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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
(as revised October 28, 1997)
TABLE OF CONTENTS
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Page
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THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . 4
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . 67
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . 78
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
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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
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Investment Trust, Series I ("Master Trust I"), are collectively 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 Provident Distributors, Inc.
("PDI" or the "Distributor") at 800-332-3863. Capitalized terms used but not
defined herein have the same meaning as in the Prospectuses.
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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
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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:
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Year Ended Year or Period Ended
February 29, 1996 February 28, 1997
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National Municipal Bond Fund(1) 37% 12%
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U.S. Government Securities Fund 137% 94%
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California Tax-Exempt Bond Fund 57% 34%
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Capital Income Fund 57% 124%
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Aggressive Growth Fund 93% 99%
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Asset Allocation Fund(2) 157% 116%
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International Equity Fund(3) N/A 114%
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Short Term Government Fund(4) N/A 81%
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Corporate Bond Fund(5) 96% 59%
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Intermediate Bond Master Portfolio 172% 83%
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Blue Chip Master Portfolio 108% 91%
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(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
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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:
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Year or Period Ended Year Ended Year Ended
February 28, 1997 February 29, 1996 February 28, 1995
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Aggressive Growth Fund $225,515 $369,002 $631,200
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Capital Income Fund $184,327 $ 95,126 $207,310
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Blue Chip Master Portfolio $637,281 $428,667 $202,817
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Asset Allocation Fund+ $152,270 $175,960 $152,778
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California Tax-Exempt Bond Fund $0 $0 $0
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U.S. Government Securities Fund $0 $0 $0
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Intermediate Bond Master $0 $0 $0
Portfolio
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National Municipal Bond Fund++ $0 $0 $0
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International Equity Fund+++ $ 78,268 N/A N/A
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Short-Term Government Fund++++ $0 N/A N/A
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+ 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 neither 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, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
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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: (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
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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.
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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
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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, Corporate Bond
Fund,
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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 with
Service Organizations.
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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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<PAGE> 16
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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<PAGE> 17
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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<PAGE> 19
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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<PAGE> 24
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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<PAGE> 25
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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<PAGE> 26
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 characteristics of the particular company,
differences between
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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 International Equity Fund's investments will be
allocated among securities denominated in the
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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
corporations. In addition, there may be less publicly available
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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 the
forward commitments, commitments to purchase when-issued
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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 in U.S. Treasury
notes. Although voting rights, or rights to consent,
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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
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.
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 contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal
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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.
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
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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 "state action," and could hold
that the private-right-of-sale proceedings violate the due process requirements
of the Federal
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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 purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be
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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 receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus
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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 school districts and
community college districts, and exempted increased gasoline taxes and truck
weight fees from the State
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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 to the effective date of Proposition 62, to be subject
to approval by a majority of voters. The Court held that the
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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, calculate fees and assessments, notify the public and defend local
government fees and assessments in court.
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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 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
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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 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
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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).
3. Sell securities short or purchase securities on
margin, except such short-term credits as are necessary for the
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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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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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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 Paragraph 1 in this
Statement of Additional Information with respect to the National Municipal Bond
Fund, investment limitation Paragraph 7 in this Statement of Additional
Information with respect to the Aggressive Growth Fund, investment limitation
Paragraph 11 in this Statement of Additional Information with respect to the
California Tax-Exempt Bond Fund, investment limitation Paragraph 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 Paragraph 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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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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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> 69
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> 70
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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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. (Effective
October 18, 1997, all such requests should be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968.) 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 43219-3035, in which case the proceeds will
be mailed, wired or made available at the Transfer Agent on the next business
day. (Effective October 18, 1997, Checks should be delivered to PFPC, P.O. Box
8968, Wilmington, Delaware 19899-8968.) 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
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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 PDI 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
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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 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.
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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.
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
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<PAGE> 76
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 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
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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 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 is a day
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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.
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
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<PAGE> 79
shareholders would be taxable as ordinary income to the extent of the current
and accumulated earnings and profits of the particular Fund and would be
eligible for the dividends received deduction in the case of corporate
shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, 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
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<PAGE> 80
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 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
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<PAGE> 81
$6,727,109 of which $442,467, $5,401,993 and $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> 82
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> 83
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> 84
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> 85
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 63 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
</TABLE>
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<PAGE> 86
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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 72 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (regis-
Newport Beach, CA 92660-2629 tered investment
advisor) 1991 to date; Director,
FCA Securities, Inc. (registered
broker/dealer) November 1996 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; Chairman, TIS Mortgage
Investment Company (real estate
investment trust); Trustee and a
former Vice Chairman of the Board,
Claremont McKenna College;
Chartered Financial Analyst.
</TABLE>
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<PAGE> 87
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Robert E. Greeley 65 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 81 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* 68 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; Director, Farmers
Suite 550 Group, Inc. (insurance
Washington, DC 20005 company) 1991 to date; Provost,
1982 to January 1993, Senior Vice
President for Academic Affairs,
1981 to January 1993, University of
Southern California; Trustee,
Master Investment Trust, Series I
(since
</TABLE>
-87-
<PAGE> 88
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C>
1995); former Trustee, Master
Investment Trust, Series II
(October 1995 to February 1997).
Stephen M. Wynne 41 Vice President Executive Vice President
Executive and Chief Accounting
Vice President, Officer (since 1993) and
PFPC Inc. Senior Vice President
400 Bellevue Parkway and Chief Accounting
Wilmington, DE 19809 Officer (1991 to 1993), PFPC Inc.;
Executive Vice President, PFPC
International (since 1995); Vice
President and Chief Accounting
Officer, PNC Institutional
Management Corp. (since 1987).
Jay F. Nusblatt 36 Treasurer Vice President and
Vice President, Director of Fund
PFPC Inc. Accounting and
103 Bellevue Parkway Administration, PFPC
Wilmington, DE 19809 Inc. (since 1993); formerly
Assistant Vice President, Fund/Plan
Services, Inc. (1989 to 1993).
Linda L. Kaufmann 36 Assistant Treasurer Vice President and
Vice President, Director, Investment Accounting, PFPC
PFPC Inc. Inc. (since 1996); Senior Manager,
103 Bellevue Parkway Investment Accounting, PFPC, Inc.
Wilmington, DE 19809 (1994-1996); and Manager, Investment
Accounting, PFPC, Inc. (1991-1994).
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
Gary M. Gardner 46 Assistant Secretary Chief Counsel-Mutual
Chief Counsel-Mutual Funds, PNC Bank (since
Funds, 1994); Associate General
PNC Bank Counsel, The Boston
1600 Market Street, Company, Inc. (1992 to
28th Fl. 1994); General Counsel,
Philadelphia, PA 19103 SunAmerica Asset Management Inc.
(1986 to 1992).
J. Robert Dugan 32 Assistant Secretary Counsel-Mutual Funds,
Counsel-Mutual Funds, PNC Bank (since 1993);
PNC Bank Associate, Drinker
1600 Market Street Biddle & Reath LLP
28th Fl. (1990 to 1993).
Philadelphia, PA 19103
</TABLE>
- -----------------------------
* Dr. Pings is an "interested director" of the Company as defined in the
1940 Act.
-88-
<PAGE> 89
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. 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
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<PAGE> 90
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 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.
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<PAGE> 91
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Investment Trust, Series I
("Master Trust I"), their addresses, age, and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Thomas M. Collins 63 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 61 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 65 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 68 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
Monroe Haegele 52 President of CEO of Provident Distributors,
Provident Distributors, Master Trust I Inc. (since 1993); formerly
Inc. Vice Chairman of PNC
Four Falls Corporate Institutional Management Corp.
Center (PIMC) (1990 to 1992);formerly 6th
Floor Partner in The Hay Group (1981
West Conshohocken, PA 19428 to 1986); formerly Senior Vice
</TABLE>
-91-
<PAGE> 92
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupations
- ---------------- --- -------------- ---------------------
<S> <C> <C> <C>
President at First
Pennsylvania Company
(1978 to 1981); formerly Vice
President at Chase Manhattan
Bank (1974 to 1978).
Stephen M. Wynne 41 Vice President of See "Directors
Executive Vice President, Master Trust I and Officers of
PFPC Inc. the Company."
400 Bellevue Parkway
Wilmington, DE 19809
J. Fergus McKeon 37 Treasurer of General Manager,
80 Harcourt Street Master Trust I PFPC International
Dublin, Ireland (since 1993); formerly Chief
Accountant, SBC-ISL (1990-1993).
Jay F. Nusblatt 36 Assistant Treasurer See "Directors and
Vice President, PFPC of Master Trust I Officers of the
Inc. Company."
103 Bellevue Parkway
Wilmington, DE 19809
Robert Kelly 28 Assistant Treasurer Accounting Manager, PFPC
80 Harcourt Street of Master Trust I International (since 1996);
Dublin, Ireland Accountant, Oppenheimer Funds Inc.
(1992 to 1996).
W. Bruce McConnel, III 54 Secretary of See "Directors and
1345 Chestnut Street Master Trust I Officers of the Company."
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant Secretary See "Directors and Officers
Chief Counsel-Mutual of Master Trust I of the Company."
Funds,
PNC Bank
1600 Market Street, 28th Fl.
Philadelphia, PA 19103
J. Robert Dugan 32 Assistant Secretary See "Directors and Officers
Counsel-Mutual Funds, of Master Trust I of the Company."
PNC Bank
1600 Market Street, 28th Fl.
Philadelphia, PA 19103
</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
-92-
<PAGE> 93
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.
-93-
<PAGE> 94
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>
==============================================================================================================
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND ANNUAL BENEFITS AND FUND COMPLEX**
NAME OF PERSON/ POSITION THE COMPANY EXPENSES* UPON RETIREMENT PAID TO DIRECTORS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $76,000 $ 14,074 $ 31,293 $86,125
Director
- --------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $37,000 $ 11,410 $ 24,680 $37,000
Vice Chairman of the Board
- --------------------------------------------------------------------------------------------------------------
Robert E. Greeley $33,000 $ 8,992 $ 17,905 $51,625
Director
- --------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $35,000 $ 12,664 $ 26,722 $43,000
Director
- --------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $78,500 $ 18,500 $ -- $78,500
Director Emeritus
- --------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,000 $ 10,133 $ 22,561 $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.
-94-
<PAGE> 95
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 and California Tax-Exempt
Bond Fund; .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 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,
-95-
<PAGE> 96
Bank of America may voluntarily waive fees or reimburse a particular Fund or
Master Portfolio for expenses. Prior to June 3, 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. Prior to October 28,
1997, Bank of America was entitled to receive an investment advisory fee
at the annual rate of 0.40% of the daily net assets of the California
Tax-Exempt Bond Fund.
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 Fund $1,239,652 $935,275 $816,300
- --------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ 857,206 $584,994 $606,131
- --------------------------------------------------------------------------------------------
Capital Income Fund $1,220,622 $992,349 $572,638
- --------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 283,471 $269,498 $397,905
- --------------------------------------------------------------------------------------------
International Equity Fund(1) $ 48,128 N/A N/A
- --------------------------------------------------------------------------------------------
Short-Term Government Fund(2) $ 12,022 N/A N/A
- --------------------------------------------------------------------------------------------
</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:
-96-
<PAGE> 97
<TABLE>
<CAPTION>
--------------------------------------------------
Year ended Year Ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $244,720 $234,006 $242,173
- --------------------------------------------------------------------------------------------
Capital Income Fund $ 0 $ 0 $359,205
- --------------------------------------------------------------------------------------------
U.S. Government Securities Fund $134,763 $ 41,779 $ 0
- --------------------------------------------------------------------------------------------
International Equity Fund(1) $ 56,931 N/A N/A
- --------------------------------------------------------------------------------------------
Short-Term Government Fund(2) $ 12,022 N/A N/A
- --------------------------------------------------------------------------------------------
</TABLE>
(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.
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 $428,287(1) $ 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 Asset Allocation Master Portfolio. On June 23, 1997,
the Asset Allocation Fund withdrew assets from the Asset
(continued...)
-97-
<PAGE> 98
<TABLE>
<CAPTION>
-----------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Master Portfolio $2,701,648(1) $1,574,388(2) $1,091,132
- ----------------------------------------------------------------------------------
Asset Allocation Master $1,046,406(1) $ 913,660(2) $ 849,188
Portfolio
- ----------------------------------------------------------------------------------
National Municipal Bond
Fund(3) $34,135(1) $ 24,739 $ 6,147
- ----------------------------------------------------------------------------------
</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)
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.
-98-
<PAGE> 99
<TABLE>
<CAPTION>
----------------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $146,716 $0 $207,033
- --------------------------------------------------------------------------------------------
Blue Chip Fund $0 $0 $245,776
- --------------------------------------------------------------------------------------------
Asset Allocation Fund $ 31,598 $0 $245,718
- --------------------------------------------------------------------------------------------
Municipal Master Portfolio $0(1) $0 $121,591
- --------------------------------------------------------------------------------------------
National Municipal Bond Fund $0 $0 $180,700
- --------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 93,097 $0 $0
- --------------------------------------------------------------------------------------------
Corporate Bond Fund $0 $0 $0
- --------------------------------------------------------------------------------------------
International Equity Fund(2) $132,666 N/A N/A
- --------------------------------------------------------------------------------------------
Short-Term Government Fund(3) $114,415 N/A N/A
- --------------------------------------------------------------------------------------------
</TABLE>
(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.
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:
-99-
<PAGE> 100
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Period April 25, 1994
(the date the
Predecessor Fund was
reorganized into the
Period October 1, Corporate Bond Fund)
Year ended Year ended 1994 through February through September 30,
February 28, 1997 February 29, 1996 28, 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bond $70,991(1) $144,324 $58,897 $73,575
Fund
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
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 of a particular Master Portfolio's or Fund's
outstanding voting securities, or by Bank of America.
-100-
<PAGE> 101
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 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
-101-
<PAGE> 102
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, 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
-102-
<PAGE> 103
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 PDI. 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 PDI. From time to time, legislation modifying
such restriction has been introduced in Congress which, if enacted, would
permit a bank holding company to establish a non-bank subsidiary having the
authority to organize, sponsor and distribute shares of an investment company.
If this or similar legislation were enacted, the Companies expect that Bank of
America's parent bank holding company would consider the possibility of one of
its non-bank subsidiaries offering to perform some or all of the services now
provided by PDI. 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.
-103-
<PAGE> 104
ADMINISTRATOR
Bank of America National Trust and Savings Association (the
"Administrator") serves as administrator of the Funds. PFPC International Ltd.
serves as administrator and accounting services agent of the Master Portfolios.
Bank of America and PFPC International Ltd. are collectively referred to as the
"Administrators." Prior to September 15, 1997, The BISYS Group, Inc. through
its wholly-owned subsidiary BISYS Fund Services, L.P. ("BISYS"), with offices
at 150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219 served as administrator of the Funds and Master
Portfolios. Prior to November 1, 1996, Concord Holding Corporation, an
indirect, wholly-owned subsidiary of BISYS served as the Funds' and Master
Portfolios' administrator ("Concord Holding").
Bank of America provides administrative services to the Funds
as described in the Funds' Prospectuses pursuant to an Administration Agreement
with the Company. PFPC International Ltd. provides administration and
accounting services to the Master Portfolios as described in the Funds'
prospectuses pursuant to an Administration and Accounting Services Agreement
with Master Trust I. Each Master Portfolio's Administration and Accounting
Services Agreement became effective September 15, 1997 and will continue in
effect until terminated by Master Trust I or PPPC International Ltd. upon 60
days' prior written notice to the other party. The Company's administration
agreement became effective September 15, 1997 and, unless sooner terminated,
continues in effect until October 31, 1998 and thereafter will be extended with
respect to each Fund for successive periods of one year, provided that each
such extension is specifically approved at least annually by (a) vote of a
majority of those members of the Company's Board of Directors 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) 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 cause and without payment of any penalty by vote of a
majority of the Company's Board of Directors or by vote of a majority of the
outstanding voting securities of any Fund upon 60 days' written notice to the
Administrator, or by the Administrator at any time, without payment of any
penalty upon 90 days' written notice to the Company. The agreement will
immediately terminate in the event of its "assignment."
The Company has agreed to pay the Administrator fees for its
services as administrator of the Funds, computed daily and payable monthly, at
the annual rates of .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,
-104-
<PAGE> 105
Short-Term Government, Capital Income, Corporate Bond, International Equity and
California Tax-Exempt Bond Funds; and .30% of the average daily net assets of
the Aggressive Growth Fund. Master Trust I has agreed to pay PFPC
International Ltd. fees for its services as administrator of the Master
Portfolios, computed 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. The fees payable to the Administrators are not subject
to reduction as the value of each Fund's and Master Portfolio's net assets
increase. From time to time, the Administrators 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, BISYS or Concord
Holding 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. Prior to October 28, 1997, BISYS, Concord Holding or Bank
of America was entitled to receive an administration fee payable at the annual
rate of 0.30% of the California Tax-Exempt Bond Fund's average daily net assets.
-105-
<PAGE> 106
For the fiscal years indicated, the following administration
fees (net of waivers) were paid or payable to BISYS or Concord Holding 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 Fund $619,826 $467,638 $408,150
- --------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $459,068 $438,745 $454,249
- --------------------------------------------------------------------------------------------
Capital Income Fund $542,500 $441,044 $414,134
- --------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 84,992 $153,997 $227,374
- --------------------------------------------------------------------------------------------
Short-Term Government Fund $ 0(1) N/A N/A
- --------------------------------------------------------------------------------------------
International Equity Fund $ 0(2) N/A N/A
- --------------------------------------------------------------------------------------------
International Equity Master $ 0(3) N/A N/A
Portfolio
- --------------------------------------------------------------------------------------------
</TABLE>
(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 Concord Holding and
Concord Holding waived administration fees of $551 with respect to the
International Equity Master Portfolio.
For the fiscal years indicated, BISYS or Concord Holding
waived administration fees with respect to the Aggressive Growth, California
Tax-Exempt Bond, Capital Income, U.S. Government Securities, Short-Term
Government and International Equity Funds as follows:
-106-
<PAGE> 107
<TABLE>
<CAPTION>
--------------------------------------------------
Year ended Year ended Year ended
February 28, February 29, February 28,
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $183,837 $175,505 $181,979
- --------------------------------------------------------------------------------------------
Capital Income Fund $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 77,220 $ 23,875 $ 0
- --------------------------------------------------------------------------------------------
Short-Term Government Fund $ 9,617(1) N/A N/A
- --------------------------------------------------------------------------------------------
International Equity Fund $ 15,032(2) N/A N/A
- --------------------------------------------------------------------------------------------
</TABLE>
(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.
Additionally, for the fiscal years indicated, BISYS or Concord
Holding 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:
-107-
<PAGE> 108
<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 Fund $ 31,598 $192,545 $ 0
- -------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 146,716 $253,991 $ 0
- -------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 147,200 $172,071 $ 0
- -------------------------------------------------------------------------------------------
Municipal Master Portfolio(1) $ 0 $169,773 $ 0
- -------------------------------------------------------------------------------------------
Corporate Bond Fund $ 0 $0 $ 0
- -------------------------------------------------------------------------------------------
Corporate Bond Master $ 0 $233,360 $ 0
Portfolio(2)
- -------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 0(3) N/A N/A
- -------------------------------------------------------------------------------------------
International Equity Fund $ 0(4) N/A N/A
- -------------------------------------------------------------------------------------------
International Equity Master $ 0(5) N/A N/A
Portfolio
- -------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(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 Concord
Holding 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, Concord
Holding reimbursed operating expenses of $0 with respect to the
Corporate Bond Master Portfolio.
-108-
<PAGE> 109
(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, Concord Holding reimbursed operating expenses of $32,892
with respect to the International Equity Master Portfolio.
