<PAGE> 1
PROSPECTUS
JANUARY 1, 1997
PACIFIC HORIZON INTERNATIONAL EQUITY FUND
Investment Portfolio Offered by Pacific
Horizon Funds, Inc.
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The PACIFIC HORIZON INTERNATIONAL EQUITY FUND (the "Fund") is a diversified
mutual fund whose investment objective is to seek long-term capital growth
primarily through investments in foreign equity securities.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"), an open-end,
series management investment company. Bank of America National Trust and Savings
Association ("Bank of America" or the "investment adviser") serves as the Fund's
investment adviser. Based in San Francisco, California, Bank of America and its
affiliates have over $48 billion under management, including over $13 billion in
mutual funds. Wellington Management Company, LLP ("Wellington Management")
serves as the sub-adviser to the Fund.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated January 1, 1997 and is
incorporated by reference into this Prospectus.
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Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investment in the Fund involves investment
risk, including the possible loss of principal.
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LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, in
connection with the offering of the Fund's shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This Prospectus does not constitute an offer
by the Fund or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Fund or the distributor to make such offer in such
jurisdiction.
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<PAGE> 2
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 7 INVESTMENT OBJECTIVE
7 TYPES OF INVESTMENTS
9 FUNDAMENTAL LIMITATIONS
9 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 14 HOW TO BUY SHARES
14 What Is My Minimum Investment In The Fund?
14 What Alternative Sales Arrangements Are Available?
14 How Are Shares Priced?
18 How Do I Decide Whether To Buy A or K Shares?
19 How Can I Buy Shares?
20 What Price Will I Receive When I Buy Shares?
21 What Else Should I Know To Make A Purchase?
21 HOW TO SELL SHARES
21 How Do I Redeem My Shares?
23 What NAV Will I Receive For Shares I Want To Sell?
23 What Kind Of Paperwork Is Involved In
Selling Shares?
24 How Quickly Can I Receive My Redemption Proceeds?
24 Do I Have Any Reinstatement Privileges After
I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION 24
POLICIES
SHAREHOLDER SERVICES 25 CAN I USE THE FUND IN MY RETIREMENT PLAN?
25 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
26 WHAT IS TELETRADE?
26 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
27 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
27 CAN I ARRANGE PERIODIC WITHDRAWALS?
27 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
28 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 28 FUND MANAGEMENT
28 Expenses
28 Service Providers
30 Fee Waivers
TAX INFORMATION 31
MEASURING PERFORMANCE 32
DESCRIPTION OF SHARES 33
PLAN PAYMENTS 34
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DISTRIBUTOR: INVESTMENT ADVISER: SUBADVISER:
Concord Financial Group, Inc. Bank of America National Trust Wellington Management
3435 Stelzer Road and Savings Association Company, LLP
Columbus, OH 43219-3035 555 California Street 75 State Street
San Francisco, CA 94104 Boston, MA 02109
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</TABLE>
<PAGE> 3
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 14 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and/or shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A and K Shares and their estimated operating expenses for the first twelve
months of operations. Actual expenses may vary. A hypothetical example based on
the summary is also shown.
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- -----------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0.30% 0.30%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares (After Fee
Waivers)* 0.75%*
Other Expenses (After
Expense Reimbursements)+ 0.95% 0.95%
---- ----
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 1.50% 2.00%
===== =====
<FN>
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage(R)
or Advantage Plus(TM) Programs) are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A Shares cannot be
purchased under the Large Purchase Exemption if there is another no-load
exemption available. Accordingly, A Shares purchased under another no-load
exemption are not subject to a contingent deferred sales charge. Although no
front-end sales load will be paid on shares purchased under the Large
</TABLE>
2
<PAGE> 4
Purchase Exemption, the Distributor will compensate brokers whose customers
purchase such shares at the following rates: 1.00% of the amount under $3
million, 0.50% of the next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc. ("SIS")
and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in the Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds'
K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers and/or expense reimbursement, management fees for each
class of the Fund would be 0.95% of the average net assets (annualized);
"Other Expenses" for the Fund's A and K Shares are estimated to be 1.22% and
1.22%, respectively, of average net assets (annualized); and "Total Operating
Expenses" for the Fund's A and K Shares are estimated to be 2.42% and 2.92%
of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Fund as shown in
the above table, long-term K shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. For a further description of
shareholder transaction expenses and the Fund's operating expenses, see the
sections entitled "Shareholder Guide," "The Business of the Fund" and "Plan
Payments" below.
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EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS
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<S> <C> <C>
A Shares(1).................................................. $ 60 $ 90
K Shares..................................................... $ 20 $ 63
<FN>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
</TABLE>
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Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. The Fund is
new and the above figures are estimates for the first twelve months of
operations only. Actual investment returns and operating expenses may be more or
less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.75% of the Fund's
average daily net assets; and
- - an administration fee payable at the annual rate of 0.20% of the Fund's
average daily net assets.
