1997 in consideration of his years of service.
The Board has also established a retirement plan (the "Retirement Plan") for
the Directors. The Retirement Plan provides that each Director who dies or
resigns after five years of service as a director will be entitled to receive
ten annual payments each equal to the greater of: (i) 50% of the annual
Director's retainer that was payable during the year of that director's 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 as a director will be entitled to receive
ten annual payments equal to the greater of: (i) 100% of the annual Director's
retainer that was payable during the year of that Director's 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. In addition, the
amount payable each year to a Director who dies or resigns shall be increased by
$1,000 for each year of service that the Director served as Chairman of the
Board. Each Director may receive any benefits payable under the Retirement Plan,
at his or her election, either in one lump sum payment or ten annual
installments. A Director's years of service for the purpose of calculating the
payments described above shall be based upon service as a Director or Chairman
after February 28, 1994. Aggregate costs pursuant to the Retirement Plan
amounted to $211 for the Fund, for the period ended February 28, 1997.
NOTE 5 -- SECURITIES TRANSACTIONS
For the period ended February 28, 1997, the cost of purchases and the
proceeds from sales of Fund securities (excluding short-term investments)
amounted to $16,180,160 and $4,757,526, respectively.
21
<PAGE> 24
NOTE 6 -- CAPITAL SHARE TRANSACTIONS
Transactions in capital shares for the Fund are summarized below:
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997(a)
---------------------------
SHARES AMOUNT
--------- -----------
<S> <C> <C>
A SHARES
Issued.......................................................... 1,739,262 $17,406,395
Reinvested...................................................... 65 646
Redeemed........................................................ (185,384) (1,855,045)
--------- -----------
Net increase..................................................... 1,553,943 $15,551,996
========= ===========
</TABLE>
- ---------------
(a) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
22
<PAGE> 25
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<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)
Distribution 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 (excludes sales charge)................................... 3.33%(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (millions).................................. $ 16
Ratio of expenses to average net assets............................... 0.11%(b)
Ratio of net investment income to average net assets.................. 5.53%(b)
Ratio of expenses to average net assets*.............................. 3.15%(b)
Ratio of net investment income to average net assets*................. 2.49%(b)
Portfolio turnover rate............................................... 81%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such fee reductions and/or reimbursements had not occurred, the ratios
would have been as shown.
(a) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
(b) Annualized.
(c) Not annualized.
See Notes to Financial Statements.
23
<PAGE> 26
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors
and Shareholders of
Pacific Horizon Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Pacific Horizon Short-Term
Government Fund (one of the portfolios constituting Pacific Horizon Funds, Inc.,
hereafter referred to as the "Funds") at February 28, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
the period August 2, 1996 (commencement of operations) through February 28,
1997, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at February
28, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
April 21, 1997
24
<PAGE> 27
For more information, complete the following form and mail it to:
PACIFIC HORIZON FUNDS
1230 Columbia Street, Suite 500
San Diego, CA 92101
...............................................................................
First Name Last Name
...............................................................................
Street Address
...............................................................................
City State Zip Code
...............................................................................
Area Code and Telephone Number
PLEASE CHECK ONE OF THE TWO BOXES BELOW SO WE CAN BETTER MEET YOUR NEED FOR
SERVICE.
[ ] A broker assisted me with the purchase of my Pacific Horizon Fund.
...............................................................................
Name of Broker
...............................................................................
Name of Brokerage Firm
[ ] I purchased my Pacific Horizon Fund without the assistance of a broker.
Please send me a free investing kit on the Pacific Horizon Fund(s) checked
below. The kit includes a prospectus, which has more complete information on
the Fund(s) such as charges and expenses. Read the prospectus carefully
before investing or sending money.
PACIFIC HORIZON FUNDS
<TABLE>
<S> <C>
[ ] International Equity Fund [ ] Intermediate Bond Fund
[ ] Aggressive Growth Fund [ ] U.S. Government Securities Fund
[ ] Blue Chip Fund [ ] Short-Term Government Fund
[ ] Capital Income Fund [ ] National Municipal Bond Fund
[ ] Asset Allocation Fund [ ] California Tax-Exempt Bond Fund
[ ] Corporate Bond Fund
Money Market Funds
[ ] Prime Fund [ ] Treasury Only Fund
[ ] Treasury Fund [ ] Tax-Exempt Money Fund
[ ] Government Fund [ ] California Tax-Exempt Money Market Fund
</TABLE>
Additional Comments:
...............................................................................
...............................................................................
...............................................................................
...............................................................................
...............................................................................
...............................................................................
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
<PAGE> 28
PACIFIC HORIZON INCOME FUNDS
-------------
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1
-------------
[PACIFIC HORIZON FUNDS LOGO]
Concord of Financial Group, Inc., Distributor
SGB-0003 4/97