Except as noted below, for the fiscal years indicated BISYS or
Concord Holding 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 Bond Fund $ 24,165 $ 9,952 $ 1,723
- ----------------------------------------------------------------------------------------
Intermediate Bond Master $ 47,588(1) $ 30,769 $33,431
Portfolio
- ----------------------------------------------------------------------------------------
Blue Chip Fund $153,571 $ 44,971 $ 5,833
- ----------------------------------------------------------------------------------------
Blue Chip Master Portfolio $180,110(1) $104,889(2) $72,742
- ----------------------------------------------------------------------------------------
Asset Allocation Fund $ 41,432 $ 19,909 $ 4,703
- ----------------------------------------------------------------------------------------
Asset Allocation Master $ 94,685(1) $ 83,060(2) $79,573
Portfolio
- ----------------------------------------------------------------------------------------
National Municipal Bond Fund $ 25,897(1) $ 10,543 $ 2,720
- ----------------------------------------------------------------------------------------
Municipal Master Portfolio(3) $ 0 $ 3,534 $ 896
- ----------------------------------------------------------------------------------------
</TABLE>
-109-
<PAGE> 110
- --------------------
(1) For the fiscal year ended February 28, 1997, BISYS or Concord Holding
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, Concord Holding 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 Concord Holding waived
administration fees of $1,951 with respect to the Municipal Master
Portfolio.
For the periods indicated, BISYS or Concord Holding 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)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 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 Concord Holding waived administration fees of $7,727 with
respect to the Corporate Bond Master Portfolio.
-110-
<PAGE> 111
During the course of the Company's fiscal year, 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 Administrators will bear all expenses in connection with
the performance of their services under the administration agreements with the
exception of the fees charged by The Bank of New York (with respect to the
National Municipal Bond Fund, California Tax-Exempt Bond Fund, U.S. Government
Securities Fund, Capital Income Fund and Aggressive Growth Fund) and PFPC (with
respect to the Corporate Bond Fund, International Equity Fund, Short-Term
Government Fund, Asset Allocation Fund, Intermediate Bond Fund and Blue Chip
Fund) for certain fund accounting services which are borne by the Funds. See
"General Information--Custodian, Accounting Agent 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 Administrators or their
subcontractors or any of their affiliates, SEC fees and state securities
registration and qualification fees, advisory fees, fees payable to shareholder
organizations, fees for special management services, 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 or any supplement or amendment thereto, necessary for the
continued effective registration of shares under the 1933 Act or state
securities laws, costs of printing and distributing any prospectus, supplement
or amendment thereto for existing shareholders, 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 Company's Administration Agreement provides that Bank of
America shall not be liable for any error of judgment or mistake of law or any
loss suffered by the Company or the Funds 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
-111-
<PAGE> 112
reckless disregard by it of its obligations and duties under the Administration
Agreement. Under its Administration and Accounting Services Agreement with
Master Trust I, PFPC International Ltd. is obligated to exercise care and
diligence in the performance of its duties, to act in good faith and to use its
best efforts, within reasonable limits, in performing services thereunder.
PFPC International Ltd. shall be liable for any damages arising out of its
failure to perform its duties under the administration and accounting services
agreement to the extent such damages arise out of its willful misfeasance, bad
faith, negligence or reckless disregard of its duties.
Bank of America may from time to time employ such person or
persons as it may believe to be particularly fitted to assist in the
performance of the Administration Agreement; provided, however, that the
compensation of such person or persons shall be paid by Bank of America and
Bank of America shall be as fully responsible to the Company for the acts and
omissions of any subcontractor as it is for its own acts and omissions. The
Bank of New York ("BONY") (with respect to the National Municipal Bond Fund,
California Tax-Exempt Bond Fund, U.S. Government Securities Fund, Capital
Income Fund and Aggressive Growth Fund) and PFPC (with respect to the Corporate
Bond Fund, International Equity Fund, Short-Term Government Fund, Asset
Allocation Fund, Intermediate Bond Fund and Blue Chip Fund) provide the Funds
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. The monthly fees charged by BONY and PFPC under the fund
accounting services agreements are borne by the Funds.
Bank of America has also entered into an agreement with PFPC
to provide certain sub-administration services to the Funds as described in the
Prospectuses. The monthly fees charged by PFPC for these services under the
sub-administration agreement are borne by Bank of America.
PFPC International Ltd. may assign its rights and delegate its
duties under its Adminstration and Accounting Services Agreement to any
wholly-owned direct or indirect subsidiary of PNC Bank, N.A. or PNC Bank Corp.,
provided, however that PFPC International Ltd. shall be as fully responsible to
Master Trust I for the acts and omissions of any delegate as PFPC International
Ltd. is for its own acts and omissions.
DISTRIBUTOR AND PLAN PAYMENTS
Provident Distributors, Inc. acts as distributor of the shares
of Pacific Horizon. Shares are sold on a continuous basis
-112-
<PAGE> 113
by the Distributor. Prior to September 15, 1997, Concord Financial Group, Inc.
("CFG"), a wholly owned subsidiary of BISYS, acted as distributor for the
Funds.
The Distributor has agreed to use its best efforts to effect
sales of shares of the Funds although it is not obliged to sell any certain
number of shares. The distribution agreement became effective September 15,
1997 and, unless sooner terminated, shall continue in effect with respect to
each Fund until October 31, 1998. 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".
For the fiscal years ended February 28, 1997, February 29,
1996 and February 28, 1995, CFG 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:
-113-
<PAGE> 114
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, 1997
-----------------------------------
--------------------------------------------------------------------
Amount of Total
Sales Load Retained
Total Sales Load Amount of Total Sales By Affiliates of
Received By CFG Load Retained By CFG Bank of America
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,088,000(1) $120,955 $ 938,206
- -----------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ 591,000(1) $ 45,746 $ 542,086
- -----------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 179,000(1) $ 19,990 $ 161,482
- -----------------------------------------------------------------------------------------------------------------
Capital Income Fund $2,424,000(1) $268,543 $2,094,439
- -----------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 92,000(1) $ 10,026 $ 82,259
- -----------------------------------------------------------------------------------------------------------------
Blue Chip Fund $2,418,000(1) $268,770 $2,128,530
- -----------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 421,000(1) $ 47,026 $ 373,436
- -----------------------------------------------------------------------------------------------------------------
National Municipal $ 203,000(1) $ 21,986 $ 180,834
Bond Fund
- -----------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ 103,000(1) $ 11,522 $ 90,340
- -----------------------------------------------------------------------------------------------------------------
Short-Term Government Fund(2) $ 0(1) $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------
International Equity Fund(3) $ 115,000(1) $ 12,765 $ 101,858
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------
(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.
-114-
<PAGE> 115
<TABLE>
<CAPTION>
Fiscal Year Ended February 29, 1996
-----------------------------------
------------------------------------------------------------------------
Amount of Total
Sales Load Retained
Total Sales Load Amount of Total Sales By Affiliates of
Received By CFG Load Retained By CFG Bank of America
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 805,092(1) $118,403 $ 653,024
- -------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $1,180,348(1) $131,821 $1,048,152
- -------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 571,074(1) $ 63,560 $ 505,941
- -------------------------------------------------------------------------------------------------------------
Capital Income Fund $1,746,063(1) $202,102 $1,493,113
- -------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 460,801(1) $ 51,076 $ 408,407
- -------------------------------------------------------------------------------------------------------------
Blue Chip Fund $2,138,130(1) $255,167 $1,875,240
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 642,818(1) $ 69,818 $ 569,332
- -------------------------------------------------------------------------------------------------------------
National Municipal $ 370,172(1) $ 40,099 $ 325,350
Bond Fund
- -------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ 152,616 $ 17,586 $ 133,287
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------
(1) Balance was paid to selling dealers.
-115-
<PAGE> 116
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, 1995
-----------------------------------
-------------------------------------------------------------------
Amount of Total
Sales Load Retained
Total Sales Load Amount of Total Sales By Affiliates of
Received By CFG Load Retained By CFG Bank of America
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 340,853(1) $ 60,878 $257,259
- ------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ 322,982(1) $ 37,001 $268,563
- ------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 181,635(1) $ 21,022 $ 90,642
- ------------------------------------------------------------------------------------------------------
Capital Income Fund $2,449,559(1) $201,638 $388,254
- ------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 53,285 $ 5,470 $ 47,815
- ------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 286,628 $121,377 $165,251
- ------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 114,388 $ 30,504 $ 83,884
- ------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 85,535(1) $ 9,400 $ 74,860
======================================================================================================
</TABLE>
- ----------------------------------
(1) Balance was paid to selling dealers.
-116-
<PAGE> 117
<TABLE>
<CAPTION>
Period October 1, 1994 through
February 28, 1995
----------------------------------------------------------------------------
Amount of Total
Sales Load Retained
Total Sales Load Amount of Total Sales By Affiliates of
Received By CFG Load Retained By CFG Bank of America
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $11,175 $1,436 $9,326
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Period April 25, 1994 (the date the Predecessor Fund reorganized into
the Corporate Bond Fund) through September 30, 1994
---------------------------------------------------------------------------
Amount of Total
Sales Load Retained
Total Sales Load Amount of Total Sales By Affiliates of
Received By CFG Load Retained By CFG Bank of America
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond Fund $1,485(1) $125 $1,175
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Balance was paid to selling dealers.
The following table shows all sales loads, commissions and
other compensation received by CFG 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.
-117-
<PAGE> 118
<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
</TABLE>
- -------------------
(1) Represents amounts received from front-end sales charge on A Shares.
(2) Represents the total of (i) amounts paid to BISYS or Concord Holding
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 CFG.
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 owners of Fund shares, including, but not
limited to shareholder
-118-
<PAGE> 119
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 be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
-119-
<PAGE> 120
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 Total Amount of Total
Amount of Total Shareholder Service Shareholder Service
Total Shareholder Shareholder Service Fee Paid to Bank of Fee Paid to Affiliates
Service Fee Fee Paid to CFG America of Bank of America
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $516,392 $308,283 $0 $182,530
- ------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $535,750 $205,096 $0 $303,684
- ------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $677,727 $46,625 $0 $593,044
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $202,413 $ 7,966 $0 $185,292
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 40,161 $ 1,045 $0 $18,409
- ------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $256,504 $19,012 $0 $230,703
- ------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 68,548 $ 2,735 $0 $ 64,576
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ 77,972 $54,333 $0 $ 9,525
- ------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 35,033 $ 478 $0 $ 18,506
[$15,738
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 12,022 $0 $0 $0
[$12,022
waived]
- ------------------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 18,778 $0 $0 $0
[$18,778
waived]
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 28, 1997, no SRF Shares had been issued in a
public offering.
-120-
<PAGE> 121
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 Total
Amount of Total Shareholder Service
Amount of Total Shareholder Service Fee Paid to Affiliates
Total Shareholder Shareholder Service Fee Paid to Bank of of Bank of America
Service Fee Fee Paid to CFG America
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $389,698 $257,687 $0 $110,825
- --------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $511,875 $232,686 $0 $277,153
- --------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $551,305 $ 64,707 $0 $483,153
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $222,341 $ 17,257 $0 $205,084
- --------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 16,582 $ 0 $0 $ 0
[$ 16,582
waived]
- --------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 74,950 $ 0 $0 $ 0
[$ 74,950
waived]
- --------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 33,182 $ 0 $0 $ 0
[$ 33,182
waived]
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ 80,246 $ 0 $0 $ 0
[$ 80,246
waived]
- --------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 17,571 $ 0 $0 $ 0
[$ 17,571
waived]
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-121-
<PAGE> 122
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 Total Amount of Total
Amount of Total Shareholder Service Shareholder Service
Total Shareholder Shareholder Service Fee Paid to Bank of Fee Paid to Affiliates
Service Fee Fee Paid to CFG America of Bank of America
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $340,125 $207,752 $0 $ 61,145
- ------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $530,190 $198,585 $0 $253,362
- ------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $517,667 $ 42,808 $0 $333,632
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $284,218 $ 7,186 $0 $198,847
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 2,873 $ 0 $0 $0
[$ 2,873
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 9,721 $ 0 $0 $ 0
[$ 9,721
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 7,757 $ 0 $0 $ 0
[$ 7,757
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ 32,614 $ 0 $0 $ 0
[$ 32,614
waived]
- ------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 4,533 $ 0 $0 $ 0
[$ 4,533
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
Plans, the Distributor provides that a report of the amounts expended under the
Plans, and the purposes
-122-
<PAGE> 123
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 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
-123-
<PAGE> 124
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.
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.
-124-
<PAGE> 125
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 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
-125-
<PAGE> 126
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:
-126-
<PAGE> 127
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Amount of Total Amount of Total
Total Amount of Total Administra- Administra-
Administra- Administra- tive and tive and
tive and tive and Shareholder Service Shareholder Service
Shareholder Service Shareholder Service Fee Paid to Bank of Fee Paid to Affiliates
Fee Fee Paid to CFG America of Bank of America
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $ 138 $0 $0 $0
[$ 138
waived]
- ------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ 0 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ 396 $0 $0 $0
$ 396
[waived]
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 170 $0 $0 $0
$ 170
[waived]
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 116 $0 $0 $0
[$ 116
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 632 $0 $0 $0
[$ 583
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 1506 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $0 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $0 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 148 $0 $0 $0
[$ 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:
-127-
<PAGE> 128
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Amount of Total Amount of Total
Total Distribution Distribu-
Distribution Amount of Total Plan Fee Paid tion Plan Fee Paid to
Plan Distribution to Bank of Affiliates of Bank of
Fee Plan Fee Paid to CFG America America
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $ 121 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond Fund $ 0 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $1,186 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 510 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 0 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $1,242 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $1,000 $1,000 $0 $0
[$499 waived]
- -----------------------------------------------------------------------------------------------------------------------------
Corporate Bond Fund $ 284 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 0 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 0 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
</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 communications to shareholders. The Funds may also include
-128-
<PAGE> 129
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 30-day (or one month)
period by the maximum offering price per
-129-
<PAGE> 130
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 6
Yield = 2 [(----- + 1) - 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
-130-
<PAGE> 131
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
-131-
<PAGE> 132
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%
</TABLE>
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
-132-
<PAGE> 133
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:
-133-
<PAGE> 134
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:
-134-
<PAGE> 135
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Returns
---------------------------------------------------------------------------------------------------
Period from
One-Year Five-Year Ten-Year Commencement of
Period Ended Period Ended Period Ended Operations
February 28, February 28, February 28, through February
1997 1997 1997 28, 1997*
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund 4.21% 7.38% 11.17% 18.37%
---------------------------------------------------------------------------------------------------
Capital Income Fund 13.22% 14.61% N/A 14.29%
(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-Exempt -0.39% 5.81% 5.96% 7.86%
Bond Fund (after fee
waivers)
---------------------------------------------------------------------------------------------------
Intermediate Bond Fund -0.76% N/A N/A 3.39%
---------------------------------------------------------------------------------------------------
Blue Chip Fund 21.29% N/A N/A 19.31%
---------------------------------------------------------------------------------------------------
Asset Allocation Fund 12.35% N/A N/A 12.25%
---------------------------------------------------------------------------------------------------
National Municipal 0.89% N/A N/A 4.38%
Bond Fund (after fee
waivers and expense
reimbursements)
---------------------------------------------------------------------------------------------------
Corporate Bond Fund** -0.56% 6.83% 5.35% 8.38%
---------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* 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
-135-
<PAGE> 136
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>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
------------------------------------------------------------------------------
One-Year Period Five-Year Ten-Year Period Period from
Ended Period Ended Ended Commencement of
February 28, February 28, February 28, Operations through
1997 1997 1997 February 28, 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund 4.21% 42.74% 188.34% 785.02%
- ---------------------------------------------------------------------------------------------------------------
Capital Income Fund 13.22% 97.72% N/A 252.76%
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Securities 0.54% 25.42% N/A 93.64%
Fund
- ---------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond -0.39% 32.64% 78.47% 165.89%
Fund
- ---------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund -0.76% N/A N/A 10.89%
- ---------------------------------------------------------------------------------------------------------------
Blue Chip Fund 21.29% N/A N/A 73.73%
- ---------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 12.35% N/A N/A 43.32%
- ---------------------------------------------------------------------------------------------------------------
National Municipal Bond 0.89% N/A N/A 14.14%
Fund (after fee waivers
and expense reimbursements)
- ---------------------------------------------------------------------------------------------------------------
Corporate Bond Fund** -0.56 39.14% 68.47% 556.10%
- ---------------------------------------------------------------------------------------------------------------
Short-Term Government Fund N/A N/A N/A -1.31%*
- ---------------------------------------------------------------------------------------------------------------
International Equity Fund N/A N/A N/A -5.21%*
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
* Inception dates of the Short-Term Government Fund and International
Equity Fund are August 2, 1996 and May 13, 1996, 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
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<PAGE> 137
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.
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:
<TABLE>
<CAPTION>
--------------------------------------------------------
Average Annual Total Return
- ------------------------------------------------------------------------------------------------------
Period from
One-Year Five-Year Ten-Year Commencement of
Period Ended Period Ended Period Ended Operations**
February 28, February 28, February 28, through February
1997 1997 1997 28, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 8.83% 8.31% 11.65% 18.77%
Fund*
- ------------------------------------------------------------------------------------------------------
Capital Income* Fund 18.14% 15.59% N/A 14.81%
(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-Exempt 4.29% 6.78% 6.46% 8.24%
Bond* Fund (after fee
waivers)
- ------------------------------------------------------------------------------------------------------
Intermediate Bond 3.80% N/A N/A 4.90%
Fund*
- ------------------------------------------------------------------------------------------------------
Blue Chip Fund* 26.84% N/A N/A 21.03%
- ------------------------------------------------------------------------------------------------------
Asset Allocation Fund* 17.57% N/A N/A 13.91%
- ------------------------------------------------------------------------------------------------------
</TABLE>
-137-
<PAGE> 138
<TABLE>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal 5.66% N/A N/A 5.94%
Bond Fund* (after fee
waivers and expense
reimbursements)
- ------------------------------------------------------------------------------------------------------
Corporate Bond Fund*+ 4.03% 7.79% 5.83% 8.59%
- ------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* 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.
** 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.
-138-
<PAGE> 139
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
-----------------------------------------------------------------------------
One-Year Period Five-Year Ten-Year Period Period from
Ended Period Ended Ended Commencement of
February 28, February 28, February 28, Operations through
1997 1997 1997 February 28, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund* 8.83% 49.08% 201.05% 823.75%
- --------------------------------------------------------------------------------------------------------------
Capital Income Fund* 18.14% 106.32 N/A 267.97%
- --------------------------------------------------------------------------------------------------------------
U.S. Government Securities 4.57% 30.49% N/A 101.50%
Fund*
- --------------------------------------------------------------------------------------------------------------
California Tax-Exempt Bond 4.29% 38.83% 86.93% 178.22%
Fund*
- --------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund* 3.80% N/A N/A 15.96%
- --------------------------------------------------------------------------------------------------------------
Blue Chip Fund* 26.84% N/A N/A 81.68%
- --------------------------------------------------------------------------------------------------------------
Asset Allocation Fund* 17.57% N/A N/A 50.02%
- --------------------------------------------------------------------------------------------------------------
National Municipal Bond 5.66% N/A N/A 19.51%
Fund (after fee waivers
and expense
reimbursements)*
- --------------------------------------------------------------------------------------------------------------
Corporate Bond Fund*+ 4.03% 45.52% 76.20% 586.38%
- --------------------------------------------------------------------------------------------------------------
International Equity Fund N/A N/A N/A -1.09%++
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* 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
-139-
<PAGE> 140
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.
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%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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%
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* 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.
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.
-140-
<PAGE> 141
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 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
-141-
<PAGE> 142
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.
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.
-142-
<PAGE> 143
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.
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 National Municipal
Bond Fund, California Tax-Exempt Bond Fund, U.S. Government Securities Fund,
Capital Income Fund and Aggressive Growth Fund) and PFPC (with respect to the
Corporate Bond Fund, International Equity Fund, Short-Term Government Fund,
Asset Allocation Fund, Intermediate Bond Fund and Blue Chip Fund) provide the
Funds with certain accounting services pursuant to Fund Accounting Services
Agreements with Bank of America. Both
-143-
<PAGE> 144
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. The monthly fees charged by The Bank of New
York and PFPC under the Fund Accounting Agreements are borne by the Funds. 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.