Currently, the most restrictive expense limitation limits the Fund's aggregate
annual expenses (including management fees) to 2.5% of the first $30 million of
the Fund's average daily net assets, 2% of the next $70 million and 1.5% of the
Fund's remaining average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is
3
<PAGE> 5
more advantageous to incur a front-end sales charge and thereafter be subject to
annual fees under a Shareholder Services Plan, with respect to A Shares; or
incur neither a front-end sales charge nor a contingent deferred sales charge,
but incur fees under a Distribution Plan and/or an Administrative and
Shareholder Services Plan, with respect to K Shares. K Shares, however, are only
available for investment by: (a) businesses or other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America; (b)
individuals investing proceeds from a redemption of shares from another open-end
investment company on which such individual paid a front-end sales load if (i)
such redemption occurred within 30 days prior to the purchase order, and (ii)
such other open-end investment company was not distributed and advised by
Concord Financial Group, Inc. and Bank of America, respectively, or their
affiliates; and (c) accounts opened for IRA rollovers from a 401(k) plan in
which the assets were held in any Pacific Horizon or Time Horizon Fund and
subsequent purchases into an IRA rollover account opened as described above, so
long as the original IRA rollover account remains open on the Company's books.
See the section entitled "How to Buy Shares" below.
4
<PAGE> 6
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the period indicated. The Fund commenced operations on May 13, 1996
by offering a single series of shares known as A Shares, and began offering K
Shares on July 22, 1996. Prior to September 1, 1996, the Fund operated as part
of a master-feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company (the "Master
Portfolio") which had an identical investment objective. On September 1, 1996,
the Fund withdrew its assets from the Master Portfolio and invested them
directly in portfolio securities.
The financial data included in this table has been derived from unaudited
financial statements and notes which are incorporated by reference into the
Statement of Additional Information. The Financial Highlights should be read in
conjunction with such financial statements and notes thereto. Further
information about the performance of the Fund is available in the semi-annual
report to shareholders. Both the Statement of Additional Information and the
semi-annual report to shareholders may be obtained from the Fund free of charge
by calling 800-332-3863.
Selected data for an A Share of common stock outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1996
(UNAUDITED)(A)*
---------------
<S> <C>
Net asset value per share,
Beginning of Period................... $ 10.00
-------
Income from Investment Operations:
Net investment income................. 0.01
Net realized and unrealized losses on
investments......................... (0.29)
-------
Total loss from investment
operations.......................... (0.28)
-------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................... --
Distributions to shareholders in
excess of net investment income..... --
Net change in net asset value......... (0.28)
-------
Net asset value per share,
End of Period....................... $ 9.72
=======
Total Return............................ (2.80%)+
Ratios/supplemental data:
Net assets, End of Period (000)....... $ 9,189
Ratio of net expenses to average
net assets**........................ 0.75%++
Ratio of net investment income to
average net assets**................ 0.65%++
<FN>
* For the period May 13, 1996 (commencement of operations) through August 31,
1996.
** Reflects the Fund's proportionate share of the International Equity
Portfolio (the "Portfolio") of Master Investment Trust, Series I expenses
and fee waivers and expense reimbursements by the Portfolio's Investment
Adviser and Administrator and the Fund's Administrator and Distributor. Such
fee waivers and expense reimbursements had the effect of reducing the ratio
of expenses to average net assets and increasing the ratio of net investment
income to average net assets by 10.04%, for the period ended August 31,
1996. Prior to September 1, 1996, the Fund invested all its assets in the
Portfolio.
+ Unannualized and does not include the effect of the maximum 4.50% sales
charge.
++ Annualized.
(a) As of July 22, 1996, the Company designated the existing series of Shares as
"A" Shares.
</TABLE>
5
<PAGE> 7
Selected data for a K Share of common stock outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
AUGUST 31, 1996
(UNAUDITED)*
---------------
<S> <C>
K SHARES
Net asset value,
Beginning of Period................... $ 9.76
-------
Income from Investment Operations:
Net investment income................. --
Net realized and unrealized gain
(loss) on investments............... (0.05)
-------
Total income (loss) from investment
operations.......................... (0.05)
-------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................... --
Dividends to shareholders in excess
of net investment income............ --
Net change in net asset value........... (0.05)
-------
Net asset value, end of period.......... $ 9.71
=======
Total return............................ (2.90%)+
Ratios/Supplement Data:
Net assets, end of period............. $ 989
Ratio of net expenses to average
net assets**........................ 1.25%++
Ratio of net investment income to
average net assets**................ 0.15%++
<FN>
* For the period July 22, 1996 (commencement of operations) through August 31,
1996.
+ Not annualized. Represents total return for the A shares from May 13, 1996 to
July 21, 1996 plus the total return for the K shares for the period from July
22, 1996 through August 31, 1996. A share performance does not include
deduction of the maximum 4.50% sales charge. K share performance will be
lower than A share performance due to K shares' additional 0.50% distribution
or shareholder source fee.
++ Annualized.
** Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's investment advisor and
administrator and the Fund's Administrator and Distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 10.04% for the period ended August 31, 1996. Prior to
September 1, 1996, the Fund invested all its assets in the Portfolio.