Effective October 25, 1997, PFPC Inc., P.O. Box 8968,
Wilmington, Delaware 19899-8968, serves as transfer and dividend disbursing
agent for each class of shares of the Funds, except the SRF shares of the
Intermediate Bond Fund, Blue Chip Fund and Asset Allocation Fund. Effective on
or about November 21, 1997, PFPC Inc. will serve as transfer and dividend
disbursing agent for the Company's SRF shares. Prior to PFPC Inc. becoming the
Company's transfer and dividend disbursing agent, BISYS Fund Services, Inc.,
3435 Stelzer Road, Columbus, Ohio 43219, a wholly owned subsidiary of BISYS,
served as transfer and dividend disbursing agent.
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 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.
-144-
<PAGE> 145
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%); 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
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<PAGE> 146
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 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
-146-
<PAGE> 147
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
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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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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 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,
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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 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 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
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
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"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
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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.
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"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
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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:
<TABLE>
<S> <C>
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
</TABLE>
The bond prices have fallen, and the portfolio has sustained a
loss of $130,312. This would have been the loss incurred without hedging.
However, the Municipal Bond Index also has fallen, and its value stands at
83-27. Suppose now the portfolio manager closes out his or her futures
position by buying back 50 municipal bond index futures contracts at this
price.
The following table provides a summary of transactions and the
results of the hedge.
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
--------------------- ----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset
the loss in the cash market, the $8,437 loss is significantly lower than the
loss which would have been incurred without hedging.
The numbers reflected in this appendix do not take into
account the effect of brokerage fees or taxes.
III. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures
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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).
B-8
<PAGE> 173
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Aggressive Growth Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that
is, market value decreased and a Portfolio had entered into an anticipatory
purchase hedge, or market value increased and a Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
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<PAGE> 174
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Aggressive Growth Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
IV. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Aggressive Growth Fund to hedge against exposure to fluctuations in exchange
rates between the U.S. dollar and other currencies arising from multinational
transactions.
V. MARGIN PAYMENTS
Unlike when a Portfolio purchases or sells a security, no
price is paid or received by the Portfolio upon the purchase or sale of a
futures contract. Initially, the Portfolio will be
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<PAGE> 175
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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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 losses will be
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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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PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
ASSET ALLOCATION FUND
June 24, 1997
(as revised October 28, 1997)
TABLE OF CONTENTS
Page
The Company......................................................... 2
Investment Objectives And Policies.................................. 2
Additional Purchase And Redemption Information...................... 25
Additional Information Concerning Taxes............................. 32
Management.......................................................... 35
General Information................................................. 62
Appendix A.......................................................... A-1
Appendix B.......................................................... B-1
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 Provident Distributors, Inc. ("PDI" or
the "Distributor") at 800-332-3863. Capitalized terms used but not defined
herein have the same meaning as in the Prospectus.
<PAGE> 184
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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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 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
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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 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.
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<PAGE> 187
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.
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
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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.
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
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<PAGE> 189
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-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.
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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 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
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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 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
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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.
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
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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
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
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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 well- conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
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
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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 market, the market may advance and
the value of securities held in the Fund may decline. If this occurred, the Fund
would lose
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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 contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase.
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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.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been
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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.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and
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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. (See the Fund's Prospectus under "Tax
Information.") Proposals to further restrict or eliminate the tax benefits of
municipal
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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 when- issued 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 on the day the Fund agrees to purchase the securities. The Fund does
not earn interest on the securities it has committed to
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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
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 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; 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
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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 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.
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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.
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,
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<PAGE> 205
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
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,
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<PAGE> 206
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).
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
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<PAGE> 207
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.
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
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<PAGE> 208
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 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.
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<PAGE> 209
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 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.
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<PAGE> 210
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. (Effective
October 18, 1997, all such requests should be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968.) 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 Provident Distributors, 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 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.
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<PAGE> 211
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 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.
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<PAGE> 212
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 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
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<PAGE> 213
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 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.
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<PAGE> 214
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent 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.
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
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<PAGE> 215
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 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
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<PAGE> 216
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.
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."
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<PAGE> 217
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:
<TABLE>
<CAPTION>
Position
--------
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Thomas M. Collins 63 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
</TABLE>
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<PAGE> 218
<TABLE>
<CAPTION>
Position
---------
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
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 72 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (regis-
Newport Beach, CA tered investment
92660-2629 advisor) 1991 to date;
Director, FCA Securities,
Inc. (registered
broker/dealer) November
1996 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;
Chairman, TIS Mortgage
Investment Company (real
estate investment trust);
Trustee and a former Vice
Chairman of the Board,
Claremont McKenna College;
Chartered Financial
Analyst.
Robert E. Greeley 65 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,
</TABLE>
-36-
<PAGE> 219
<TABLE>
<CAPTION>
Position
--------
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
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 81 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* 68 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; Director, Farmers
Suite 550 Group, Inc. (insurance
Washington, DC 20005 company) 1991 to date;
Provost, 1982 to January
1993, Senior 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).
Stephen M. Wynne 41 Vice President Executive Vice President
Executive Vice President, and Chief Accounting Officer
PFPC Inc. (since 1993) and Senior Vice
400 Bellevue Parkway President and Chief Account-
Wilmington, DE 19809 ing Officer (1991 to 1993),
PFPC Inc.; Executive Vice
President, PFPC
International (since 1995);
Vice President and Chief
Accounting Officer, PNC
Institutional Management
Corp. (since 1987).
</TABLE>
-37-
<PAGE> 220
<TABLE>
<CAPTION>
Position
--------
Name and Address Age with Company Principal Occupations
- ---------------- --- ------------ ---------------------
<S> <C> <C> <C>
Jay F. Nusblatt 36 Treasurer Vice President and Director
Vice President, of Fund Accounting and
PFPC Inc. Administration, PFPC Inc.
103 Bellevue Parkway (since 1993); formerly
Wilmington, DE 19809 Assistant Vice President,
Fund/Plan Services, Inc.
(1989 to 1993).
Linda L. Kaufmann 36 Assistant Vice President and Director,
Vice President, Treasurer Investment Accounting, PFPC Inc.
PFPC Inc. (since 1996); Senior Manager,
103 Bellevue Parkway Investment Accounting, PFPC, Inc.
Wilmington, DE 19809 (1994-1996); and Manager,
Investment Accounting, PFPC Inc.
(1991-1994)
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
Gary M. Gardner 46 Assistant Chief Counsel-Mutual Funds,
Chief Counsel-Mutual Secretary PNC Bank (since 1994);
Funds, Associate General Counsel,
PNC Bank The Boston Company, Inc.
1600 Market Street, 28th Fl. (1992 to 1994); General
Philadelphia, PA 19103 Counsel, SunAmerica Asset
Management Inc. (1986 to
1992).
J. Robert Dugan 32 Assistant Counsel-Mutual Funds, PNC
Counsel-Mutual Funds, Secretary Bank (since 1993); Associate,
PNC Bank Drinker Biddle & Reath LLP
1600 Market Street, (1990 to 1993).
28th Fl.
Philadelphia, PA 19103
</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
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<PAGE> 221
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 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
-39-
<PAGE> 222
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.
Prior to June 23, 1997, the Fund invested all of its assets in the
Master Portfolio of Master Trust I. Each trustee of Master Trust I 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 Biddle & Reath LLP, of which Mr.
McConnel is a partner, receives legal fees as counsel to Master Trust I.
-40-
<PAGE> 223
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>
- --------------------------------------------------------------------------------------------
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM
AGGREGATE ACCRUED AS ANNUAL REGISTRANT
COMPENSATION PART OF BENEFITS AND FUND
NAME OF PERSON/ FROM THE FUND UPON COMPLEX** PAID
POSITION COMPANY EXPENSES* RETIREMENT TO DIRECTORS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $76,000 $ 14,074 $ 31,293 $86,125
Director
- --------------------------------------------------------------------------------------------
Douglas B. Fletcher $37,000 $ 11,410 $ 24,680 $37,000
Vice Chairman of
the Board
- --------------------------------------------------------------------------------------------
Robert E. Greeley $33,000 $ 8,992 $ 17,905 $51,625
Director
- --------------------------------------------------------------------------------------------
Kermit O. Hanson $35,000 $ 12,664 $ 26,722 $43,000
Director
- --------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $78,500 $ 18,500 $ -- $78,500
Director Emeritus
- --------------------------------------------------------------------------------------------
Cornelius J. Pings $57,000 $ 10,133 $ 22,561 $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 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.
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to the
Company since the commencement of its operations. In the Investment Advisory
Agreement with the Fund, Bank of America has agreed to provide investment
advisory services as described in the Prospectus. Bank of America has also
agreed to pay all expenses incurred by it in connection with its activities
under its agreement other than the cost of securities, including brokerage
commissions, if
-41-
<PAGE> 224
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.
-42-
<PAGE> 225
Additionally, for the fiscal years indicated Bank of America assumed
certain operating expenses of 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 $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, 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
-43-
<PAGE> 226
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 PDI. If current restrictions under the Glass-Steagall Act
preventing a bank from sponsoring, organizing, controlling, or distributing
shares of an investment company were relaxed, the Company expects that Bank of
America would consider the possibility of offering to perform some or all of the
services now provided by PDI. 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
-44-
<PAGE> 227
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 PDI. 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
Bank of America National Trust and Savings Association (the
"Administrator") serves as the Fund's administrator. Prior to September 15,
1997, The BISYS Group, Inc., through its wholly-owned subsidiary BISYS Fund
Services, L.P. ("BISYS"), served as administrator. Their offices are located at
150 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road, Columbus,
Ohio 43219, respectively. Prior to November 1, 1996, Concord Holding
Corporation, an indirect, wholly-owned subsidiary of BISYS served as the Fund's
administrator (the "Concord Holding").
The Fund's administration agreement became effective September 15, 1997
and, unless sooner terminated, will continue in effect until October 31, 1998
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 cause and without payment of any penalty, by vote of a majority of the
Company's Board of Directors or by a vote of a majority of the outstanding
voting securities of the Fund upon 60 days' written notice to the Administrator,
or by the Administrator at any time, without payment of any penalty, upon 90
days' written notice to the Company. The agreement will immediately terminate in
the event of its "assignment."
The Company has agreed to pay the Administrator a fee for its services
as Administrator, computed 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
increases. From time to time, the Administrator may voluntarily waive fees or
reimburse the Fund for expenses. Prior to June 23, 1997, BISYS or Concord
Holding was entitled to receive an administration fee payable at the annual rate
of 0.15% of the
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<PAGE> 228
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, BISYS or Concord
Holding 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
- --------------------------------------------------------------------------------
</TABLE>
- --------------------
1. For the fiscal year ended February 28, 1997, BISYS or Concord Holding
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 Concord Holding waived $65,491
in administration fees with respect to the Master Portfolio.
Additionally, for the fiscal years indicated, BISYS or Concord Holding
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 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, Accounting
Agent 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 their
subcontractors or
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<PAGE> 229
any of their affiliates, SEC fees and state securities registration and
qualification fees, advisory fees, fees payable to shareholder organizations,
fees for special management services, 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,
or any supplement or amendment thereto, necessary for the continued effective
registration of shares under the 1933 Act or state securities laws, costs of
printing and distributing any Prospectus, supplement or amendment thereto for
existing shareholders, cost of shareholders' 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 under the administration agreement.
The Administrator may from time to time employ such person or persons
as it may believe to be particularly fitted to assist in the performance of the
administration agreement; provided, however, that the compensation of such
person or persons shall be paid by the Administrator and the Administrator shall
be as fully responsible to the Company for the acts and omissions of any
subcontractor as it is for its own acts and omissions. PFPC provides the Fund
with certain accounting services pursuant to a separate fund accounting services
agreement with the Administrator. Under the fund accounting services agreement,
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 agreement are borne by the
Fund.
The Administrator has also entered into an agreement with PFPC to
provide certain sub-administration services to the Fund as described in the
Prospectus. The monthly fees charged by PFPC for these services under the
sub-administration agreement are borne by the Administrator.
-47-
<PAGE> 230
DISTRIBUTOR AND PLAN PAYMENTS
Provident Distributors, Inc. acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. Prior to
September 15, 1997, Concord Financial Group, Inc. ("CFG"), a wholly owned
subsidiary of BISYS, acted as distributor for the Fund.
The Distributor has agreed to use its best efforts to effect sales of
shares of the Fund although it is not obliged to sell any certain number of
shares. The distribution agreement became effective September 15, 1997 and,
unless sooner terminated, shall continue in effect with respect to the Fund
until October 31, 1998. Thereafter, if not terminated, the distribution
agreement shall continue automatically for successive terms of one year,
provided that such continuance is specifically approved at least annually by (a)
a vote of a majority of those members of the Board of Directors of the Company
who are not parties to the distribution agreement or "interested persons" of any
such party, cast in person at a meeting called for the purpose of voting on 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 CFG 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
CFG By CFG 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
- --------------------------------------------------------------------------------
</TABLE>
- --------------------
-48-
<PAGE> 231
1. Balance was paid to selling dealers.
The following table shows all sales loads, commissions and other
compensation received by CFG 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
Discounts and and With Fund Other
Commissions(1) Repurchase Transactions Compensation(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset
Allocation
Fund $47,026 $ 0 $ 0 $47,026
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Represents amounts received from front-end sales charge on A Shares.
(2) Represents the total of (i) amounts paid to BISYS or Concord 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 CFG.
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) non-distribution shareholder services provided by the
Distributor to Service Organizations and/or the beneficial owners of Fund
shares, including, but not limited to shareholder servicing provided by the
Distributor at facilities dedicated for Company use, provided such shareholder
servicing is not duplicative of the servicing otherwise provided on behalf of
the Fund, and (b) fees paid to Service Organizations (which may include the
Distributor itself) for the provision of support services for shareholders for
whom the Service Organization is the dealer of record or holder of record or
with whom the Service Organization has a servicing relationship ("Clients").
-49-
<PAGE> 232
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (ii) processing dividend and distribution
payments from the Fund on behalf of Clients; (iii) providing information
periodically to Clients regarding their positions in shares; (iv) arranging for
bank wires; (v) responding to Client inquiries concerning their investments in
Fund shares; (vi) providing the information to the Fund necessary for accounting
or subaccounting; (vii) if required by law, forwarding shareholder
communications from the Fund (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (viii) assisting in processing exchange and redemption requests from
Clients; (ix) assisting Clients in changing dividend options, account
designations and addresses; and (x) providing such other similar services.
The Plan provides that the Distributor is entitled to receive payments
for expenses on a monthly basis, at an annual 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:
-50-
<PAGE> 233
<TABLE>
<CAPTION>
------------------------------------------------------------------
Amount of
Amount of Total
Amount of Total Shareholder
Total Shareholder Service Fee
Total Shareholder Service Fee Paid to
Shareholder Service Fee Paid To Bank Affiliates of
Service Fee Paid To CFG 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:
<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 CFG 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 CFG 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
-51-
<PAGE> 234
addition, the Plan provides that the selection and nomination of the directors
of the Company who are not "interested persons" thereof have been committed to
the discretion of the directors who are neither "interested persons" (as defined
in the 1940 Act) of the Company nor have any direct or indirect financial
interest in the operation of the Plan (or related servicing agreements) (the
"Non-Interested Plan Directors").
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of A Shares. These fees
would be in addition to any amounts which might be received under the Plan.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
The Company's Board of Directors has concluded that the Plan will
benefit the Fund and its A shareholders. The Plan is subject to annual
reapproval by a majority of the Non-Interested Plan Directors and is terminable
at any time with respect to the Fund by a vote of a majority of such Directors
or by vote of the holders of a majority of the A Shares of the Fund. Any
agreement entered into pursuant to the Plan with a Service Organization is
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
-52-
<PAGE> 235
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 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.
-53-
<PAGE> 236
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 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
-54-
<PAGE> 237
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:
<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 CFG 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 CFG 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.
-55-
<PAGE> 238
YIELD AND TOTAL RETURN
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objectives
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of the
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund), as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, Treasury bills and shares of the Fund. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. From time to
time, the investment adviser may enter into alliances with retirement plan
sponsors, including The Legend Group, and the Fund may in its advertisements and
sales 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
-56-
<PAGE> 239
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 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 6
Yield = 2 [(----- + 1) - 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
-57-
<PAGE> 240
assumed that each month contains 30 days. The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) the
Fund may elect either (i) to amortize the discount and premium on the remaining
security, based on the cost of the security, to the weighted average maturity
date, if such information is available, or to the remaining term of the
security, if any, if the weighted average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. The Fund's maximum offering price per
share for purposes of the formula includes the maximum sales load imposed by the
Fund on A Shares -- currently 4.50% of the per share offering price.
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%.
-58-
<PAGE> 241
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 one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of
years.
The Fund computes its aggregate total returns 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
-59-
<PAGE> 242
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.
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
Commencement
One-Year Of Operations(1)
Period Ended Through
February 28, February 28,
1997 1997
- -------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund 12.35% 12.25%
- -------------------------------------------------
</TABLE>
- --------------------
1. The Fund commenced investment operations on January 18, 1994.
<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 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:
-60-
<PAGE> 243
<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%
- -----------------------------------------------
</TABLE>
- ------------------------
* 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>
<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%
- --------------------------------------------------
</TABLE>
- -------------------
* 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.
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.
-61-
<PAGE> 244
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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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 a Fund Accounting Services
Agreement with the Administrator. Both PNC and PFPC, which is located at 103
Bellevue Parkway, Wilmington, Delaware 19809, are wholly owned subsidiaries of
PNC Bancorp., a bank holding company. Under the fund accounting services
agreement, 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 agreement 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.
Effective October 25, 1997, PFPC Inc., P.O. Box 8968, Wilmington,
Delaware 19899-8968 serves as transfer and dividend disbursing agent for the
Fund. Prior thereto, BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219, a wholly owned subsidiary of BISYS, served 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
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counsel to the Company and will pass upon the legality of the shares offered
hereby.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, with offices at 1177 Avenue of the Americas, New
York, New York 10036, has been selected as independent accountants of the Fund
for the fiscal year ended February 28, 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
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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 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
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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 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,
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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%).
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.,
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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 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:
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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 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
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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 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%).
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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 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 market price of 100. Assume these short-term securities are yielding
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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
contractual obligations have
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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 contracts if the
volatility over a particular time period of the
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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 rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
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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 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
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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.
Generally, futures contracts and options on futures contracts held by
the Fund at the close of the Fund's taxable
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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.
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
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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 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
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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.
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PACIFIC HORIZON FUNDS, INC.
PACIFIC HORIZON SHARES,
HORIZON SHARES,
HORIZON SERVICE SHARES, X SHARES AND S SHARES
OF THE
PRIME FUND, TREASURY FUND, GOVERNMENT FUND,
TREASURY ONLY FUND, TAX-EXEMPT MONEY FUND AND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
JUNE 16, 1997
(AS REVISED OCTOBER 28, 1997)
Y SHARES
OF THE
PRIME FUND AND TREASURY FUND
JUNE 29, 1997
(AS REVISED OCTOBER 28, 1997)
STATEMENT OF ADDITIONAL INFORMATION
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . 3
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . . 38
MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . 48
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
YIELD INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
-------------------------
This Statement of Additional Information applies to the
Pacific Horizon Shares, Horizon Shares and Horizon Service Shares of the Prime
Fund, Treasury Fund, Government Fund, Treasury Only Fund, Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund, the X Shares of the Prime Fund,
Treasury Fund and California Tax-Exempt Money Market Fund, the S Shares of the
Prime Fund, Treasury Fund, Tax-Exempt Money Fund and California Tax-Exempt
Money Market Fund and the Y Shares of the Prime Fund and Treasury Fund (each a
"Fund" and collectively the "Funds") of Pacific Horizon Funds, Inc. (the
"Company"). This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses dated June 16, 1997 with respect to the
Horizon and Horizon Shares of the Funds and June 29, 1997 with respect to the Y
Shares of the Prime and Treasury Funds, as the same may from time to time be
revised (individually, a "Prospectus" and collectively, the "Prospectuses"),
and 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 shares of any Fund should be made solely upon the information
contained herein. Copies of the Prospectuses relating to the Company's Pacific
Horizon Shares, Horizon Shares, Horizon Service Shares, X Shares, S Shares and
Y Shares may be obtained by calling Provident Distributors, Inc. ("PDI" or the
"Distributor") at (800) 332-3863. Capitalized terms used but not defined
herein have the same meanings as in the Prospectuses.