</TABLE>
6
<PAGE> 8
FUND INVESTMENTS
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INVESTMENT OBJECTIVE
The Pacific Horizon International Equity Fund seeks long-term capital growth by
investing primarily in foreign equity securities. The Fund may be appropriate
for investors who want to diversify their investments into foreign equity
markets and who are prepared to accept the risks entailed in such investments.
WHILE THE FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. During normal market conditions, the Fund will invest at least 80%
of its total assets in equity securities of companies that are domiciled or have
their principal activities in countries outside the United States. Normally, the
Fund will invest in equity securities of companies in at least three different
foreign countries. The domicile or the location of the principal activities of a
company will be the country under whose laws the company is organized, in which
the principal trading market for the equity securities issued by the company is
located, or in which the company has over half of its assets or derives over
half of its revenues or profits. Equity securities in which the Fund may invest
consist of common stocks, preferred stocks, securities convertible into common
stocks or preferred stocks, and warrants to purchase such securities.
The Fund may invest up to 20% of its total assets (at the time of purchase) in
convertible bonds and debt securities. These debt obligations include U.S.
Government and foreign government securities and corporate debt securities,
including Samurai and Yankee bonds and Euro-bonds. The Fund will limit its
purchases of debt securities to investment grade obligations. "Investment grade"
debt refers to those securities rated within one of the four highest ratings
categories by Moody's Investors Service, Inc. ("Moody's") or by Standard &
Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit Co.
("D&P"), or Fitch Investors Service, Inc. ("Fitch"), or, if unrated, deemed by
Bank of America or Wellington Management to be of equivalent quality. Securities
rated in the lowest category of investment grade, Baa by Moody's or BBB by S&P,
D&P or Fitch may have speculative characteristics.
In the event that the rating of any security held by the Fund falls below the
required rating, the Fund will not be obligated to dispose of such security and
may continue to hold the security if, in the opinion of Bank of America or
Wellington Management, such investment is considered appropriate under the
circumstances.
The Fund may also invest, without limitation, in securities of foreign issuers
in the form of American Depository Receipts ("ADRs") or other similar securities
evidencing ownership of underlying securities issued by foreign issuers. ADRs
purchased for the Fund will be included as part of the 80% of assets in foreign
equity securities. These securities may not necessarily be denominated in the
same currency as the securities underlying the ADRs. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying foreign securities. Generally, ADRs, in registered form, are designed
for use in U.S. securities markets.
During temporary defensive periods when Bank of America or Wellington Management
believe such a position is warranted by uncertain or unusual market conditions,
the Fund may invest without limit in securities issued or guaranteed by the U.S.
Government (and its agencies and instrumentalities), foreign or domestic money
market instruments and investment grade debt securities, or may hold its assets
in cash (U.S. dollars, foreign currencies or multinational currency units).
7
<PAGE> 9
RISK FACTORS. Although investing in any mutual fund has certain inherent risks,
an investment in the Fund may have even greater risks than investments in most
other types of mutual funds. The Fund is not a complete investment program, and
it may not be appropriate for an investor if he or she cannot bear financially
the loss of at least a significant portion of his or her investment. The Fund's
net asset value per share is subject to rapid and substantial changes because
greater risk is assumed in seeking the Fund's objective.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers carry certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Fund will invest heavily in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will, to the extent the Fund does not adequately hedge against such
fluctuations, affect the value of securities in the Fund so far as U.S.
investors are concerned. Foreign currency exchange rates are determined by
forces of supply and demand on the foreign exchange markets and the regulatory
control of the exchanges on which the currencies trade. These forces are
themselves affected by the international balance of payments and other economic
and financial conditions, government intervention, speculation and other
factors. Costs are incurred in connection with conversions between various
currencies.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or as
uniform as, those of U.S.-based companies. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than U.S.
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable U.S.-based companies. There
is generally less government supervision and regulation of foreign exchanges,
brokers and issuers than there is in the United States. The Fund may have
greater difficulty taking appropriate legal action in a foreign court than in a
United States court.
The expense ratio of the Fund can be expected to be higher than that of funds
investing in domestic securities. The costs attributable to investing abroad are
usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
Interest and dividends payable on the Fund's foreign portfolio securities may be
subject to foreign withholding taxes. To the extent such taxes are not offset by
credits or deductions allowed to investors under U.S. federal income tax
provisions, they may reduce the net return to the Funds' shareholders. See "Tax
Information."
The International Equity Fund may invest up to 25% of its total assets in
countries with emerging economies or securities markets. These countries may
include but are not limited to Argentina, Brazil, Colombia, Greece, Hungary,
Israel, Malaysia, Mexico, Peru, Poland, South Africa, South Korea, Taiwan,
Thailand, and Turkey. Political and economic structures in many of these
countries may be undergoing significant evolution and rapid development, and
these countries may lack the social, political and economic stability
characteristic of more developed countries. Some of these countries have in the
past failed to recognize private property rights and have at times nationalized
or expropriated the assets of private companies. As a result, the risks
described above, including the risks of nationalization or expropria-
8
<PAGE> 10
tion of assets, may be heightened. In addition, unanticipated political or
social developments may affect the value of investments in these countries and
the availability to the Fund of additional investments in emerging market
countries. The small size and inexperience of the securities markets in certain
of these countries and the limited volume of trading in securities in these
countries may make investments in the countries illiquid and more volatile than
investments in Japan or most Western European countries. There may be little
financial or accounting information available with respect to issuers located in
certain emerging market countries, and it may be difficult as a result to assess
the value or prospects of an investment in such issuers.