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THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation and commenced its public sale of shares (Pacific Horizon Shares) on
March 30, 1984 in each of the Prime Fund and Treasury Fund, which were
originally called "Money Market Portfolio" and "Government Money Market
Portfolio," respectively. On January 19, 1990 the Prime Fund and Treasury Fund
of The Horizon Funds, a Massachusetts business trust (sometimes called the
"Predecessor Prime Fund" and "Predecessor Treasury Fund," respectively), were
combined with the Money Market Portfolio and Government Money Market Portfolio,
respectively, of the Company; the Company changed the names of its resulting
portfolios to "Prime Fund" and "Treasury Fund"; and the Company began offering
Horizon Shares and Horizon Service Shares in such Funds. On January 19, 1990
the Tax-Exempt Money Fund of The Horizon Funds (the "Predecessor Tax-Exempt
Fund") was reorganized as a new portfolio of the Company. Each of these three
Predecessor Funds originally commenced operations on July 10, 1987. The
California Tax-Exempt Money Market Fund, which commenced its initial public
offering of shares on December 6, 1989 by offering a single series of shares
known as Pacific Horizon Shares, began offering Horizon Service Shares on March
1, 1993. As of the date of this Statement of Additional Information, the
Company has classified but not yet offered Horizon Shares of the California
Tax-Exempt Money Market Fund, S Shares of the Treasury Fund, the Tax-Exempt
Money Fund and the California Tax-Exempt Money Market Fund and Y Shares of the
Prime Fund and Treasury Fund. The Government Fund and Treasury Only Fund
commenced operations on June 4, 1990 as separate investment portfolios (the
"Predecessor Government Funds" and "Predecessor Treasury Only Funds,"
respectively) of First Cash Funds of America and First Funds of America, which
were organized as Massachusetts business trusts. On March 1, 1993, the
Predecessor Government Funds and Predecessor Treasury Only Funds were
reorganized as new portfolios of the Company. Prior to this reorganization,
these Predecessor Funds offered and sold shares of beneficial interest that
were similar to the Company's Horizon Service and Pacific Horizon Shares. On
July 22, 1996, the Prime Fund and Treasury Fund began offering X Shares. On
October 2, 1996, the California Tax-Exempt Money Market Fund began offering X
Shares. On April 7, 1997, the Prime Fund began offering S Shares.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment
objective of the Fund to which it applies. The following information
supplements the descriptions of the investment objective and policies in the
Prospectuses for the Funds.
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PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of
Directors, Bank of America National Trust and Savings Association ("Bank of
America") is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities for each Fund. Securities
purchased and sold by each Fund are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. During their
last three fiscal periods, the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund, Tax-Exempt Money Fund and California Tax-Exempt Money
Market Fund did not pay any brokerage commissions. The cost of securities
purchased by the Funds from underwriters generally includes an underwriting
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or
dealers, it is the Company's policy to seek the best overall terms available.
The investment advisory agreement between the Company and Bank of America
provides that, in assessing the best overall terms available for any
transaction, Bank of America shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, the investment advisory agreement
authorizes Bank of America, subject to the approval of the Company's Board of
Directors, to cause the Company to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that such commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of Bank of America to the
particular Fund and the Company. Brokerage and research services may include:
(1) advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities, and (2) analyses and reports concerning
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts.
The Directors will periodically review the commissions paid by
the Company to consider whether the commissions, if any, paid over
representative periods of time appear to be reasonable in relation to the
benefits inuring to the Company. It is possible that certain of the
supplementary research or other services received will primarily benefit one or
more other
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investment companies or other accounts for which investment discretion is
exercised. Conversely, the Company or any given Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other accounts or investment companies.
Brokerage or research services so received are in addition to
and not in lieu of services required to be performed by Bank of America and do
not reduce the advisory fee payable to Bank of America by the Company. Such
services may be useful to Bank of America in serving both the Company and other
clients and, conversely, supplemental information obtained by the placement of
business of other clients may be useful to Bank of America in carrying out its
obligations to the Company. The Company will not acquire certificates of
deposit or other securities issued by Bank of America or its affiliates, and
will give no preference to certificates of deposit or other securities issued
by Shareholder Service or Distribution Organizations (as defined below). In
addition, portfolio securities in general will be purchased from and sold to
Bank of America, PDI and their affiliates acting as principal underwriter,
syndicate member, market-maker, dealer, broker or in any other 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 Fund's annual portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the Fund's portfolio securities. The
calculation excludes all securities the maturities of which at the time of
acquisition were thirteen months or less. There is not expected to be any
portfolio turnover for the Funds for regulatory reporting purposes.
A Fund may participate, if and when practicable, in bidding
for the purchase of securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
Any such Fund will engage in this practice only when Bank of America, in its
sole discretion, subject to guidelines adopted by the Board of Directors,
believes such practice to be in the Fund's interest.
Subsequent to its purchase by a Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The Board of Directors or Bank of America,
pursuant to guidelines established by the Board, will promptly consider such an
event in determining whether the Fund involved should continue to hold the
obligation, but will only continue to hold the obligation if retention is in
accordance with the interests of the Fund and
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applicable regulations of the SEC. In addition, it is possible that
unregistered securities purchased by a Fund in reliance upon Rule 144A under
the Securities Act of 1933 (the "1933 Act") could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a period, uninterested in purchasing these securities.
To the extent permitted by law, Bank of America may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents held by the Company 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 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
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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 debt 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. and Paine Webber are considered to be regular
brokers and dealers of the Company.
PORTFOLIO INSTRUMENTS
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, COMMERCIAL
PAPER AND SHORT-TERM NOTES. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specific return. Bankers' acceptances are
negotiable deposits or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank
(meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument at maturity). Certificates of deposit and bankers'
acceptances acquired by a Fund will be dollar-denominated obligations of
domestic or foreign banks having total assets at the time of purchase
(including assets of both domestic and foreign branches) in excess of $2.5
billion. Commercial paper consists of unsecured promissory notes issued by
corporations. Short-term notes acquired by a Fund may be issued by commercial
or investment banking firms, financing companies or industrial or manufacturing
concerns. Commercial paper and short-term notes, except for variable and
floating rate instruments, will normally have maturities of nine months or less
and fixed rates of return, although such instruments may have maturities of up
to thirteen months. Commercial paper and short-term notes will consist of
issues which, with respect to the Prime, Treasury and Tax-Exempt Money Funds
are "First Tier Securities" as defined by the SEC and, with respect to the
California Tax-Exempt Money Market Fund are "Eligible Securities" as defined by
the SEC. During temporary defensive periods or if in the investment adviser's
opinion suitable First Tier Securities are not available for investment, the
Tax-Exempt Money Fund may also acquire "Eligible Securities" as defined by the
SEC. First Tier Securities consist of instruments that are either rated at the
time of purchase in the top rating category
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by one or more unaffiliated nationally recognized statistical rating
organizations ("NRSROs") or issued by issuers with such ratings. Eligible
Securities consist of instruments that are either rated at the time of purchase
in the top two rating categories by one or more unaffiliated NRSROs or issued
by issuers with such ratings. See the Appendix to this statement of additional
information for a description of the applicable NRSRO ratings. Unrated
instruments (including instruments with long-term but no short-term ratings)
purchased by a Fund will be of comparable quality as determined by Bank of
America pursuant to guidelines approved by the Board of Directors and Bank of
America.
Holding Euro CDs, Yankee CDs, Yankee BAs, Yankee Euros,
commercial paper or other obligations of foreign issuers may subject a Fund to
investment risks that are different in some respects from those incurred by a
Fund which invests only in obligations of domestic issuers. Such risks include
future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which
may be made and interest rates which may be charged. In addition, the
profitability of the banking industry is dependent largely upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well
as exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels
of reserves, limited in the amount which they can loan to a single borrower,
and subject to other regulations designed to promote financial soundness.
However, such laws and regulations do not necessarily apply to the Euro CDs,
Yankee CDs, Yankee BAs, Yankee Euros and other foreign bank obligations that a
Fund may acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S.
Government and its agencies and instrumentalities include Treasury bills,
certificates of indebtedness, notes and bonds, Treasury strips, and issues of
such entities as the Federal Home Loan Banks, Federal Land Banks, Federal
Housing Administration,
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Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, Resolution Funding Corporation,
Tennessee Valley Authority and Federal National Mortgage Association. The
Prime, Treasury, Tax-Exempt Money and California Tax-Exempt Money Market Funds
will not acquire obligations issued by the International Bank for
Reconstruction and Development, the Asian Development Bank or the
Inter-American Development Bank; however, the Government and Treasury Only
Funds may acquire such obligations in accordance with their investment
policies.
Government National Mortgage Association ("GNMA") certificates
are U.S. Government agency mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans, issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations, are
either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. A "pool" or group of such mortgages is assembled and,
after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal
on each mortgage is guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. GNMA certificates differ from bonds in that principal
is paid back monthly by the borrower over the term of the loan rather than
returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
In addition to GNMA certificates, mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC") may also be acquired. Securities issued and
guaranteed by FNMA and FHLMC are not backed by the full faith and credit of the
United States. If either fixed or variable rate pass-through securities issued
by the U.S. Government or its agencies or instrumentalities are developed in
the future, the Prime, Government, Tax-Exempt Money and California Tax-Exempt
Money Market Funds reserve the right to invest in them, after making
appropriate disclosure to investors. Certain securities issued by all
governmental agencies may be prepaid. Prepayment of mortgages underlying most
mortgage-backed securities may reduce their current yield and total return.
During periods of declining interest rates, such prepayments can be expected to
accelerate and the Funds would be required to reinvest the proceeds at the
lower interest rates then available.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may acquire
variable and floating rate instruments as described in
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their Prospectuses. Variable and floating rate instruments are frequently not
rated by credit rating agencies; however, unrated variable and floating rate
instruments purchased by a Fund will be determined by the investment adviser
under guidelines established by the Company's Board of Directors to be of
comparable quality at the time of purchase to rated instruments eligible for
purchase by such Fund. In making such determinations, the investment adviser
will consider the earning power, cash flows and other liquidity ratios of the
issuers of such instruments (such issuers include financial, merchandising,
bank holding and other companies) and will continuously monitor their financial
condition. There may not be an active secondary market with respect to a
particular variable or floating rate instrument purchased by a Fund. The
absence of such an active secondary market could make it difficult for a Fund
to dispose of the variable or floating rate instrument involved. In the event
the issuer of the instrument defaulted on its payment obligations, the Fund
involved could, for this or other reasons, suffer a loss to the extent of the
default. Variable and floating rate instruments may be secured by bank letters
of credit and may have maturities of more than thirteen months. In determining
a Fund's average weighted maturity and whether a variable or floating rate
instrument has a remaining maturity of thirteen months or less, each variable
rate instrument having a demand feature that entitles the Fund to receive the
principal amount thereof at any time, or at specified intervals not exceeding
thirteen months, in each case on not more than thirty days' notice, shall be
deemed by the Company to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period remaining until
the principal amount can be recovered through demand; each variable rate
instrument not having such a demand feature but having a stated maturity of
thirteen months or less or issued or guaranteed by the U.S. Government or its
agencies will be deemed to have a maturity equal to the period remaining until
the next interest rate adjustment; each floating rate instrument having a
demand feature that entitles the Fund to receive the principal amount thereof
at any time, or at specified intervals not exceeding thirteen months, in each
case on not more than thirty days' notice, shall be deemed to have a maturity
equal to the period of time remaining until the principal amount owed can be
recovered through demand. Variable and floating rate instruments which are not
payable upon seven days' notice and which do not have an active trading market
are considered illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch
Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA
Limited and IBCA Inc. ("IBCA") represent their opinions as to the quality
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of debt securities. However, ratings are general and are not absolute
standards of quality, and debt securities with the same maturity, interest rate
and rating may have different yields while debt securities of the same maturity
and interest rate with different ratings may have the same yield.
An issuer's obligations under its debt securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code and laws which
may be enacted by federal or state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or, in the case of governmental entities, upon
the ability of such entities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on, and principal of, its
debt securities may be materially adversely affected by litigation or other
conditions.
MUNICIPAL SECURITIES. Substantially all of the assets of the
Tax-Exempt Money Fund and primarily all of the assets of the California
Tax-Exempt Money Market Fund are invested in "Municipal Securities" (securities
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their political subdivisions, authorities,
agencies and instrumentalities, the interest on which is exempt from regular
Federal income tax in the opinion of bond counselor to the issuer). The
Tax-Exempt Money Fund may concentrate more than 25% of its assets in California
Municipal Securities and the California Tax-Exempt Money Market Fund intends
that under normal market conditions at least 80% of its net assets will be
invested in California Municipal Securities. Although the Prime Fund is also
authorized to invest in Municipal Securities under certain circumstances, no
more than 5% of the value of such Fund's net assets will be so invested at any
one time. (The purchase of Municipal Securities by the Prime Fund may be
advantageous when, as a result of prevailing economic, regulatory or other
circumstances, the yield on such securities, on a pre-tax basis, is comparable
to that of other short-term money market instruments that the Fund may
purchase. Dividends paid by the Prime Fund that are derived from interest on
Municipal Securities would be taxable to the Fund's shareholders for federal
income tax purposes.)
Municipal Securities include debt obligations issued by
governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. In addition certain
types of private activity bonds are issued by or on behalf of public
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authorities to finance various privately-operated facilities. Municipal
Securities also include short-term tax anticipation notes, bond anticipation
notes, revenue anticipation notes and other forms of short-term loan
obligations. Such notes are issued with a short-term maturity in anticipation
of the receipt of tax funds, the proceeds of bond placements or other revenues.
There are variations in the quality of Municipal Securities
between classifications (such as general obligation, revenue and moral
obligation issues) and within a particular classification, and the yields on
Municipal Securities depend upon a variety of factors, including general money
market conditions, the financial condition of the issuer, general conditions of
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. It should also be noted, with
respect to all Municipal Securities issued after August 15, 1986 (August 31,
1986 in the case of certain bonds), that the issuer must comply with certain
rules formerly applicable only to "industrial development bonds" which, if the
issuer fails to observe them, could cause interest on the Municipal Securities
to become taxable retroactive to the date of issue.
The payment of principal and interest on most Municipal
Securities purchased by the Funds will depend upon the ability of the issuers
to meet their obligations. The District of Columbia, each state, each of their
political subdivisions, agencies, instrumentalities and authorities and each
multi-state agency of which a state is a member is a separate "issuer" as that
term is used in this Statement of Additional Information and the Prospectuses.
The non-governmental user of facilities financed by private activity bonds is
also considered to be an "issuer."
From time to time proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to
federal tax legislation passed in 1986, interest on certain private activity
bonds must be included in an investor's federal alternative minimum taxable
income, and corporate investors must include all tax-exempt interest in their
federal alternative minimum taxable income. (See the relevant Funds'
Prospectuses under "Dividends, Distributions and Taxes.") The Funds cannot
predict what legislation, if any, may be proposed in Congress or in the
California legislature in the future as regards the federal and California
state personal income tax status of interest on Municipal Securities in
general, or California Municipal Securities in particular, or which proposals,
if any, might be enacted. Such proposals, if enacted, might materially
adversely affect the availability of Municipal Securities (and California
Municipal Securities) for investment by the Tax-Exempt Money Fund
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and the California Tax-Exempt Money Market Fund and the liquidity and value of
such Funds' portfolios. In such an event the Board of Directors would
reevaluate the Funds' investment objectives and policies and consider changes
in their structure or possible dissolution.
REPURCHASE AGREEMENTS. Each Fund, except the Treasury Only
Fund, may enter into repurchase agreements with respect to their portfolio
securities as indicated in their Prospectuses. Pursuant to such agreements, a
Fund purchases securities from financial institutions such as banks and
broker-dealers which are deemed to be creditworthy by the investment adviser
under guidelines approved by the Board of Directors, subject to the seller's
agreement to repurchase and the Fund's agreement to resell such securities at a
specified date and price. No Fund will enter into repurchase agreements with
Bank of America or Bank of America's affiliates, nor will any Fund give
preference to repurchase agreements with Distribution Organizations (as defined
below), Shareholder Organizations or Service Organizations. The repurchase
price generally equals the price paid by the Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the underlying portfolio security). Securities subject to repurchase
agreements will be held by the Funds' custodian or a sub-custodian or in the
Federal Reserve/Treasury book-entry system, and a Fund will make payment for
such securities only upon receipt of evidence of physical delivery of the
securities or of such book entry. The seller under a repurchase agreement will
be required to deliver instruments the value of which is 102% of the repurchase
price (excluding accrued interest), provided that notwithstanding such
requirement, the 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 accrued resale premium) provided in the agreement. The accrued
resale premium shall be the amount specified in the repurchase agreement or the
daily amortization of the difference between the purchase price and the resale
price specified in the repurchase agreement. If the seller defaulted on its
repurchase obligation, the Fund holding the repurchase agreement would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
were less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the particular Fund's rights
with respect to such securities to be delayed or limited. Repurchase
agreements are considered to be loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The Funds may also enter into
reverse repurchase agreements with respect to their securities. Whenever a
Fund enters into a reverse repurchase agreement, it will place in a segregated
account maintained with
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its custodian cash, U.S. Government securities and other liquid high-grade debt
securities having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account for maintenance of such
equivalent value. Reverse repurchase agreements are considered to be
borrowings by a Fund under the Investment Company Act of 1940.
INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The Funds may purchase securities on a "when-issued," "forward
commitment" or "delayed" settlement basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). When a Fund agrees to purchase
securities on a when-issued, forward commitment or delayed settlement basis,
its custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case a Fund may be required subsequently to place additional assets (cash or
liquid securities) in the separate account so that the value of the account
remains equal to the amount of such Fund's commitment. The Funds do not intend
to engage in these transactions for speculative purposes but only in
furtherance of their investment objectives. Because a Fund will set aside cash
or liquid investments to satisfy its purchase commitments in the manner
described, the Fund's liquidity and the ability of the investment adviser to
manage it may be affected in the event the Fund's forward commitments,
commitments to purchase when-issued securities and delayed settlements ever
exceeded 25% of the value of its assets.
A Fund will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing
the transaction. If deemed advisable as a matter of investment strategy,
however, a Fund may dispose of or renegotiate a commitment after it is entered
into, and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In these cases
the Fund may realize a taxable capital gain or loss.
When a Fund engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Fund's incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued
purchase, a forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account
when determining the market
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value of a Fund starting on the day the Fund agrees to purchase the securities.
The Fund does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date.
STAND-BY COMMITMENTS. The Tax-Exempt Money Fund and
California Tax-Exempt Money Market 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 a Fund, at the Fund's
option, specified Municipal Securities at a specified price.
The amount payable to the Tax-Exempt Money Fund or the
California Tax-Exempt Money Market Fund upon its exercise of a "stand-by
commitment" is normally the amortized cost of the underlying instruments plus
accrued interest, if any. "Stand-by commitments" can be acquired when the
remaining maturity of the underlying Municipal Securities is not greater than
thirteen months, and are exercisable by a Fund at any time before the maturity
of such obligations. In determining net asset value, a Fund values Municipal
Securities on the basis of amortized cost without reference to the presence of
the "stand-by commitment," as described below. A "stand-by commitment" may be
sold, transferred or assigned by a Fund only with the instrument involved.
The Tax-Exempt Money Fund and California Tax-Exempt Money
Market Fund expect that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held by a Fund will not exceed
1/2 of 1% of the value of its total assets calculated immediately after each
"stand-by commitment" is acquired.
The Tax-Exempt Money Fund and California Tax-Exempt Money
Market Fund intend to enter into "stand-by commitments" only with dealers,
banks and broker-dealers which, in the investment adviser's opinion, present
minimal credit risks. A Fund's reliance upon the credit of these dealers,
banks and broker-dealers is secured by the value of the underlying Municipal
Securities that are subject to a commitment.
The Tax-Exempt Money Fund or California Tax-Exempt Money
Market Fund would acquire "stand-by commitments" solely to facilitate portfolio
liquidity and do not intend to exercise their rights thereunder for trading
purposes. The acquisition of
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a "stand-by commitment" would not affect the valuation or assumed maturity of
the underlying Municipal Securities, which would continue to be valued at
amortized cost in accordance with the ordinary method of valuation employed by
a Fund. "Stand-by commitments" which would be acquired by a Fund would be
valued at zero in determining net asset value. Where a Fund 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 Fund. "Stand-by commitments" would not affect a
Fund's average weighted maturity.
LOANS OF SECURITIES. The Prime Fund, Government Fund and
Treasury Only Fund may lend their securities to brokers, dealers and financial
institutions, provided (1) the loan is secured continuously by collateral
consisting of U.S. Government securities (U.S. Treasury securities with respect
to the Treasury Only Fund) or cash or letters of credit which is marked to the
market daily to ensure that each loan is fully collateralized at all times; (2)
the Fund involved may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Fund will receive any
interest or dividends paid on the securities loaned; and (4) the aggregate
market value of securities loaned will not at any time exceed 30% of the total
assets of the Fund (33 1/3% with respect to the Treasury Only Fund).
A Fund will earn income for lending its securities because
cash collateral pursuant to these loans will be invested in short term money
market instruments. In connection with lending securities, a Fund may pay
reasonable finders, administrative and custodial fees. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral.
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include
bank certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by a
fund of the Company. The Fund may also invest in securities, interests or
obligations of companies or entities which have a deposit, loan, commercial
banking or other business relationship with Bank of America or any of its
affiliates (including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities purchased by a fund of the
Company).
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SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive description of all
relevant facts. Although the Company has no reason to believe that the
information summarized herein is not correct in all material respects, this
information has not been independently verified for accuracy or thoroughness by
the Company. Rather, the information presented herein has been culled from
official statements and prospectuses issued in connection with various
securities offerings of the State of California and local agencies in
California, available as of the date of this Statement of Additional
Information. Further, the estimates and projections presented herein should
not be construed as statements of fact. They are based upon assumptions which
may be affected by numerous factors and there can be no assurance that target
levels will be achieved.
ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1996-97. By the close of the 1989-90
Fiscal Year, California's revenues had fallen below 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
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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 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
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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), 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.
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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.
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
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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 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
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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, 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.
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.
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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 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
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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.
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.
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Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights
under the power of sale contained in the mortgage or deed of trust are subject
to the constraints imposed by California law upon transfers of title to real
property by private power of sale. During the three-month period beginning
with the filing of a formal notice of default, the debtor is entitled to
reinstate the mortgage by making any overdue payments. Under standard loan
servicing procedures, the filing of the formal notice of default does not occur
unless at least three full monthly payments have become due and remain unpaid.
The power of sale is exercised by posting and publishing a notice of sale for
at least 20 days after expiration of the three-month reinstatement period. The
debtor may reinstate the mortgage, in the manner described above, up to five
business days prior to the scheduled sale date. Therefore, the effective
minimum period for foreclosing on a mortgage could be in excess of seven months
after the initial default. Such time delays in collections could disrupt the
flow of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold
that the private-right-of-sale proceedings violate the due process requirements
of the Federal or State Constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.
Certain 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
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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 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
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"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 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
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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 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;
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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 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
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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, 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
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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 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
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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 Money Market 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 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
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California Tax-Exempt Money Market Fund's total assets in California Municipal
Securities at the close of each quarter of the California Tax-Exempt Money
Market 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.
INVESTMENT LIMITATIONS
The Prospectuses for each Fund (except the Government Fund and
the Treasury Only Fund) set forth certain fundamental policies that may not be
changed with respect to such Fund without the affirmative vote of the holders
of the majority of the Fund's outstanding shares (as defined below under
"Miscellaneous"). Similarly, the following enumerated additional fundamental
policies may not be changed with respect to a Fund without such a vote of
shareholders.
THE PRIME FUND MAY NOT:
1. Purchase securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if immediately thereafter more than 15% of its total assets
would be invested in certificates of deposit or bankers' acceptances of any one
bank, or more than 5% of its total assets would be invested in other securities
of any one bank or the securities of any other issuer (except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
In accordance with current regulations of the SEC,
the Prime Fund presently will limit its investments in the securities of any
single issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) to not more than 5% of the
Fund's total assets at the time of purchase, provided that the Fund may invest
up to 25% of its total assets in the securities of any one issuer for a period
that does not exceed three business days. This intention is not, however, a
fundamental policy of the Fund.
THE TREASURY FUND MAY NOT:
1. Concentrate its investments in any particular
industry (excluding obligations of the U.S. Government, obligations of domestic
banks, and repurchase agreements), but if it is deemed appropriate for the
achievement of its investment objective, up to 25% of the assets of the Fund
(taken at market value at the time of each investment) may be invested in any
one industry; provided, that nothing in this investment restriction shall
affect the Fund's ability to invest a portion or all of its
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assets in a corresponding investment company with the same investment objective
and policies.
THE PRIME FUND, TREASURY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND MAY
NOT:
1. Purchase or sell real estate (however, a Fund may, to
the extent appropriate to its investment objective, purchase securities issued
by companies investing in real estate or interests therein and the California
Tax-Exempt Money Market Fund may purchase Municipal Securities secured by real
estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of
exercising control.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets.
6. Make loans except that (i) a Fund may purchase or
hold debt instruments and enter into repurchase agreements pursuant to its
investment objective and policies, and (ii) the Prime Fund may lend portfolio
securities.
NEITHER THE GOVERNMENT FUND NOR THE TREASURY ONLY FUND MAY:
1. Purchase any security or evidence of interest therein
on margin, except that a Fund may obtain such short term credit as may be
necessary for the clearance of purchases and sales of securities.
2. Underwrite securities issued by other persons, except
that all of the assets of a Fund may be invested in a corresponding investment
company with the same investment objective and policies and except insofar as a
Fund may technically be deemed an underwriter under the 1933 Act in selling a
security.
3. Make loans to other persons except (a) through the
lending of securities held by a Fund, (b) through the use of fixed time
deposits or repurchase agreements or the purchase of short term obligations, or
(c) by purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions; for purposes of this
investment restriction the purchase of short-term commercial
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paper or a portion of an issue of debt securities which are part of an issue to
the public shall not be considered the making of a loan.
4. Purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (each Fund reserves the
freedom of action to hold and to sell real estate acquired as a result of the
ownership of securities by such Fund).
5. Issue any senior security (as that term is defined in
the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or
the rules and regulations promulgated thereunder, except as appropriate to
evidence a debt incurred without violating Investment Restriction No. 2 as
stated in the Funds' Prospectus regarding borrowing.
6. Concentrate its investments in any particular
industry (excluding obligations of the U.S. Government, obligations of domestic
banks, and repurchase agreements), but if it is deemed appropriate for the
achievement of its investment objective, up to 25% of the assets of the Fund
(taken at market value at the time of each investment) may be invested in any
one industry; provided, that nothing in this investment restriction shall
affect the Fund's ability to invest a portion or all of its assets in a
corresponding investment company with the same investment objective and
policies.
THE TAX-EXEMPT MONEY 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. For purposes
of this limitation and the Fund's policy on concentration of investments set
forth in the Prospectus, a governmental agency, authority, instrumentality or
other political subdivision is deemed to be an issuer, separate from the
government creating such subdivision, if the security issued by such
subdivision is backed only by the assets and revenues of the subdivision, and a
guarantee of a security is not deemed to be a security issued by the guarantor,
provided that no more than 10% of the value of the Fund's total assets is
invested in securities issued or guaranteed by such guarantor.
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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 the Fund
may, to the extent appropriate to its investment objective, invest in
securities issued by companies which invest in real estate or interests
therein.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof.
6. Purchase or sell commodities or 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,
invest in securities issued by companies which purchase or sell commodities or
commodity contracts or which invest in such programs.
7. Purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization.
8. Make loans, except that the Fund may purchase or hold
debt obligations in accordance with its investment objective, policies and
limitations, and may enter into repurchase agreements with respect to
securities.
9. 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 Municipal Securities or obligations
issued or guaranteed by the Federal Government and its agencies and
instrumentalities; (b) although there is no limitation with respect to
investments in certificates of deposit and bankers' acceptances issued by
domestic branches of United States banks, no more than 10% of the total value
of the Fund's assets at the time of purchase may be invested in certificates of
deposit and bankers' acceptances issued by domestic branches of foreign banks
and no more than 25% of the total value of the Fund's assets at the time of
purchase may be invested in certificates of deposit and bankers' acceptances
issued by domestic branches of foreign banks and foreign branches of domestic
banks; (c) each utility service (such as gas, gas transmission, electric and
telephone service) will be considered a single industry for purposes of
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this policy; and (d) 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.
THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND MAY NOT:
1. 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.
2. 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).
3. Purchase securities while its borrowings (including
reverse repurchase agreements) are outstanding.
4. 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.
5. Purchase any securities which would cause 25% or more
of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that this limitation shall not apply
to Municipal Securities or governmental guarantees of Municipal Securities; and
provided, further, that for the purpose of this limitation only, industrial
development bonds that are backed only by the assets and revenues of a
non-governmental user shall not be deemed to be Municipal Securities.
* * *
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For purposes of Investment Limitation Paragraph 1 relating to
the Prime Fund in this Statement of Additional Information, Investment
Limitation Paragraph 6 relating to the Government Fund and Treasury Only Fund in
this Statement of Additional Information, Investment Limitation Paragraph 9
relating to the Tax-Exempt Money Fund in this Statement of Additional
Information and Investment Limitation Paragraph 5 relating to the California
Tax-Exempt Money Market Fund only in this Statement of Additional Information,
these
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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.
For purposes of Investment Limitation Paragraph 6 of this
Statement of Additional Information with respect to the Prime Fund, Treasury
Fund, and California Tax-Exempt Money Market Fund, Investment Limitation
Paragraph 3 of this Statement of Additional Information with respect to the
Government Fund and Treasury Only Fund and Investment Limitation Paragraph 8
of this Statement of Additional Information with respect to the Tax-Exempt
Money Fund, the Funds may hold debt instruments whether such instruments are
part of a public offering or privately negotiated.
PURCHASE AND REDEMPTION OF SHARES
IN GENERAL
The Company or its transfer agent may require any information
reasonably necessary to evidence that a redemption has been duly authorized.
Under the 1940 Act any of the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed (other than customary weekend and holiday
closings), during which trading on such Exchange is restricted, during which an
emergency exists (as determined by the SEC by rule or regulation) as a result
of which disposal or valuation of portfolio securities is not reasonably
practicable or for such other periods as the SEC may permit. A Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.
In addition a Fund may redeem shares involuntarily in certain
instances if such redemption is appropriate to carry out the Company's
responsibilities under the 1940 Act. If the Board of Directors determines that
conditions exist which make payment of redemption proceeds wholly in cash
unwise or undesirable, a Fund may make payment wholly or partly in
readily-marketable securities or other property. In such an event a
shareholder would incur transaction costs in selling the securities or other
property. See "Net Asset Value" below for an example of when such form of
payment might be appropriate. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the Company's net asset value at the beginning of such
period.
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Any institution purchasing shares on behalf of separate
accounts will be required to hold the shares in a single nominee name (a
"Master Account"). Institutions investing in more than one Fund offered by the
Company must maintain a separate Master Account for each Fund. Institutions
may arrange with the Funds' transfer agent for certain sub-accounting services
(such as purchase, redemption and dividend record keeping).
NATIONAL BANKING REGULATIONS
The Comptroller of the Currency has ruled that a national bank
may invest in shares of an investment company to the extent that the portfolio
of such company consists of investments in which the bank might invest
directly. As a national bank could invest directly without limitation in
general obligations of the U.S. Treasury and the portfolios of the Treasury
Fund and Treasury Only Fund are limited to such investments, national banks may
acquire shares of the Treasury Fund and Treasury Only Fund without limitation.
In addition, the regulations of the Comptroller of the
Currency provide that funds held in a fiduciary capacity by a national bank
approved by the Comptroller to exercise fiduciary powers must be invested in
accordance with the instrument establishing the fiduciary relationship and
local law. In the opinion of the Company's counsel, the purchase of shares of
the Funds by such national banks acting on behalf of their fiduciary accounts
is not contrary to applicable regulations if consistent with the particular
account and proper under the law governing the administration of the account.
Prospective investors should consult their advisers regarding the law
applicable to their purchase of shares.
NET ASSET VALUE
IN GENERAL. Each class's net asset value per share is
calculated by dividing the total value of the assets attributable to the class,
less the value of any liabilities applicable to the class, by the total number
of outstanding shares of that class. Each class's net asset value is
calculated separately from each of the other of the Company's class's net asset
value. "Assets belonging to" a Fund consist of the consideration received upon
the issuance of shares representing interests in the Fund together with all
income, earnings, profits and proceeds derived from the investment thereof, any
proceeds from the sale, exchange or liquidation of such investments, any funds
or payments derived from any re-investment of such proceeds, and a portion of
any general assets of the Company not belonging to a particular Fund. Each
Fund is charged with the direct expenses of that Fund and with a share of the
general expenses of the Company. The determinations by the Board of Directors
as to direct and
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allocable expenses and the allocable portion of general assets with respect to
the various portfolios are conclusive. The expenses that are charged to a Fund
are borne equally by each share of the Fund except for payments to Shareholder
Organizations that are borne solely by Horizon Service Shares and certain
payments to Distribution or Service Organizations, including Bank of America
and BA Investment Services, Inc. ("BAIS"), that are borne solely by Pacific
Horizon Shares, X Shares, Y Shares and S Shares and Rule 12b-1 fees that are
borne solely by X Shares, Y Shares and S Shares of the Funds, as described in
the Prospectuses for such Shares.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent is a day on which both the
Funds' custodian and the New York Stock Exchange are open for trading, except a
"business day" does not include Martin Luther King, Jr. Day, Columbus Day or
Veteran's Day. In 1997 the holidays on which the New York Stock Exchange is
closed are: New Year's Day, President's Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
AMORTIZED COST METHOD. The Funds use the amortized cost
method of valuation in computing the net asset value of their shares for
purposes of sales and redemptions. Under this method a Fund values each of its
portfolio securities at cost on the date of purchase and thereafter assumes a
constant proportionate amortization of any discount or premium until maturity
of the security. As a result the value of a portfolio security for purposes of
determining net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method seems to provide certainty in
portfolio valuation it may result in periods during which values, as determined
by amortized cost, are higher or lower than the amount such Fund would receive
if it sold its portfolio securities. The market value of the securities in the
Funds can be expected to vary inversely with changes in prevailing interest
rates. Thus, if interest rates have increased from the time a security was
purchased, such security, if sold, might be sold at a price less than its
amortized cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price
greater than its amortized cost. In either instance, if the security is held
to maturity, no gain or loss will be realized.
In connection with their use of amortized cost valuation, the
Funds limit the dollar-weighted average maturity of their portfolios to not
more than 90 days and do not purchase any instrument with a remaining maturity
of greater than 397 calendar days, except for certain qualifying variable or
floating rate instruments whose maturities may be longer. The Company's
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Board of Directors has also established, pursuant to rules promulgated by the
SEC, procedures that are intended to stabilize each Fund's net asset value per
share for purposes of sales and redemptions at $1.00. Such procedures include
the determination, at such intervals as the Board deems appropriate, of the
extent, if any, to which a Fund's net asset value per share calculated by using
available market quotations deviates from $1.00 per share. In the event such
deviation exceeds 1/2 of 1% the Board will promptly consider what action, if
any, should be initiated. If the Board believes that the amount of any
deviation may result in material dilution or other unfair results to investors
or existing shareholders, it will take such steps as it considers appropriate
to eliminate or reduce to the extent reasonably practicable any such dilution
or unfair results. These steps may include selling portfolio instruments prior
to maturity, shortening a Fund's average portfolio maturity, withholding or
reducing dividends, reducing the number of a Fund's outstanding shares without
monetary consideration or determining net asset value per share by using
available market quotations. If a Fund reduces the number of its outstanding
shares without monetary consideration it will mail written notice to
shareholders at least three business days before the redemption and in the
notice will state the reason for the redemption and the fact that the
redemption may result in a capital loss to shareholders.
The Funds' administrator may use a pricing service to value
certain portfolio securities where the prices provided are believed by the
administrator pursuant to guidelines adopted by the Board of Directors to
reflect the fair value of such securities. In valuing a Fund's securities, the
pricing service would normally take into consideration such factors as yield,
risk, quality, maturity, type of issue, trading characteristics, special
circumstances and other factors it deems relevant in determining valuations for
normal institutional-sized trading units of debt securities and would not rely
on quoted prices. The methods used by the pricing service and the valuations
so established will be utilized under the general supervision of the Company's
Board of Directors. Additionally, in determining market-based net asset value
per share all portfolio securities for which market quotations (or appropriate
substitutes that reflect current market conditions) are not readily available
shall be valued at their fair value as determined by the valuation committee in
accordance with procedures established by the Board of Directors.
SUPPLEMENTARY PURCHASE INFORMATION: PACIFIC HORIZON SHARES
Initial purchases of Pacific Horizon Shares into a new account
may not be made by wire. However, persons wishing to make a subsequent
purchase of Pacific Horizon Shares into an already existing account by wire
should telephone the Transfer
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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.
Shares may be purchased in connection with IRAs 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. The Transfer Agent may charge a fee to act as custodian for IRAs,
payment of which could require the liquidation of shares. Pacific Horizon
Shares of the Prime Fund acquired through an exchange of Class B shares of an
investment portfolio of the Time Horizon Funds liquidated by the Transfer Agent
as fees for custodial services to IRA accounts will not be subject to the
contingent deferred sales load. All fees charged are described in the
appropriate form.
SUPPLEMENTARY REDEMPTION INFORMATION: PACIFIC HORIZON SHARES
Pacific Horizon Shares for which orders for wire redemption
are received on a business day before 2:30 p.m. (Eastern Time) with respect to
the Prime Fund, Treasury Fund or Government Fund, 11:30 a.m. (Eastern Time)
with respect to the Treasury Only Fund, 10:30 a.m. (Eastern Time) with respect
to the California Tax-Exempt Money Market Fund or 12:00 noon (Eastern time)
with respect to the Tax-Exempt Money Fund, will be redeemed as of such time and
the proceeds of redemption (less any applicable contingent deferred sales load
charged on Pacific Horizon Shares of the Prime Fund acquired through an
exchange of Class B shares of an investment portfolio of the Time Horizon
Funds) will normally be wired in Federal funds on the same 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, payment for 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. Pacific Horizon Shares
for which orders for wire redemption are received on a business day after the
respective times stated above or on a non-business day will be redeemed as of
the next determination of net asset value for the Fund involved and the
proceeds of redemption (less any applicable contingent deferred sales load
charged on Pacific Horizon Shares of the Prime Fund acquired through an
exchange of Class B shares of an investment portfolio of the Time Horizon
Funds) will normally be wired in federal funds on the next business day after
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receipt of the redemption request. Redemption proceeds (less any applicable
contingent deferred sales load charged on Pacific Horizon Shares of the Prime
Fund acquired through an exchange of Class B shares of an investment portfolio
of the Time Horizon Funds) 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. (Effective
October 18, 1997, all such requests should be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968.) Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectuses. Guarantees must be signed by an
authorized signatory and "signature guaranteed" must appear with the signature.
The Transfer Agent may request further documentation from corporations,
executors, administrators, trustees or guardians, and will accept other
suitable verification arrangements from foreign investors, such as consular
verification.