ADDITIONAL INVESTMENTS. When not invested in the securities described above,
the Fund may invest in other types of securities subject to the limitations
described previously.
The Fund may purchase bank obligations including certificates of deposit and
bankers' acceptances issued by domestic or foreign banks or financial
institutions that have total assets of more than $2.5 billion. The Fund may also
make interest-bearing savings deposits in commercial banks in amounts not
exceeding 5% of its total assets.
Commercial paper rated in the top rating category by S&P, Moody's, D&P or Fitch
and unrated commercial paper determined to be of comparable quality by Bank of
America or Wellington Management may also be purchased.
As noted above, the Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Obligations of some of
these agencies and instrumentalities, such as the Small Business Administration
or the Maritime Administration, are backed by the full faith and credit of the
U.S. Government; others, like the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, including the Student Loan Marketing
Association, are backed solely by the issuer's credit. There is no assurance
that the U.S. Government would support a U.S. Government-sponsored entity if it
was not required to do so by law.
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund may not be changed without a vote by the
holders of a majority of the outstanding shares of the Fund. Policies requiring
such a vote to effect a change are known as "fundamental." Included in the
Fund's fundamental investment limitations is the restriction that the Fund may
not borrow money for the purpose of obtaining investment leverage or issue
senior securities (as defined in the Investment Company Act of 1940), provided
that the Fund may borrow from banks for temporary purposes and in an amount not
exceeding 10% of the value of the total assets of the Fund; or mortgage, pledge
or hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of its total assets at the time of such borrowing. This restriction shall
not apply to (a) the sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase, or (b) transactions in currency, options,
futures contracts and options on futures contracts, or forward commitment
transactions.
A complete list of the fundamental investment limitations is set out in full in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Fund may write covered put and call options and purchase put and
call options on U.S. or foreign securities that are traded on United States and
foreign securities exchanges and in over-the-counter markets.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund
9
<PAGE> 11
holds a call on the same security and in the same principal amount as the call
written and the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, government
securities or other high grade debt obligations in a segregated account with its
custodian.
Put options written by the Fund give the holder the right to sell the underlying
security to the Fund at a stated exercise price. A put option written by the
Fund is "covered" if the Fund maintains cash or high grade debt obligations with
a value equal to the exercise price in a segregated account with its custodian,
or holds a put on the same security and in the same principal amount as the put
written and the exercise price of the put held is equal to or greater than the
exercise price of the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign securities exchanges are similar
to the risks of investing in foreign securities. In addition, a foreign exchange
may impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option plus transaction costs. The Fund may purchase
call options to hedge against an increase in the price of securities that the
Fund anticipates purchasing in the future. The premium paid for the call option
plus any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option. Unless the price of the underlying security rises
sufficiently, the call option may expire worthless to the Fund.
The Fund's options transactions will be limited as follows: a) not more than 5%
of the total assets of the Fund may be invested in options; b) the obligations
of the Fund under put options written by the Fund may not exceed 50% of the
Fund's net assets; and c) the aggregate premiums on all options purchased by the
Fund may not exceed 25% of the Fund's net assets.
The Fund may buy put and call options on various stock indices. In contrast to
an option on a particular security, an option on a stock index provides the
holder with the right to make or receive a cash settlement upon exercise of the
option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write put and call
options on foreign currencies to increase the Fund's gross income and for the
purpose of protecting against declines in the United States dollar value of
foreign currency-denominated portfolio securities and against increases in the
United States dollar cost of such securities to be acquired. As with other kinds
of options, however, writing an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. Purchasing an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium paid plus related transaction costs.
Options on foreign currencies written or purchased by the Fund may be traded on
United States and foreign exchanges or over-the counter. There is no specific
percentage limitation on the Fund's investments in options on foreign
currencies.
STOCK INDEX, INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS AND
OPTIONS. The Fund may purchase and sell stock index, interest rate and foreign
currency futures contracts (as well as purchase related options) in an effort to
hedge
10
<PAGE> 12
against changes in the value of securities that the Fund holds in its portfolio
or which it intends to purchase, or as a substitute for purchasing or selling
the underlying security. Such changes could occur as a result of market
conditions or fluctuating currency exchange rates. These transactions will only
be entered into when deemed appropriate by Bank of America or Wellington
Management to reduce the risks inherent in the management of the Fund.
The Fund may not purchase or sell a futures contract or purchase a related
option unless immediately after any such transaction the sum of the aggregate
amount of initial margin deposits on its existing futures positions and the
amount of premiums paid for related options does not exceed 5% of the Fund's
total assets (after taking into account certain technical adjustments).
More information regarding futures contracts and related options can be found in
Appendix A to the Statement of Additional Information.
POTENTIAL RISKS OF OPTIONS AND FUTURES. The successful use of the foregoing
investment techniques depends on the ability of Bank of America or Wellington
Management to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of futures contracts or options or
may realize losses and thus be in a worse position than if such strategies had
not been used. Unlike many exchange-traded futures contracts and options on
futures contracts, there are no daily price fluctuation limits with respect to
options on currencies, and adverse market movements could therefore continue to
an unlimited extent over a period of time. In addition, the correlation between
movements in the prices of such instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses. The Fund's ability to dispose of its positions in
futures contracts, options and forward contracts will depend on the availability
of liquid markets in such instruments. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. In order to prevent leverage in connection with the purchase of
futures contracts or call options thereon by the Fund, an amount of cash, cash
equivalents or liquid high grade debt securities equal to the market value of
the obligation under the futures contracts (less any related margin deposits)
will be maintained in a segregated account with the custodian. Furthermore, the
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Fund will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America or Wellington Management,
under guidelines approved by the Fund's Board of Directors. It is intended that
such agreements will not have maturities longer than 60 days. During the term of
any repurchase agreement, the seller must maintain the value of the securities
subject to the agreement in an amount that is greater than the repurchase price.
Bank of America or Wellington Management then continually monitors that value.
Nonetheless, should the seller default on its obligations under the agreement,
the Fund would be exposed to possible loss due to adverse market action or
delays connected with the disposition of the underlying obligations. Repurchase
agreements are considered to be loans under the Investment Company Act of 1940
(the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary purposes
by entering into reverse repurchase agreements. Under these agreements the Fund
sells portfolio securities to financial institutions (such as banks and
broker-dealers) and agrees to buy them back at an agreed upon time and price.
When the Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that
11
<PAGE> 13
have a value equal to or greater than the repurchase price. The account is then
continuously monitored by Bank of America or Wellington Management to make sure
that an appropriate value is maintained. Reverse repurchase agreements involve
the risk that the value of portfolio securities the Fund relinquishes may
decline below the price the Fund must pay when the transaction closes. Reverse
repurchase agreements are considered to be borrowings by the Fund under the 1940
Act. Borrowings may magnify the potential for gain or loss on amounts invested
resulting in an increase in the speculative character of the Fund's outstanding
shares. The Fund will only enter into reverse repurchase agreements to avoid the
need to sell portfolio securities to meet redemption requests during unfavorable
market conditions.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Fund
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, the Fund may purchase or sell
securities on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by the Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. Delayed settlement refers to a transaction in the secondary
market that will settle some time in the future. These transactions involve the
risk that the price or yield obtained may be less favorable than the price or
yield available when the delivery takes place. The Fund will set aside in a
segregated account cash or liquid securities equal to the amount of any
when-issued, forward commitment or delayed settlement transactions. When-issued
purchases, forward commitments and delayed settlements are not expected to
exceed 25% of the Fund's total assets under normal circumstances. These
transactions will not be entered into for speculative purposes, but primarily to
hedge against anticipated changes in interest rates.
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to financial institutions (such as banks and brokers) that
Bank of America or Wellington Management consider to be of good standing.
Borrowers of portfolio securities may not be affiliated directly or indirectly
with the Company or the Fund. If the financial institution should become
bankrupt, however, the Fund could experience delays in recovering its
securities. A securities loan will only be made when, in the judgment of Bank of
America or Wellington Management, the possible reward from the loan justifies
the possible risks. In addition, such loans will not be made if, as a result,
the value of securities loaned by the Fund exceeds 30% of its total assets.
Securities loans will be fully collateralized.
INVESTMENT COMPANY SECURITIES. The Fund may acquire shares of open and
closed-end investment companies, including companies that invest in foreign
issuers and money market mutual funds advised by Bank of America, subject to the
requirements of applicable securities laws. No more than 10% of the value of the
Fund's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one investment
company; except with respect to the investment in a money market mutual fund
advised by Bank of America, the Fund is permitted to invest the greater of 5% of
its net assets or $2.5 million. In addition, the Fund may hold no more than 3%
of the outstanding voting stock of any other investment company. Although these
investment companies may have policies that differ from the Fund's policies,
their management and other types of expenses will be similar to those borne by
the Fund. When the Fund invests in another investment company, it pays a pro
rata portion of that company's expenses. Such expenses are in addition to the
expenses the Fund pays in connection with its own operations.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
net assets (determined at the time of acquisition) in securities that are
illiquid. If, after the time of acquisition, events
12
<PAGE> 14
cause this limit to be exceeded, the Fund will take steps to reduce the
aggregate amount of illiquid securities as soon as is reasonably practicable.
The Fund intends that investments in securities that are not registered under
the Securities Act of 1933 but may be purchased by institutional buyers under
Rule 144A and for which a liquid trading market exists as determined by the
Board of Directors, Bank of America, or Wellington Management (pursuant to
guidelines adopted by the Board), will not be subject to the Fund's 15%
limitation on illiquid securities. This investment practice could have the
effect of increasing the level of illiquidity in the Fund during any period that
institutional buyers under Rule 144A become uninterested in purchasing these
securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made
independently from those for other investment companies and accounts managed by
Bank of America or Wellington Management and their affiliated entities. Such
other investment companies and accounts may also invest in the same securities
as the Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Fund and another investment company
or account, available investments or opportunities for sales will be equitably
allocated pursuant to procedures of Bank of America or Wellington Management. In
some instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or sold by the Fund.