Investors 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 43219-3035, in which case the proceeds will be mailed, wired or
made available at the Transfer Agent on the next business day. (Effective
October 18, 1997, Checks should be delivered to PFPC, P.O. Box 8968,
Wilmington, Delaware 19899-8968.) 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.
Because dividends accrue daily and because a contingent
deferred sales load may be applicable, Checks should not be used to close an
account. Check redemption may be modified or terminated at any time by the
Company or the Transfer Agent upon notice to shareholders.
For processing redemptions, the Transfer Agent may request
further documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will
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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 specifically is 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.
Pacific Horizon Shares of the Prime Fund acquired through an
exchange of Class B shares of an investment portfolio of the Time Horizon Funds
are subject to a contingent deferred sales load upon redemption. For purposes
of computing the contingent deferred sales load, the length of time of
ownership will be measured from the date of the original purchase of Class B
shares and will not include any period of ownership of the Pacific Horizon
Shares of the Prime Fund.
Exchange Privilege. Shareholders in the Pacific Horizon
Family of Funds have an exchange privilege whereby they may exchange all or
part of their Pacific Horizon Shares for shares of other investment portfolios
in the Pacific Horizon Family of Funds or for like shares of any investment
portfolio of Time Horizon Funds. In addition, holders of Class B shares of an
investment portfolio of Time Horizon Funds may exchange such Class B shares for
Pacific Horizon Shares of the Pacific Horizon Prime Fund without the payment of
any contingent deferred sales load at the time the exchange is made. By use of
the exchange privilege, the investor authorizes the Transfer Agent to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself 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. Shares of any investment portfolio purchased with a sales
load, as well as additional shares acquired through
reinvestment of dividends or distributions on
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<PAGE> 324
such shares, may be exchanged without a sales load for shares
of any other investment portfolio in the Pacific Horizon
Family of Funds or Time Horizon Funds.
B. Pacific Horizon Shares of the Prime Fund ("Prime Shares")
acquired pursuant to an exchange transaction with Class B
shares of an investment portfolio of Time Horizon Funds will
continue to be subject to a contingent deferred sales load.
However, Prime Shares that had been acquired through an
exchange of Class B shares of an investment portfolio of the
Time Horizon Funds may be exchanged for other Class B shares
without the payment of a contingent deferred sales load at the
time of exchange. In determining the holding period for
calculating the contingent deferred sales load payable on
redemption of Class B shares, the holding period of the shares
originally held will be added to the holding period of the
shares acquired through exchange unless the Class B shares
have been exchanged for Prime Shares.
C. Shares of any investment portfolio in the Pacific Horizon
Family of Funds or Time Horizon Funds acquired by a previous
exchange transaction involving shares on which a sales load
has directly or indirectly been paid (e.g. shares purchased
with a sales load or issued in connection with an exchange
transaction involving shares that had been purchased with a
sales load), as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may
be redeemed and the proceeds used to purchase without a sales
load shares of any other investment portfolio. To accomplish
an exchange transaction under the provisions of this
Paragraph, investors must notify the Transfer Agent of their
prior ownership of shares and their account number.
D. Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
shares of any other investment portfolio in the Family that is
offered without a sales load.
E. Shares of any investment portfolio in the Pacific Horizon
Family of Funds purchased without a sales load may be
exchanged without a sales load for shares in any other
portfolio where the investor involved maintained an account in
the Pacific Horizon Family of Funds before April 20, 1987 or
was the beneficial owner of shares of Bunker Hill Income
Securities, Inc. on the date of its reorganization into the
Company's Corporate Bond Fund.
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<PAGE> 325
Except as stated above, a sales load will be imposed when
shares of any investment portfolio in the Pacific Horizon Family of Funds that
were purchased or otherwise acquired without a sales load are exchanged for
shares of another investment portfolio in the Pacific Horizon Family (or for
shares of any investment portfolio of Time Horizon Funds) which are sold with a
sales load.
Exchange requests received on a business day prior to the time
shares of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new investment portfolio into which the
shareholder is investing will also normally be purchased at the net asset value
per share next determined coincident to or after the time of redemption.
Exchange requests received on a business day after the time shares of the
investment portfolios involved in the request are priced will be processed on
the next business day in the manner described above.
PACIFIC HORIZON SHARES, X SHARES, Y SHARES AND S SHARES
Persons wishing to purchase Pacific Horizon Shares through
their accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions. Persons purchasing X Shares
through Bank of America's 401(k) Program should contact their representative.
Persons wishing to establish a Sweep Account at BAIS, with respect to X Shares,
a Sweep Account at Bank of America or its banking or brokerage affiliates, with
respect to S Shares or Y Shares or at certain other Service Organizations, with
respect to X Shares, Y Shares and S Shares, should contact BAIS, Bank of
America, its banking or brokerage affiliates or a Service Organization directly
for appropriate instructions. Depending on the terms of the Sweep Account,
Bank of America, its banking or brokerage affiliates, or BAIS 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, its banking or brokerage affiliates, BAIS
or the particular Service Organization is responsible for providing information
concerning these services and any charges to any customers who must authorize
the purchase of shares prior to such purchase.
Miscellaneous. Certificates for shares will not be issued.
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<PAGE> 326
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or
(d) an emergency exists as determined by the SEC. (The Company may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does
not increase such balance to $500 or more upon 60 days' notice. The contingent
deferred sales load with respect to Pacific Horizon Shares of the Prime Fund
acquired through an exchange of B Shares of an investment portfolio of the Time
Horizon Funds is not charged on involuntary redemptions. The Company will not
require a shareholder to redeem shares of a Fund if the balance held of record
by the shareholder is less than $500 solely because of a decline in the net
asset value of the shares. The Company may also redeem shares involuntarily if
such redemption is appropriate to carry out the Company's responsibilities
under the Investment Company Act of 1940.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in readily
marketable securities or other property. In such an event, a shareholder would
incur transaction costs in selling the securities or other property. The
Company has committed that it will pay all redemption requests by a shareholder
of record in cash, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of $250,000 or 1% of the net asset value at
the beginning of such period.
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<PAGE> 327
MANAGEMENT OF THE FUNDS
Directors and Officers
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 63 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 72 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (regis-
Newport Beach, CA 92660-2629 tered investment
advisor) 1991 to date;
Director, FCA
Securities, Inc.
(registered broker/
dealer) November 1996 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,
</TABLE>
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<PAGE> 328
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Chairman,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and a former
Vice Chairman of the
Board, Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 65 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 81 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
</TABLE>
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<PAGE> 329
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Washington; Director,
Washington Federal
Savings & Loan
Association; Trustee,
Seafirst Retirement
Funds (since 1993)
(registered investment
company).
Cornelius J. Pings* 68 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; Director, Farmers
Suite 550 Group, Inc. (insurance
Washington, DC 20005 company) 1991 to date;
Provost, 1982 to January
1993, Senior 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).
Stephen M. Wynne 41 Vice President Executive Vice President
Executive Vice and Chief Accounting
President, PFPC Inc. Officer (since 1993) and
400 Bellevue Parkway Senior Vice President
Wilmington, DE 19809 and Chief Accounting
Officer (1991 to 1993),
PFPC Inc.; Executive
Vice President, PFPC
International (since
1995); Vice President
and Chief Accounting
Officer, PNC Institu-
tional Management Corp.
(since 1987).
Jay F. Nusblatt 36 Treasurer Vice President and
Vice President, Director of Fund
PFPC Inc. Accounting and Admin-
103 Bellevue Parkway istration, PFPC Inc.
Wilmington, DE 19809 (since 1993); formerly
Assistant Vice
President, Fund/Plan
Services, Inc. (1989 to
1993).
Linda L. Kaufmann 36 Assistant Vice President and Director,
Vice President, Treasurer Investment Accounting,
PFPC Inc. PFPC Inc. (since 1996); Senior
103 Bellevue Parkway Manager, Investment
Wilmington, DE 19809 Accounting, PFPC, Inc.
(1994-1996); and Manager,
Investment Accounting,
PFPC Inc. (1991-1994)
</TABLE>
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<PAGE> 330
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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
Gary M. Gardner 46 Assistant Chief Counsel-Mutual
Chief Counsel-Mutual Funds, Secretary Funds, PNC Bank (since
PNC Bank 1994); Associate
1600 Market Street, 28th Fl. General Counsel, The
Philadelphia, PA 19103 Boston Company, Inc.
(1992 to 1994); General
Counsel, SunAmerica
Asset Management Inc.
(1986 to 1992).
J. Robert Dugan 32 Assistant Counsel-Mutual Funds,
Counsel-Mutual Funds, Secretary PNC Bank (since 1993);
PNC Bank Associate, Drinker
1600 Market Street, 28th Fl. Biddle & Reath LLP
Philadelphia, PA 19103 (1990 to 1993).
</TABLE>
- -----------------------------
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
The Audit Committee of the Board is comprised of all directors
and is chaired by Dr. Hanson. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $20,000 per annum for his
services as President; 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. Kenneth L. Trefftz, a former director
of the Company, became a director emeritus of the Company and received a
retirement benefit of $60,000 on January 1, 1997. Mr. Collins, the former
President and Chairman of the Company, received an additional $40,000 per year
through February 28, 1997 in recognition of his years of service. The Funds,
and each other fund of the Company, pays its proportionate share of these
amounts based on relative net asset values.
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<PAGE> 331
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 $316,500. Of that amount, $148,436, $78,691, $18,169,
$11,974, $12,997 and $19,418 of directors' compensation were allocated to the
Prime, Treasury, Government, Treasury Only, Tax-Exempt Money and California
Tax-Exempt Money Market 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 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
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<PAGE> 332
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.
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:
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<PAGE> 333
<TABLE>
<CAPTION>
================================================================================================================
PENSION OR TOTAL
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL REGISTRANT AND
NAME OF PERSON/ COMPENSATION FROM AS PART OF FUND BENEFITS UPON FUND COMPLEX**
POSITION THE COMPANY EXPENSES* RETIREMENT PAID TO DIRECTORS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $76,000 $14,074 $31,293 $86,125
Director
- ----------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $37,000 $11,410 $24,680 $37,000
Vice Chairman of the Board
- ----------------------------------------------------------------------------------------------------------------
Robert E. Greeley $33,000 $8,992 $17,905 $51,625
Director
- ----------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $35,000 $12,664 $26,722 $43,000
Director
- ----------------------------------------------------------------------------------------------------------------
Kenneth J. Trefftzs $78,500 $18,500 -- $78,500
Director Emeritus
- ----------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,000 $10,133 $22,561 $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 Investment Trust, Series I, Master Investment Trust, Series II,
Time Horizon Funds and World Horizon Funds.
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to each of the Funds, other than the Government and Treasury Only
Funds, since the commencement of their operations. In the investment advisory
agreement, Bank of America has agreed to provide investment advisory services
as described in the Prospectuses. Bank of America has also agreed to pay all
expenses incurred by it in connection with its activities under its agreement
other than the cost of securities, including brokerage commissions, if any,
purchased for the Company. In rendering its advisory services, Bank of America
may utilize Bank officers from one or more of the departments of the Bank which
are authorized to exercise the fiduciary powers of Bank of America with respect
to the investment of trust assets. In some cases, these officers may also
serve as officers, and
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<PAGE> 334
utilize the facilities, of wholly-owned subsidiaries or other affiliates of
Bank of America or its parent corporation. For the services provided and
expenses assumed pursuant to the investment advisory agreement, the Company has
agreed to pay Bank of America fees, accrued daily and payable monthly, at the
following annual rates: .10% of the first $3 billion of each Fund's net
assets, plus .09% of the next $2 billion of each Fund's net assets, plus .08%
of each Fund's net assets over $5 billion. From time to time, Bank of America
may waive fees or reimburse the Company for expenses voluntarily or as required
by certain state securities laws.
For the fiscal years ended February 28, 1995, February 29,
1996 and February 28, 1997, Bank of America was paid in the aggregate, pursuant
to the investment advisory agreements applicable to them, advisory fees (net of
waivers) of $2,330,203, $3,964,899 and $5,792,971, respectively, by the Prime
Fund, $2,140,125, $2,446,958 and $2,861,734, respectively, by the Treasury Fund
and $501,956, $439,603 and $444,648, respectively, by the Tax-Exempt Money
Fund. For the fiscal years ended February 28, 1995, February 29, 1996 and
February 28, 1997, Bank of America was paid in the aggregate, pursuant to the
investment advisory agreements applicable to it, advisory fees (net of waivers
and expense reimbursements) of $301,964, $508,348 and $849,799, respectively,
by the California Tax-Exempt Money Market Fund. For the fiscal years ended
February 28, 1995, February 29, 1996 and February 28, 1997, Bank of America did
not effect any fee waivers or expense reimbursements with respect to the
Treasury Fund but did reimburse expenses or waive fees to the Prime Fund, in
the aggregate, in the amount of $920,627, $0 and $0, and the Tax-Exempt Money
Fund, in the amount of $11,611, $0 and $0, respectively. For the fiscal years
ended February 28, 1995, February 29, 1996 and February 28, 1997, Bank of
America, in the aggregate, waived fees and reimbursed expenses with respect to
the California Tax-Exempt Money Market Fund in the amount of $0, $0 and
$153,004, respectively.
For the fiscal year ended February 28, 1995, the Government
Fund and Treasury Only Fund paid Bank of America investment advisory fees (net
of fee waivers or expense reimbursements) of $321,634 and $293,305,
respectively. For that same period, Bank of America waived fees of $8,313 for
the Treasury Only Fund and waived fees of $313,740 and reimbursed expenses to
the Government Fund in the amount of $14,000. For the fiscal year ended
February 29, 1996, the Government Fund and Treasury Only Fund paid Bank of
America investment advisory fees (net of fee waivers and expense
reimbursements) of $539,047 and $487,156, respectively. For that same period,
Bank of America waived fees of $276,490 and reimbursed expenses of $4,778 with
respect to the Government Fund. For the fiscal year ended February 28, 1997,
the Government Fund and Treasury Only Fund
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<PAGE> 335
paid Bank of America investment advisory fees (net of fee waivers and expense
reimbursements) of $539,047 and $487,156, respectively. For that same period,
Bank of America waived fees of $335,332 and $0 for the Government Fund and
Treasury Only Fund, respectively.
The Company's investment advisory agreement for the Funds
provides that Bank of America shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company in connection with the
performance of the investment advisory agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or negligence
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies.
Bank of America believes that if the question 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
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
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<PAGE> 336
no cases deciding whether a national bank may perform services comparable to
those performed by Bank of America and future changes in either federal or
state statutes and regulations relating to permissible activities of banks or
trust companies and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations, could prevent Bank of America from continuing to
perform such services for the Company or from continuing to purchase Company
shares for the accounts of its customers.
For a discussion of the Glass-Steagall Act in connection with
the Company's Shareholder Services Plan, see "Shareholder Services Plan" in the
Prospectuses for Horizon Service Shares.
On the other hand, as described herein, the Funds are
currently distributed by PDI. If current restrictions under the Glass-Steagall
Act preventing a bank from sponsoring, organizing, controlling or distributing
shares of an investment company were relaxed, the Company expects that Bank of
America would consider the possibility of offering to perform some or all of
the services now provided by PDI. 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 was 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 PDI. 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
Bank of America National Trust and Savings Association (the
"Administrator") serves as administrator of the Funds. Prior to September 15,
1997, The BISYS Group, Inc., through its wholly-owned subsidiary BISYS Fund
Services, L.P. ("BISYS"), with principal offices at 150 Clove Road, Little
Falls, New Jersey 07424 and 3435 Stelzer Road, Columbus, Ohio 43219, served as
the Company's administrator. Prior to November 1, 1996, Concord Holding
Corporation ("Concord") an indirect, wholly-owned subsidiary of BISYS served as
administrator.
The Administrator provides administrative services for the
Funds as described in their Prospectuses pursuant to an Administration
Agreement with the Company. The agreement became
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<PAGE> 337
effective September 15, 1997 and, unless sooner terminated, will continue in
effect until October 31, 1998 and thereafter will be extended with respect to
each Fund for successive periods of one year, provided that each such extension
is specifically approved at least annually (a) by vote of a majority of those
members of the Company's Board of Directors 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)
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 cause and without payment of any penalty by vote of a majority of the
Company's Board of Directors or by a vote of a majority of a Fund's outstanding
voting securities upon 60 days' written notice to the Administrator, or by the
Administrator at any time, without payment of any penalty upon 90 days' written
notice to the Company. The agreement will immediately terminate in the event
of its "assignment."
For its services under the Administration Agreement, the
Administrator is entitled to receive an administration fee, computed daily and
payable monthly, at the following annual rates: .10% of the first $7 billion
of each Fund's net assets, plus .09% of the next $3 billion of each Fund's net
assets, plus .08% of each Fund's net assets over $10 billion. From time to
time, the Administrator may voluntarily waive fees or reimburse the Company for
expenses.
For the fiscal years ended February 28, 1995, February 29,
1996 and February 28, 1997, BISYS or Concord was paid, pursuant to the
administration agreement then in effect, administration fees (net of waivers)
of $2,366,035, $4,062,578 and $6,236,990, respectively, by the Prime Fund,
$2,140,125, $2,447,372 and $2,863,262, respectively, by the Treasury Fund and
$501,956, $439,603 and $444,648, respectively, by the Tax-Exempt Money Fund.
For the fiscal years ended February 28, 1995, February 29, 1996 and February
28, 1997, BISYS or Concord was paid, pursuant to the administration agreement
then in effect, administrative fees (net of waivers) of $301,964, $508,348 and
$849,799, respectively, by the California Tax-Exempt Money Market Fund. For
the fiscal years ended February 28, 1995, February 29, 1996, and February 28,
1997, neither BISYS nor Concord effected any fee waivers with respect to the
Treasury Fund, but Concord reimbursed operating expenses of $95,000 and $0 for
the fiscal years ended February 29, 1996 and February 28, 1997. For the fiscal
years ended February 28, 1995, February 29, 1996 and February 28, 1997, Concord
reimbursed the Prime Fund and Tax-Exempt Money Fund for expenses or waived fees
in the amount of $949,233, $235,000 and $0 and $11,611, $0 and $0,
respectively. For the fiscal years ended February 28, 1995, February 29, 1996
and February 28, 1997, aggregate fee waivers and expense
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reimbursements by Concord with respect to the California Tax-Exempt Money
Market Fund were $0, $5,000 and $0, respectively.
For the fiscal year ended February 28, 1995, the Government
Fund and Treasury Only Fund paid Concord (net of fee waivers), $463,641 and
$293,305, respectively. For this same period Concord waived fees due from the
Government Fund and Treasury Only Fund in the amounts of $185,733 and $8,313,
respectively and reimbursed the Funds $0 and $0, respectively. For the fiscal
year ended February 29, 1996, the Government Fund and Treasury Only Fund paid
Concord $489,935 and $341,008, respectively. For this same period, Concord
waived fees due from the Government Fund in the amount of $182,262. For the
fiscal year ended February 28, 1997, the Government Fund and the Treasury Only
Fund paid BISYS or Concord, $539,047 and $487,156, respectively.
The Administrator will bear all expenses in connection with
the performance of its services under the Administration Agreement for the
Funds with the exception of fees charged by The Bank of New York ("BONY") for
certain fund accounting services which are borne by the Funds. See "Custodian
and Transfer Agent" below. Expenses borne by the Company include taxes,
interest, brokerage fees and commissions, if any, fees of directors who are not
officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or the Administrator or their
subcontractors or any of their affiliates, SEC fees and state securities
registration and qualification fees, advisory fees, fees for special management
services, fees payable to shareholder organizations, 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, or any supplement or amendment thereto, necessary for the
continued effective registration of shares under the 1933 Act or state
securities laws, costs of printing and distributing any prospectus, supplement
or amendment thereto for existing shareholders, cost of shareholders' reports
and corporate meetings and any extraordinary expenses.
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 any 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 the Administrator's duties or from the
reckless disregard by the Administrator of its obligations and duties under the
Administration Agreement.