From time to time, the Fund may pay brokerage commissions to an affiliate of the
Fund's distributor on securities acquired by the Fund. In allocating purchase
and sale orders for investment securities, Bank of America or Wellington
Management may consider the sale of Fund shares by broker-dealers and other
financial institutions (including affiliates of Bank of America, Wellington
Management or the Fund's distributor to the extent permitted by law), provided
it believes the quality of the transaction and the price to the Fund are not
less favorable than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Fund's investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Turnover may require
payment of brokerage commissions, impose other transaction costs and could
increase substantially the amount of income received by the Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). The Fund's portfolio turnover rate is not expected to
exceed 75%, although portfolio turnover will not be a limiting factor in making
investment decisions for the Fund.
13
<PAGE> 15
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs (one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs (more than one
participant) $ 2,500 No minimum
<FN>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
</TABLE>
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. The two classes of shares in the Fund
represent interests in the same portfolio of investments of the Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares bear the expenses of a Shareholder Services Plan. K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such Plans. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
NAV = ------------------------------------------------------
Number of Outstanding Shares of the Class
14
<PAGE> 16
Net asset value is determined as of 4:00 p.m. Eastern time on days the New York
Stock Exchange (the "Exchange") is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the Fund
pursuant to procedures adopted by the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market value.
Trading in foreign securities is generally completed prior to the end of regular
trading on the Exchange. Trading may occur in foreign securities, however, on
Saturdays and U.S. holidays and at other times when the Exchange is closed. As a
result, there may be delays in reflecting changes in the market values of
foreign securities in the calculation of the net asset value per share of the
Fund on days when net asset value is not calculated and on which shareholders of
the Fund cannot redeem due to changes in values of securities traded in foreign
markets. For further information about valuing securities, see the Statement of
Additional Information. For price information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the Fund
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A% OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
--------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
<FN>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
</TABLE>
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under
the Large Purchase Exemption does not apply to A Shares purchased under the
Daily Advantage(R) or Advantage Plus(TM) Programs. To the extent that no other A
Share no-load exemption is available, the foregoing schedule of sales loads does
not apply to purchases of A Shares of $1,000,000 or more or to purchases of A
Shares if the aggregate value of the A Shares that you beneficially own in any
Pacific Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000. If you
accumulate $1,000,000 or more of A Shares, on any additional purchase of A
Shares, the contingent deferred sales load described below will apply to such A
Shares when they are redeemed. In addition, if a customer purchases $1,000,000
or more of A Shares and redeems such shares, a contingent deferred sales load
will be imposed as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ---------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
15
<PAGE> 17
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on A Shares acquired under the Large
Purchase Exemption, the Distributor will compensate brokers whose customers
purchase shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
K SHARES. Bank of America will compensate Affiliated Brokers for their
customers who invested in the Fund and are participants in the Daily
Advantage(R) Program. The Affiliated Brokers will be compensated by Bank of
America at the rate of 1.00% of the amount under $3 million, 0.50% of the next
$47 million and 0.25% thereafter of combined Pacific Horizon Funds' and Time
Horizon Funds' K Shares in each Daily Advantage(R) Program.
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
- - any purchase by an investor who was a shareholder of Seafirst Retirement Fund
on the date of such fund's reorganization into the Company;
- - any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of the Seafirst Division of Bank of
America or by or on behalf of agency accounts administered by any bank or
trust company affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain open on the
Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
16
<PAGE> 18
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?;" (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales
charge is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an exchange
and can be traced back to shares that were acquired with a sales load). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon
Fund within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load purchased during
17
<PAGE> 19
that period count as a credit toward completion of the Letter of Intent. Any
investments you make during the period receive the discounted sales load based
on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent. Shares of Time Horizon Funds may be included when
determining reduced sales loads under the letter of intent program.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A OR K SHARES?
The alternative sales arrangements of the Fund permits you to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances. You should determine whether under your particular circumstances
it is more advantageous to invest in A Shares and incur a front-end sales charge
and an ongoing Shareholder Services Plan fee; or invest in K Shares and incur
neither a front-end sales charge nor a contingent deferred sales charge. K
Shares do incur fees under a Distribution Plan and/or an Administrative and
Shareholder Services Plan. K Shares of the Fund, however, are only available to:
(a) businesses or other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order and (ii) such other open-end investment company
was not distributed and advised by Concord Financial Group, Inc. and Bank of
America, respectively, or their affiliates; and (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books ("Qualified IRA Rollovers").
18
<PAGE> 20
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to Pacific Horizon
International Equity Fund) to Pacific Horizon Funds, Inc.
the address on the Account File No. 54634
Application. Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of Fund shares in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
- --------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
You should refer to the "Shareholder Services" section
For additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next 4:00 p.m. Eastern time after your purchase order is received in proper
form by the Fund's transfer agent, BISYS Fund Services, Inc. (the "Transfer
Agent"), at its Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received
20
<PAGE> 22
by the entity by 4:00 p.m. Eastern time on a business day will be effected as of
4:00 p.m. Eastern time that day if the order is actually received by the
Transfer Agent not later than the next business morning accompanied by payment
in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will not be issued.