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The Administrator may from time to time employ such person or
persons as it may believe to be particularly fitted to assist in the
performance of the administration agreement; provided, however, that the
compensation of such person or persons shall be paid by the Administrator and
the Administrator shall be as fully responsible to the Company for the acts and
omissions of any subcontractor as it is for its own acts and omissions. BONY
provides the Funds with certain accounting services pursuant to a fund
accounting services agreement with the Administrator. Under the fund
accounting services agreement, BONY has agreed to provide certain accounting,
bookkeeping, pricing, dividend and distribution calculation services with
respect to the Funds. The monthly fees charged by BONY under the fund
accounting services agreement are borne by the Funds.
The Administrator has also entered into an agreement with
PFPC, Inc. to provide certain sub-administration services to the Funds as
described in the Prospectuses. The monthly fees charged by PFPC for these
services under the sub-administration agreement are borne by the Administrator.
SPECIAL MANAGEMENT SERVICES PLAN
Effective January 1997, the Special Management Services Agreement with
respect to the Funds' Pacific Horizon Shares was terminated and replaced by the
Special Management Services Plan. Fees payable by the Funds' Pacific Horizon
Shares pursuant to the Special Management Services Plan are the same as those
payable pursuant to the Special Management Services Agreement. Shareholder
Organizations provide services to their clients who beneficially own Pacific
Horizon Shares of the Funds as described in the prospectuses pursuant to the
Special Management Services Plan.
Unless sooner terminated, the Special Management Services Plan (and
any agreement entered into pursuant to such Plan) will continue until October
31, 1997 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually by a majority
of the Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Company and have no
direct or indirect financial interest in the operation of the Special
Management Services Plan or in any agreement related to such Plan (the
"Disinterested Directors") by vote cast in person at a meeting called for such
purpose. The selection and nomination of the directors who are not "interested
persons" of the Company shall be committed to such Disinterested Directors. In
addition, any material amendment to the terms of the Special Management
Services Plan shall become effective only upon the approval of a majority of
the Disinterested Directors. The Special Management Services Plan is
terminable at any time
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with respect to Pacific Horizon Shares of any Fund by vote of a majority of the
Disinterested Directors. Any agreement entered into pursuant to the Special
Management Services Plan is terminable with respect to Pacific Horizon Shares
of any Fund without penalty at any time by the Company (which termination may
be by vote of a majority of the Disinterested Directors) or by a Shareholder
Organization upon notice to the Company.
In consideration of the services provided pursuant to the Special
Management Services Plan, Shareholder Organizations are entitled to receive a
fee, computed daily and payable monthly at the annual rate of up to 0.32% of
the average daily net asset value of each Fund's Pacific Horizon Shares (0.35%
for the California Tax-Exempt Money Market Fund) beneficially owned by clients
of such Shareholder Organizations. The Special Management Services Plan
provides that a written report of the amounts expended under such Plan, and the
purposes for which such expenditures were incurred, will be made to the Board
of Directors for its review at least quarterly.
For the fiscal years ended February 28, 1995, February 29,
1996 and February 28, 1997, the Prime Fund incurred expenses under either the
previous Special Management Services Agreement or the new Special Management
Services Plan (January 1, 1997 through February 28, 1997) of $3,464,984,
$5,244,694 and $7,225,077, respectively, of which $65,326, $68,810 and $48,060,
respectively, were earned by BISYS or Concord, $18,906, $4,193,897 and $37,933,
respectively, were earned by Bank of America, $268,593, $633,935 and $828,637,
respectively, were earned by affiliates of BISYS or Concord, and $3,112,159,
$348,052 and $6,358,507, respectively, were earned by affiliates of Bank of
America; and the Treasury Fund incurred expenses of $3,830,002, $3,781,235 and
$2,600,002, respectively, of which $28,381, $30,679 and $17,372, respectively,
were earned by BISYS or Concord, $9,031, $3,250,931 and $0, respectively, were
earned by Bank of America, $40,665, $294,175 and $1,580,540, respectively, were
earned by affiliates of BISYS or Concord, and $3,751,925, $205,450 and
$1,019,462, respectively, were earned by affiliates of Bank of America. For
the fiscal years ended February 28, 1995, February 29, 1996 and February 28,
1997, the Tax-Exempt Money Fund incurred expenses under the Plan (before fee
waivers) of $135,034, $151,128 and $187,663, respectively, of which $8,273,
$5,115 and $5,303, respectively, were earned by BISYS or Concord, $1,062,
$145,543 and $0, respectively, were earned by Bank of America, $125,664, $0 and
$153,076, respectively, were earned by affiliates of Bank of America and $0,
$470 and $34,587, respectively, were earned by affiliates of BISYS or Concord.
For the fiscal years ended February 28, 1995, February 29, 1996 and February
28, 1997, the California Tax-Exempt Money Market Fund incurred expenses under
the Agreement (before fee waivers) of $639,503, $1,181,258 and $1,785,019,
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respectively, of which $9,701, $10,928 and $7,814, respectively, were earned by
BISYS or Concord, $21,474, $49,396 and $318,263, respectively, were earned by
affiliates of BISYS or Concord, $2,892, $959,655 and $0, respectively were
earned by Bank of America and $605,436, $0 and $1,466,756, respectively, were
earned by affiliates of Bank of America. For the fiscal years ended February
28, 1995, February 29, 1996 and February 28, 1997, Bank of America, BISYS or
Concord, and their respective affiliates, did not waive any Special Management
Services fees with respect to the Prime Fund, Treasury Fund, California
Tax-Exempt Money Market Fund, or Tax-Exempt Money Fund.
For the fiscal year ended February 28, 1995, the Government
Fund and Treasury Only Fund incurred expenses of $774,259 and $191,572,
respectively, under the Agreement, of which $0 and $1,581, respectively, were
earned by Bank of America; $135 and $1,779, respectively, were earned by
Concord; $774,124 and $187,925, respectively, were earned by affiliates of Bank
of America; and $0 and $287, respectively, were earned by affiliates of
Concord. For the fiscal year ended February 29, 1996, the Government Fund and
Treasury Only Fund incurred expenses of $993,425 and $613,759, respectively,
under the Agreement, of which, $686,425 and $434,890, respectively, were earned
by Bank of America; $182 and $5,540, respectively, were earned by Concord;
$299,463 and $134,307, respectively, were earned by affiliates of Bank of
America; and $7,355 and $39,022 were earned by affiliates of Concord. For the
fiscal year ended February 28, 1997, the Government Fund and Treasury Only Fund
incurred expenses of $720,909 and $854,818, respectively, under the Agreement,
of which $32,071 and $7,006, respectively were earned by Bank of America; $396
and $637, respectively, were earned by BISYS or Concord; $652,101 and $626,411,
respectively, were earned by affiliates of Bank of America and $36,737 and
$221,401, respectively, were earned by affiliates of BISYS or Concord.
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
During the course of the Company's fiscal year, Bank of
America and other service providers may prospectively waive payment of fees
and/or assume certain expenses of one or more of the Company's funds, as a
result of competitive pressures and in order to preserve and protect the
business and reputation of 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.
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DISTRIBUTOR
Provident Distributors, Inc. acts as the exclusive distributor
of the shares of each of the Funds pursuant to a distribution agreement with
the Company. Shares are sold on a continuous basis by the Distributor. Prior
to September 15, 1997, Concord Financial Group, Inc., a wholly owned subsidiary
of BISYS, acted as distributor for the Funds.
The Distributor has agreed to use its best efforts to effect
sales of shares of the Funds although it is not obliged to sell any certain
number of shares. No compensation is payable by the Funds to the Distributor
for its distribution services. The distribution agreement became effective
September 15, 1997 and, unless sooner terminated, shall continue in effect with
respect to each Fund until October 31, 1998. Thereafter, if not terminated,
the distribution agreement shall continue automatically for successive terms of
one year, provided that such continuance is specifically approved at least
annually (a) by a vote of a majority of those members of the Board of Directors
of the Company who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Directors of the Company or
by vote of a "majority of the outstanding voting securities" of the Funds as to
which the distribution agreement is effective; provided, however, that the
distribution agreement may be terminated by the Company at any time, without
the payment of any penalty, by vote of a majority of the entire Board of
Directors of the Company or by a vote of a "majority of the outstanding voting
securities" of such Funds on 60 days' written notice to the Distributor, or by
the Distributor at any time, without the payment of any penalty, on 90 days'
written notice to the Company. This Agreement will automatically and
immediately terminate in the event of its "assignment."
The Distribution and Services Plan. The Distributor is also
entitled to payment from the Company for distribution and service fees pursuant
to the Distribution and Services Plan (the "12b-1 Plan") adopted on behalf of
the X Shares, S Shares and Y Shares. Under the 12b-1 Plan, the Company may pay
the Distributor for: (a) direct out-of-pocket promotional expenses incurred by
the Distributor in advertising and marketing X Shares, S Shares and Y Shares;
(b) expenses incurred in connection with preparing, printing, mailing, and
distributing or publishing advertisements and sales literature for X Shares, S
Shares and Y Shares; (c) expenses incurred in connection with printing and
mailing Prospectuses and Statements of Additional Information to other than
current X, S or Y shareholders; (d) periodic payments or commissions to one or
more securities dealers, brokers, financial institutions or other industry
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professionals, such as investment advisors, accountants, and estate planning
firms (severally, "a Distribution Organization") with respect to a Fund's X
Shares, S Shares and Y Shares beneficially owned by customers for whom the
Distribution Organization is the Distribution Organization of record or holder
of record of such X Shares, S Shares or Y Shares; (e) the direct or indirect
cost of financing the payments or expenses included in (a) and (d) above; or
(f) for such other services as may be construed, by any court or governmental
agency or commission, including the Securities and Exchange Commission, to
constitute distribution services under the 1940 Act or rules and regulations
thereunder.
Pursuant to the 12b-1 Plan, the Company may also pay for
administrative support services provided with respect to a Distribution
Organizations customers ("clients") X Shares, S Shares and Y Shares.
Administrative services provided may include some or all of the following: (i)
processing dividend and distribution payments from a Fund on behalf of its
Clients; (ii) providing information periodically to its Clients showing their
positions in X Shares, S Shares and Y Shares; (iii) arranging for bank wires;
(iv) responding to routine Client inquiries concerning their investment in X
Shares, S Shares and Y Shares; (v) providing the information to the Funds
necessary for accounting or sub-accounting; (vi) if required by law, forwarding
shareholder communications from a Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to its Clients; (vii) aggregating and processing purchase and
redemption requests from its Clients and placing net purchase and redemption
orders for its Clients; (viii) establishing and maintaining accounts and
records relating to Clients that invest in X Shares, S Shares and Y Shares;
(ix) assisting Clients in changing dividend options, account designations and
addresses; (x) developing, maintaining and operating systems necessary to
support Sweep Accounts; or (xi) other similar services if requested by the
Company.
The 12b-1 Plan for X Shares, S Shares and Y Shares provides
that the Distributor is entitled to receive payments on a monthly basis at an
annual rate not exceeding 0.55%, 1.00% and 1.00% of the average daily net
assets during such month of the outstanding X Shares, S Shares and Y Shares,
respectively, to which such 12b-1 Plan relates. Not more than 0.25% of such
net assets will be used to compensate Service Organizations for personal
services provided to X, S and Y shareholders and/or the maintenance of such
shareholders' accounts and not more than 0.30%, 0.75% and 0.75% of such net
assets of the X, S and Y shareholders, respectively, will be used for
promotional and other primary distribution activities.
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Payments made out of or charged against the assets of a
particular class of shares of a particular Fund must be in payment for expenses
incurred on behalf of that class.
Payments for distribution expenses under the 12b-1 Plan are
subject to Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of [Company] shares." The Rule provides, among
other things, that 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 shares of a Fund may bear for distribution pursuant to the 12b-1
Plan without shareholder approval and that other material amendments of the
12b-1 Plan must be approved by a majority of the Board of Directors, and by a
majority of the directors who are neither "interested persons" (as defined in
the 1940 Act) of the Company nor have any direct or indirect financial interest
in the operation of the 12b-1 Plan, or in any agreements entered into in
connection with the 12b-1 Plan, by vote cast in person at a meeting called for
the purpose of considering such amendments (the "Non-Interested Plan
Directors"). The selection and nomination of the directors of the Company who
are not "interested persons" of the Company have been committed to the
discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan will benefit the Funds and their X, S
and Y shareholders. The 12b-1 Plan is subject to annual reapproval by a
majority of the Company's Board of Directors, including a majority of the
Non-Interested Plan Directors and is terminable without penalty at any time
with respect to any Fund by a vote of a majority of the Non-Interested Plan
Directors or by vote of the holders of a majority of the outstanding X Shares,
S Shares or Y Shares of the Fund involved. Any agreement entered into pursuant
to the 12b-1 Plan with a Service Organization is terminable with respect to any
Fund without penalty, at any time, by vote of a majority of the Non-Interested
Plan Directors, by vote of the holders of a majority of the outstanding X
Shares, S Shares or Y Shares of such Fund, or by the Service Organization.
Each agreement will also terminate automatically in the event of its
assignment.
For the fiscal year ended February 28, 1997, 12b-1 fee
payments to Shareholder Organization totalled $147,984, $4,111, and $22,455
with respect to X Shares of the Prime Fund, Treasury
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Fund and California Tax-Exempt Money Market Fund, respectively and represented
the total of payments made under the 12b-1 Plan. For the fiscal year ended
February 28, 1997 shareholder service fee payments to Shareholder Organization
totalled $123,320, $3,425, and $18,713 with respect to X Shares of the Prime
Fund, Treasury Fund and California Tax-Exempt Money Market Fund, respectively.
Of these amounts, for the fiscal year ended, $270,960, $7,529 and $41,168 was
paid to Bank of America affiliates with respect to X Shares of the Prime Fund,
Treasury Fund and California Tax-Exempt Money Market Fund. As of February 28,
1997, no S or Y Shares were outstanding.
CUSTODIAN AND TRANSFER AGENT
The Company has appointed The Bank of New York, 90 Washington
Street, New York, New York 10286, as custodian for the Funds. The Bank of New
York also provides the Company with certain accounting, bookkeeping, pricing,
and dividend and distribution calculation services pursuant to a fund
accounting services agreement with the Administrator. The monthly fees charged
by the bank under the fund accounting agreement are borne by the Funds. The
Company and The Bank of New York have appointed Bank of America to act as
sub-custodian pursuant to a Sub-Custodian Agreement. As sub-custodian of the
Company's assets, Bank of America (i) maintains a separate account or accounts
in the name of the Company, (ii) holds and disburses portfolio securities on
account of the Company, (iii) makes receipts and disbursements of money on
behalf of the Company, (iv) collects and receives all income and other payments
and distributions on account of the Company's portfolio securities held by Bank
of America, (v) responds to correspondence from security brokers and others
relating to its duties, and (vi) makes periodic reports to the Company's Board
of Directors concerning its duties thereunder. Under the Sub-Custodian
Agreement, the Company will reimburse Bank of America for its costs and
expenses in providing services thereunder. Bank of America is the successor to
Security Pacific under the Sub-Custodian Agreement. For the fiscal years ended
February 28, 1995, February 29, 1996 and February 28, 1997, Bank of America, in
its capacity as sub-custodian, did not hold any of the Company's assets and,
accordingly, received no fees.
Effective October 25, 1997, PFPC Inc., P.O. Box 8968,
Wilmington, Delaware 19899-8968, serves as transfer and dividend disbursing
agent for the Company. Prior thereto, BISYS Fund Services, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219, a wholly owned sudsidiary of BISYS, served as
transfer and dividend disbursing agent.
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TAXES
The following is only a summary of certain additional
considerations generally affecting the Funds and their shareholders that are
not described in the Prospectuses for the Funds. No attempt is made to present
a detailed explanation of the tax treatment of the Funds or their shareholders,
and the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning. Investors are advised to consult their tax advisers
with specific reference to their own tax situations.
FEDERAL - 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 Tax-Exempt Money Fund and
California Tax-Exempt Money Market Fund) to shareholders would be taxable as
ordinary income to the extent of the current and accumulated earnings and
profits of the particular Fund and would be eligible for the dividends received
deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. A Fund will be
taxed on its undistributed investment company taxable income, if any.
A Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short
Test"). Interest (including original issue and accrued market discount)
received by a Fund upon maturity or disposition of a security
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held for less than three months will not be treated as gross income derived
from the sale or other disposition of such security within the meaning of this
requirement. However, any other income that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
Any distribution of the excess of net long-term capital gains
over net short-term capital losses is taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held the distributing
Fund's shares and whether such gains are received in cash or additional Fund
shares. The Fund will designate such a distribution as a capital gain dividend
in a written notice mailed to shareholders after the close of the Fund's
taxable year.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%; however, because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An
individual's long-term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long-term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specific percentages of
their ordinary taxable income for each calendar year and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year
to avoid liability for this excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 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 Prime Fund, Treasury Fund,
Government Fund, Treasury Only Fund, Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund, had unused capital loss carryovers of
approximately $3,470,138 (of which $744,962 will expire in fiscal 2002 and
$2,725,176 will expire in fiscal 2003), $47,456 (which will expire in fiscal
2002), $939,079 (which will expire in fiscal 2003), $23,969 (which will expire
in fiscal
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2003), $188,027 (of which $16,664 will expire in fiscal 1998, $14,011 will
expire in fiscal 2000, $71,218 will expire in fiscal 2002, $19,132 will expire
in fiscal 2003, $36,425 will expire in fiscal 2004 and $30,577 will expire in
fiscal 2005) and $4,266 (which will expire in fiscal 2004), respectively,
available for federal income tax purposes to be applied against future capital
gains, if any.
FEDERAL - TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
The policy of the Tax-Exempt Money Fund and the California
Tax-Exempt Money Market Fund is to pay each year as exempt-interest dividends
substantially all the respective Fund's Municipal Securities interest income
net of certain deductions. An exempt-interest dividend is any dividend or part
thereof (other than a capital gains dividend) paid by a Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders after
the close of the Fund's taxable year. However, the aggregate amount of
dividends so designated by the Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Fund
during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
for any taxable year which qualifies as exempt-interest dividends will be the
same for all shareholders receiving dividends from the Fund for such year. In
order for the Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
to pay exempt-interest dividends for any taxable year, at the close of each
quarter of each Fund's taxable year at least 50% of the aggregate value of each
Fund's assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of
the Tax-Exempt Money Fund and the California Tax-Exempt Money Market Fund as
items of interest excludable from their gross income under Section 103(a) of
the Code. However, each shareholder is advised to consult his or her tax
adviser with respect to whether exempt-interest dividends would retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" or a "related person" to such user with respect to
facilities financed through any of the tax-exempt obligations held by the
respective Funds. A "substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who both (1) regularly uses a part
of such facilities in his or her trade or business and (2) whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
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acquired. A "related person" includes certain related natural persons,
affiliated corporations, partners and partnerships and S corporations and their
shareholders. Interest on indebtedness incurred by a shareholder to purchase
or carry shares of a Fund generally is not deductible for federal income tax
purposes.
Income itself exempt from federal income taxation will be
considered in addition to adjusted gross income when determining whether Social
Security payments received by a shareholder are subject to federal income
taxation.
CALIFORNIA - CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
As a regulated investment company, the California Tax-Exempt
Money Market Fund will be relieved of liability for California state franchise
and corporate income tax to the extent its taxable income is distributed to its
shareholders. The California Tax-Exempt Money Market Fund will be taxed on its
undistributed taxable income. If for any year the California Tax-Exempt Money
Market Fund does not qualify as a regulated investment company, all of its
taxable income (including interest income on California Municipal Securities
for franchise tax purposes only) may be subject to California state franchise
or income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least
50% of the value of the total assets of a regulated investment company, or
series thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then the regulated investment company, or series of that company,
will be qualified to pay dividends exempt from California state personal income
tax to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Securities
are generally limited to California Municipal Securities and certain U.S.
Government and U.S. Possession obligations. "Series" of a regulated investment
company is defined as a segregated portfolio of assets, the beneficial interest
in which is owned by the holders of an exclusive class or series of stock of
the company. The California Tax-Exempt Money Market Fund intends to qualify
under the above requirements so that it can pay California exempt-interest
dividends. If the California Tax-Exempt Money Market Fund does not so qualify,
no part of its respective dividends to shareholders will be exempt from the
California state personal income tax.
Within sixty days after the close of its taxable year, the
California Tax-Exempt Money Market Fund will notify its respective shareholders
of the portion of the dividends paid by the Fund to each shareholder with
respect to such taxable year
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which is exempt from California state personal income tax. The total amount of
California exempt-interest dividends paid by the California Tax-Exempt Money
Market Fund with respect to any taxable year cannot exceed the excess of the
amount of interest received by the California Tax-Exempt Money Market Fund for
such year on California Exempt Securities over any amounts that, if the
California Tax-Exempt Money Market Fund were treated as an individual, would be
considered expenses related to tax exempt income or amortizable bond premium
and would thus not be deductible under federal income or California state
personal income tax law. The percentage of total dividends paid for any
taxable year which qualifies as California exempt-interest dividends will be
the same for all shareholders receiving dividends from the Fund for such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Exempt Securities held by the
California Tax-Exempt Money Market 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 - Tax-Exempt Money Fund and
California Tax-Exempt Money Market Fund" above. Interest on indebtedness
incurred by a shareholder to purchase or carry California Tax-Exempt Money
Market Fund shares is not deductible for California state personal income tax
purposes if the California Tax-Exempt Money Market 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
California Tax-Exempt Money Market Fund and its shareholders. No attempt is
made to present a detailed explanation of the California state personal income
tax treatment of the California Tax-Exempt Money Market 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 California
Tax-Exempt Money Market Fund dividends constituting California exempt-interest
dividends is excludable from income for California state personal income tax
purposes only. Any dividends paid to shareholders subject to California state
franchise tax or California state corporate income tax may therefore be taxed
as ordinary or capital gains dividends to such purchasers notwithstanding that
all or a portion of such dividends is exempt from California state personal
income tax. Accordingly, potential investors in the California Tax-Exempt
Money Market Fund, including, in particular, corporate investors
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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 California Tax-Exempt Money Market Fund
dividends and as to their own California state tax situation, in general.
OTHER INFORMATION
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, a Fund may be subject to the tax laws of such states or
localities.
Exempt-interest dividends generally will be exempt from state
and local taxes as well. However, except as noted above with respect to
California state personal income tax, in some situations income distributions
may be taxable to shareholders under state or local law as dividend income even
though all or a portion of such distributions may be derived from interest on
tax-exempt obligations or U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action.
YIELD INFORMATION
The "yields" and "effective yields" of each Fund are
calculated according to formulas prescribed by the SEC. The standardized
seven-day yield for each Fund's series of shares is computed separately for
each series by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account in the particular Fund involved
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the
base period to obtain the base period return, and multiplying the base period
return by (365/7). The net change in the value of an account in a Fund
includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares, net of all fees, other than nonrecurring account or sales
charges, that are charged to all shareholder accounts in proportion to the
length of the base period and the Fund's average account size. The capital
changes to be excluded from the calculation of the net change in account
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value are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The effective annualized yields for each Fund
are computed by compounding a particular Fund's unannualized base period
returns (calculated as above) by adding 1 to the base period returns, raising
the sums to a power equal to 365 divided by 7, and subtracting 1 from the
results. In addition, the Tax-Exempt Money Fund and California Tax-Exempt
Money Market Fund may quote a standardized "tax-equivalent yield" for each of
its series of shares which is computed by: (a) dividing the portion of the
Fund's yield (as calculated above) for such series that is exempt from federal,
or in the case of the California Tax-Exempt Money Market Fund both federal and
California state, income tax by one minus a stated federal, or in the case of
the California Tax-Exempt Money Market Fund a combined federal and California
state, income tax rate; (b) with respect to the California Tax-Exempt Money
Market Fund dividing the portion of that Fund's yield (as calculated above)
that is exempt from federal income tax only by one minus a federal income tax
rate, and (c) adding the figure resulting from (a) above (with respect to the
Tax-Exempt Money Fund) or from (a) and (b) above (with respect to the
California Tax-Exempt Money Market Fund) to that portion, if any, of the Fund's
yield for such series of shares that is not exempt from federal income tax.
The fees which may be imposed by institutional investors directly on their
customers for cash management services are not reflected in the Funds'
calculations of yields. The current yields for the Funds may be obtained by
calling (800) 227-1545
Based on the foregoing calculations, for the seven-day period
ended February 28, 1997, the yield (and effective yield) for Horizon Shares,
Horizon Service Shares, Pacific Horizon Shares and X Shares (Prime and Treasury
Funds only) of the Prime Fund, Treasury Fund, Government Fund, Treasury Only
Fund, and Tax-Exempt Money Fund after fee waivers and/or expense reimbursements
by Bank of America and BISYS, were as follows: Prime Fund - Horizon Shares --
5.23% (5.37%); Prime Fund - Horizon Service Shares -- 4.98% (5.11%); Prime
Fund - Pacific Horizon Shares -- 4.91% (5.03%); Prime Fund - X Shares 4.68%
(4.79%); Treasury Fund - Horizon Shares -- 5.09% (5.22%); Treasury Fund -
Horizon Service Shares -- 4.84% (4.96%); Treasury Fund - Pacific Horizon Shares
- -- 4.89% (4.77%); Treasury Fund - X Shares 4.65% (4.54%); Government Fund -
Horizon Shares -- 5.12% (5.25%); Government Fund - Horizon Service Shares --
4.87% (4.98%); Government Fund - Pacific Horizon Shares -- 4.80% (4.91%);
Treasury Only Fund - Horizon Service Shares -- 4.68% (4.79%); Treasury Only
Fund - Pacific Horizon Shares -- 4.61% (4.72%); Treasury Only Fund - Horizon
Shares -- 4.93% (5.05%); Tax-Exempt Money Fund - Horizon Shares -- 3.19%
(3.25%); and Tax-Exempt Money Fund - Horizon Service Shares -- 2.94% (2.99%);
Tax-Exempt Money Fund - Pacific Horizon Shares -- 2.87% (2.92%). For the same
period, the tax-equivalent yield for the
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Tax-Exempt Money Fund was 5.23%, 4.82% and 4.70% for Horizon Shares, Horizon
Service Shares and Pacific Horizon Shares, respectively. The federal income
tax rate used in calculating the tax-equivalent yields of the Tax-Exempt Money
Fund was 31%. The seven-day yield, effective yield and tax-equivalent yield
(after fee waivers and expense reimbursements) for Horizon Service Shares,
Pacific Horizon Shares and X Shares of the California Tax-Exempt Money Market
Fund was 2.92%, 2.96%, 4.47%, and 2.85%, and 2.89%, 4.36%, 2.62%, and 2.65%,
respectively for the period ended February 28, 1997. The combined federal and
California income tax rate used in calculating the foregoing tax-equivalent
yields was 34.7%. As of February 28, 1997, Horizon Shares and S Shares of the
California Tax-Exempt Money Market Fund, S Shares of the Treasury Fund and
Tax-Exempt Money Fund, and Y Shares of the Prime and Treasury Funds were not
offered and accordingly, no yield information is available.
From time to time, the yields of the Funds may be quoted in
and compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders.
The Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income of a Fund would increase the value of the Fund investment more quickly
than if dividends or other distributions had been paid in cash. The Funds may
also include discussions or illustrations of the potential investment goals of
a prospective investor (including but not limited to tax and/or retirement
planning), investment management techniques, policies or investment suitability
of a Fund, economic conditions, legislative developments (including pending
legislation), the effects of inflation and historical performance of various
asset classes. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well
as the views of the investment adviser as to current market, economic, trade
and interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a
Fund. The Funds may also include in advertisements charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles. In addition, advertisements or shareholder communications
may include a discussion of certain attributes or benefits to be derived by an
investment in a Fund and may include testimonials
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as to the investment adviser's capabilities by clients. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, a Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information
with respect to the Funds is generally available by calling (800) 346-2087.
In addition to the publications listed in the Funds'
Prospectuses, yield data as reported in the following publications may be used
in comparing the yields of the Funds to those of other mutual funds with
similar investment objectives: Business Week, Investor's Business Daily,
Kiplinger, U.S. News, Financial World, USA Today, Morningstar, Mutual Fund
Monitor, and American Banker.
GENERAL INFORMATION
Description of Shares
The Company is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. The Fund's Charter
authorizes the Board of Directors to issue up to four hundred billion full and
fractional shares of capital stock. The Board of Directors has authorized the
issuance of seventy-one classes of stock - Classes A through W, Common Stock
representing interests in twenty separate investment portfolios. Each share of
capital stock has a par value of $.001. This Statement of Additional
Information describes the Pacific Horizon Shares, Horizon Shares and Horizon
Service Shares of the Prime, Treasury, Government, Treasury Only, Tax-Exempt
Money and California Tax-Exempt Money Market Funds, the X Shares of the Prime
Fund, Treasury Fund and California Tax-Exempt Money Market Fund, the S Shares
of the Prime, Treasury, Tax-Exempt Money and California Tax-Exempt Money Market
Funds and the Y Shares of the Prime and Treasury Funds.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in its Prospectuses, the Company's shares will be fully
paid and non-assessable. For information concerning possible restrictions upon
the transferability of the Company's shares and redemption provisions with
respect to such shares, see "Purchase and Redemption Information" in this
Statement of Additional Information.
The Funds' Pacific Horizon Shares, Horizon Shares, Horizon
Service Shares, X Shares, S Shares and Y Shares differ in
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the following respects. Pacific Horizon Shares beneficially owned by clients
of Shareholder Organizations bear the fees payable under a Special Management
Services Plan, which are payable at the annual rate of up to 0.32% of the
average daily net asset value of each Fund's Pacific Horizon Shares (0.35% with
respect to the California Tax-Exempt Money Market Fund). Horizon Service
Shares bear the fees payable under a Shareholder Services Plan that are payable
at the rate of up to .25% (on an annualized basis) of the average daily net
asset value of the Horizon Service Shares that are outstanding from time to
time. X Shares bear the fees payable under the Distribution and Services Plan
that has been adopted for X Shares that are outstanding from time to time. S
Shares and Y Shares bear the fees payable under the Distribution and Services
Plan that has been adopted for such shares, which are payable at the rate of up
to 1.00% (on an annualized basis) of the average daily net asset value of the S
Shares and Y Shares that are outstanding from time to time. Only Horizon
Service Shares bear the fees payable under the Shareholder Services Plan. Only
Pacific Horizon Shares beneficially owned by clients of Shareholder
Organizations bear the fees payable under the Special Management Services Plan.
Only X, S and Y Shares bear the fees payable under their respective
Distribution and Services Plan. Due to the different expenses borne by the
respective classes of the Company, net yield for each class will vary.
Holders of all outstanding shares of a particular Fund will
vote together in the aggregate and not by class on all matters, except that
only X Shares, S Shares and Y Shares of a Fund will be entitled to vote on
matters submitted to a vote of shareholders pertaining to those shares'
respective Distribution and Services Plans, only Horizon Service Shares of a
Fund will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Horizon Service Shares' Shareholder Services Plan, and only
Pacific Horizon Shares of a Fund will be entitled to vote on matters submitted
to a vote of shareholders pertaining to the Pacific Horizon Funds' Special
Management Services Plan. Further, shareholders of all of the Funds, as well
as those of any other investment portfolio now or hereafter offered by the
Company, will vote together in the aggregate and not separately on a
Fund-by-Fund basis, except as otherwise required by law or when permitted by
the Board of Directors. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it
is clear that the interests of each Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. Under
the Rule, the approval of an investment advisory agreement or any change in
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a fundamental investment policy would be effectively acted upon with respect to
a Fund only if approved by a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by shareholders of the Company
voting in the aggregate without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of a Fund voting
separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2 discussed above) or by
the Company's Charter, the Company may take or authorize such action upon the
favorable vote of the holders of more than 50% of the outstanding common stock
of the Company voting without regard to class.
HORIZON SERVICE SHARES
As stated in the Prospectuses for such Shares, Horizon Service
Shares are sold to Shareholder Organizations which enter into service
agreements requiring them to provide support services to their customers who
beneficially own Horizon Service Shares in consideration of the Funds' payment
of up to .25% (on an annualized basis) of the average daily net asset value of
the Horizon Service Shares beneficially owned by the customers. For the fiscal
years ended February 28, 1995, February 29, 1996 and February 28, 1997,
payments to Shareholder Organizations totalled $2,115,780, $3,119,024 and
$6,017,363, respectively, with respect to the Horizon Service Shares of the
Prime Fund, $989,269, $1,703,233 and $3,451,084, respectively, with respect to
Horizon Service Shares of the Treasury Fund, and $103,606, $113,492 and
$276,447, respectively, with respect to the Horizon Service Shares of the
Tax-Exempt Money Fund. Of these amounts, for the fiscal years indicated,
$391,875, $3,065,147 and $5,113,436, respectively, $224,434, $1,639,415 and
$3,115,516, respectively, and $28,442, $108,762 and $274,174, respectively,
were paid to Bank of America and/or its affiliates with respect to the Prime
Fund, Treasury Fund and Tax-Exempt Money Fund, respectively, and $15,122,
$6,746 and $0 was paid to the BISYS or Concord and/or their affiliates with
respect to the Prime Fund, Treasury Fund and Tax-Exempt Money Fund,
respectively.
For the fiscal year ended February 28, 1995, payments to
Shareholder Organizations totaled $590,188 and $604,380, respectively, with
respect to the Horizon Service Shares of the Government Fund and Treasury Only
Fund. Of these amounts, $132,934 and $569,889, respectively, were paid by the
Government Fund and Treasury Only Fund to Bank of America and/or its
affiliates, and $0 was paid by the Government Fund and the
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Treasury Only Fund to Concord and/or its affiliates. For the fiscal year ended
February 29, 1996, payments to Shareholder Organizations totalled $608,863 and
$369,104, respectively, with respect to the Horizon Service Shares of the
Government Fund and Treasury Only Fund. Of these amounts $602,557 and
$361,220, respectively, were paid by the Government Fund and Treasury Only Fund
to affiliates of Bank of America, and $0 was paid by the Government Fund and
Treasury Only Fund to Concord and/or its affiliates. For the fiscal year ended
February 28, 1997, payments to Shareholder Organizations totaled $621,036 and
$448,350, respectively with respect to the Horizon Service Shares of the
Government Fund and Treasury Only Fund. Of these amounts, $609,891 and
$416,253, respectively was paid by the Government Fund and Treasury Only Fund
to Bank of America and/or its affiliates, and $396 and $637, respectively was
paid by the Government Fund and Treasury Only Fund to the BISYS or Concord
and/or their affiliates.
For the fiscal year ended February 28, 1995, payments to
Shareholder Organizations totalled $255,299 with respect to the Horizon Service
Shares of the California Tax-Exempt Money Market Fund. Of this amount,
$251,505 was paid to Bank of America and/or its affiliates, and $0 was paid to
Concord and/or its affiliates. For the fiscal year ended February 29, 1996,
payments to Shareholder Organizations totalled $348,568 with respect to the
Horizon Service Shares of the California Tax-Exempt Money Market Fund. Of this
amount, $346,675 was paid to affiliates of Bank of America, and $0 was paid to
Concord and/or its affiliates. For the fiscal year ended February 28, 1997,
payments to Shareholder Organizations totalled $830,774 with respect to the
Horizon Service Shares of the California Tax-Exempt Money Market Fund. Of this
amount $760,334 was paid to Bank of America and/or its affiliates, and $0 was
paid to BISYS or Concord and/or their affiliates.
Services provided by Shareholder Organizations under service
agreements may include: (i) aggregating and processing purchase and redemption
requests for Horizon Service Shares from customers and placing net purchase and
redemption orders with the Distributor; (ii) providing customers with a service
that invests the assets of their accounts in Horizon Service Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend payments on
behalf of customers; (iv) providing information periodically to customers
showing their positions in Horizon Service Shares; (v) arranging for bank
wires; (vi) responding to customer inquiries relating to the services performed
by the Shareholder Organizations; (vii) providing subaccounting with respect to
Horizon Service Shares beneficially owned by customers or providing the
information to the Company necessary for subaccounting; (viii) if required by
law, forwarding shareholder communications from the Company (such as
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proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to customers; (ix) forwarding to
customers proxy statements and proxies containing any proposals regarding the
Company's arrangements with Shareholder Organizations; and (x) providing such
other similar services as requested by the Funds.
The Company's agreements with Shareholder Organizations are
governed by a Plan (called a "Shareholder Services Plan"). The Shareholder
Services Plan has been approved by the Board of Directors of the Company,
including a majority of the Directors who are not "interested persons" of the
Company as defined in the 1940 Act and have no direct or indirect financial
interest in the Shareholder Services Plan or any related service agreement (the
"Disinterested Directors"). In approving the Shareholder Services Plan, the
Directors determined that there was a reasonable likelihood that it would be
beneficial to each Fund and to the holders of its Horizon Service Shares. The
Shareholder Services Plan will continue with respect to each Fund until October
31, 1997, unless earlier terminated in accordance with its terms, and
thereafter it will continue in effect indefinitely provided that the Directors
approve the Shareholder Services Plan at least annually in the manner described
above.
Under the Shareholder Services Plan, the Board of Directors
must be provided with and must review, at least quarterly, a written report of
all amounts expended pursuant to the Shareholder Services Plan. The
Shareholder Services Plan and any service agreements implementing the
Shareholder Services Plan must be in writing. The Shareholder Services Plan
may be terminated at any time with respect to any Fund by a vote of the
majority of the Disinterested Directors. Each service agreement under the
Shareholder Services Plan is also terminable at any time without payment of any
penalty by a vote of a majority of the Disinterested Directors. Any material
amendment of the Shareholder Services Plan must be approved by a majority vote
of the Board of Directors and of the Disinterested Directors cast in person at
a meeting called for the purpose of voting on the amendment.
With respect to the purchase or sale of portfolio securities
and the execution of portfolio transactions, no Fund will give preference to
Shareholder Organizations with which the Fund enters into service agreements.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III,
Secretary of the Company, is a partner), 1345 Chestnut Street, Philadelphia
National Bank Building, Philadelphia,
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Pennsylvania 19107, serves as counsel to the Company and will pass upon the
legality of the shares offered hereby. O'Melveney & Myers LLP, 400 South Hope
Street, Los Angeles, California 90071 acts as special California counsel for
the Company and has reviewed the portions of the Prospectus and Statement of
Additional Information for the California Tax-Exempt Money Market Fund
concerning California taxes and the description of the special considerations
relating to California Municipal Securities.
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 each Fund for the fiscal year ending February 28, 1997.
REPORTS
Each Fund will send its shareholders unaudited semi-annual
reports including a description of the Fund's investments, and annual financial
statements together with a report of independent accountants.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund or a
particular series means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or of the series, or (b) 67% of the shares of the Fund or of
the series present at a meeting at which more than 50% of the outstanding
shares of the Fund or series are represented in person or by proxy.
At 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%);
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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 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
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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 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
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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%).
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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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 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
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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, 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%).
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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 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 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%).
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At such date, no other person was known by the Company to hold
of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectuses relating to the Pacific Horizon Shares,
Horizon Shares, Horizon Service Shares, X Shares, S Shares and Y Shares and
this Statement of Additional Information omit certain information contained in
the Company's registration statement filed with the SEC. Copies of the
registration statement, including items omitted herein, may be obtained from
the Commission by paying the charges prescribed under its rules and
regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended
February 28, 1997 (the "Annual Reports") accompany this Statement of Additional
Information. The financial statements and notes thereto in each Annual Report
are incorporated into this Statement of Additional Information by reference.
The financial statements and notes in each Annual Report 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
Reports 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-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
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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.
"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.
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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-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."
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"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.
"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.
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"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"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.
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"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 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.
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"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.
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.
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To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A" - 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.
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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, 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
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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.
"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:
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"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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