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
21
<PAGE> 23
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- -----------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
International Equity Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds,
Inc.
P.O. Box 80221
Los Angeles, CA 90080-9909
- -----------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) to the address on the left.
- -----------------------------------------------------------------------------------------------
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE> 24
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
$50,000 per transaction) by telephone after appropriate
(a service permitting information regarding your bank account has been established
transfers of money to your on your Fund account. This information may be provided on
checking, NOW or bank money the Account Application or in a signature guaranteed letter
market account) of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Fund itself imposes no charge when A Shares are redeemed
(except pursuant to the Large Purchase Exemption described above), if you
purchase shares through Bank of America or a Service Organization, they may
charge a fee for providing certain services in connection with investments in
Fund shares.
The Fund imposes no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance. The
contingent deferred sales charge will not be imposed upon such involuntary
redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for (i) an
amount in excess of $50,000 per day, (ii) any amount if the redemption proceeds
are to be sent somewhere other than the address of record on the Company's
books, or (iii) an amount of $50,000 or less if the address of record has not
been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
23
<PAGE> 25
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Fund's distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption
or any Pacific Horizon Shares of the Pacific Horizon Prime Fund. Shares so
reinvested will be purchased at a price equal to the net asset value next
determined after the Transfer Agent receives a reinstatement request and payment
in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends and distributions arising
from the net investment income and net realized gains, if any, earned on
investments in the Fund which are allocable to the Fund. The Fund's net income
and net realized capital gains (if any) are distributed at least annually.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, at P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
24
<PAGE> 26
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
- -------------------------------------------------------------------------------
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to A Shares subject to the
Large Purchase Exemption will not be charged on redemptions in connection with
minimum required distributions from an IRA due to a shareholder having reached
age 70 1/2. For details, contact the Fund's distributor at 800-332-3863.
Investors should also read the IRA Disclosure Statement and the Bank Custodial
Agreement for further details on eligibility, service fees and tax implications,
and should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America and
to Qualified IRA Rollovers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares, and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
25
<PAGE> 27
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
26
<PAGE> 28
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
27
<PAGE> 29
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
- --------------------------------------------------------------------------------
THE BUSINESS OF THE FUNDS
- --------------------------------------------------------------------------------
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
EXPENSES
Operating expenses borne by the Fund include taxes, fees and expenses of the
directors, and officers, investment advisory, administration, custodial and
transfer agency fees, certain insurance premiums, outside auditing and legal
expenses, cost of shareholder reports and meetings and any extraordinary
expenses. Fund expenses also include Securities and Exchange Commission fees,
state securities qualification fees, cost of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, and certain shareholder servicing fees.
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund bears the
expenses incurred in their operation.
SERVICE PROVIDERS
-----------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Fund. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 foreign countries.
28
<PAGE> 30
In its advisory agreement, Bank of America has agreed to manage the Fund's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Fund's securities. The advisory
agreement also provides that Bank of America may, in its discretion, provide
advisory services through its own employees or employees of one or more of its
affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation, provided such employees are under the management of
Bank of America. Bank of America may also employ a sub-adviser provided that
Bank of America remains fully responsible to the Fund for the acts and omissions
of the sub-adviser. In addition, notwithstanding any such employment or
association, Bank of America shall itself (a) establish and monitor general
investment criteria and policies for the Fund, (b) review and analyze on a
periodic basis the Fund's portfolio holdings and transactions in order to
determine their appropriateness in light of the Fund's shareholder base, and (c)
review and analyze on a periodic basis the policies established by any sub-
adviser for the Fund with respect to the placement of orders for the purchase
and sale of portfolio securities.
Since the commencement of operations of the Fund, E. Keith Wirtz has been the
manager of the Fund. Mr. Wirtz is a senior vice president and chief investment
officer of Bank of America, his employer since 1992. Previously, he was trust
investment manager with Security Pacific Bank for a ten year period. Mr. Wirtz
is a Chartered Financial Analyst.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.75% of the
Fund's average daily net assets. This fee is higher than that paid by other
investment companies but is comparable to fees paid by other investment
companies with similar investment objectives and policies. This amount may be
reduced pursuant to undertakings by Bank of America. (See the information below
under "Fee Waivers").
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments" below, and may
receive fees charged directly to their accounts in connection with investments
in Fund shares.
SUB-ADVISER
Wellington Management Company, LLP, ("Wellington Management") a Massachusetts
limited liability partnership with principal offices at 75 State Street, Boston,
Massachusetts 02109 , provides sub-advisory services to the Fund. Subject to the
oversight and supervision of the Adviser and the Company's Board of Directors,
the Sub-Adviser will provide a continuous investment program for the Fund,
including investment research and management with respect to all securities,
investments, cash and cash equivalents in the Fund. Wellington Management will
from time to time determine what securities and other investments will be
purchased, retained or sold by the Fund.
Wellington Management is entitled to a fee, payable by the Adviser, for its
services and expenses incurred with respect to the Fund. The fee is computed
daily and paid monthly at the following annual rates (as a percentage of the
Fund's average daily net assets), which vary according to the level of fund
assets: 0.40% on the Fund's first $50 million of average daily net assets, 0.30%
on the next $100 million, 0.25% on the next $350 million and 0.20% of the Fund's
average daily net assets in excess of $500 million.
Since January 1, 1997, the International Equity Fund has been managed by
Wellington Management's Global Equity Strategy Group, a group of global
portfolio managers and senior investment professionals headed by Trond
Skramstad. Mr. Skramstad joined Wellington Management in 1993 as the firm's
Director of International Equity Investments. Prior to joining Wellington
Management, Mr. Skramstad was a Principal at Scudder, Stevens & Clark, Inc.
29
<PAGE> 31
ADMINISTRATOR
The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary BISYS Fund
Services, L.P., serves as Administrator of the Fund. Their offices are located
at 50 Clove Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road,
Columbus, Ohio 43219-3035, respectively. Prior to November 1, 1996, Concord
Holding Corporation ("Concord"), an indirect, wholly-owned subsidiary of BISYS
served as administrator.
Under its administration agreements with the Company, BISYS has agreed to: pay
the costs of maintaining the offices of the Company; provide a facility to
receive purchase and redemption orders; provide statistical and research data,
data processing services, and clerical services; coordinate the preparation of
reports to shareholders of the Fund and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of the Fund's
shares for sale under state securities laws; maintain books and records of the
Fund; calculate the net asset value of the Fund; calculate the dividends and
capital gains distributions paid to shareholders and generally assist in all
aspects of the operations of the Fund.
For its services as administrator, BISYS is entitled to receive an
administration fee from the Fund at the annual rate of 0.20% of the Fund's
average daily net assets. This amount may be reduced pursuant to undertakings by
BISYS. (See the information below under "Fee Waivers").
Pursuant to the authority granted in its administration agreements, BISYS or a
subcontractor has entered into an agreement with PFPC, Inc. ("PFPC") under which
PFPC and an off-shore affiliate of PFPC perform certain of the services listed
above, e.g., calculating the net asset value of the Fund, calculating dividends
and capital gains distributions to shareholders, and maintaining the books and
records of the Fund. The Fund bears all fees and expenses charged by PFPC for
these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of BISYS and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Fund. BISYS Fund Services,
Inc., a wholly-owned subsidiary of BISYS, is the transfer and dividend
disbursing agent of the Fund and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers as well as by certain expense limitations imposed by state securities
regulators. Periodically, during the course of the Fund's fiscal year, Bank of
America, BISYS and/or the Distributor may prospectively choose not to receive
fee payments and/or may assume certain Fund expenses as a result of competitive
pressures and in order to preserve and protect the business and reputation of
BISYS and Bank of America. However, the service providers retain the ability to
discontinue such fee waivers and/or expense reimbursements at any time.
30
<PAGE> 32
- --------------------------------------------------------------------------------
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE
YOUR ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO
CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR
EXCHANGE OF SHARES IN THE FUNDS.
- --------------------------------------------------------------------------------
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code, as amended (the "Code"), for the current taxable year,
and the Fund intends that it will so qualify in future years as long as such
qualification is in the best interests of its shareholders. As a result of this
qualification, the Fund generally is not required to pay federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. It is not
anticipated that any such distribution from the Fund will qualify for the
dividends received deduction allowed to corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Certain interest income and dividends earned by the Fund from foreign securities
is expected to be subject to foreign withholding taxes or other taxes. So long
as more than 50% of the value of
31
<PAGE> 33
the Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Fund may elect, for U.S. federal income
tax purposes, to treat certain foreign taxes paid by it, including generally any
withholding taxes and other foreign income taxes, as paid by its shareholders.
The Fund may make this election. As a consequence, the amount of these foreign
taxes paid by the Fund will be included in the income of the Fund's shareholders
pro rata (in addition to taxable distributions actually received by them), and a
shareholder will be entitled either (a) to credit their proportionate amount of
such taxes against his U.S. federal income tax liabilities, or (b) if they
itemize their deductions, to deduct such proportionate amounts from their U.S.
income.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Fund, to the extent attributable to fluctuations in currency or exchange
rates, as well as other gains or losses attributable to exchange rate
fluctuations, are typically treated as ordinary income or loss. Such income or
loss may increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by the Fund may be
treated for federal income tax purposes as a return of capital, or, in some
circumstances, as capital gains. Generally, your tax basis in your Fund shares
will be reduced to the extent that an amount distributed to you is treated as a
return of capital.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends paid to any investor (i) who has provided either
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure properly to include on this return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
- --------------------------------------------------------------------------------
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN AND
AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
- --------------------------------------------------------------------------------
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be quoted
in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by the Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A Shares. The Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
The Fund may compare its total return to that of other mutual funds with similar
investment objectives and to stock and other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor mutual fund performance. For example, the
32
<PAGE> 34
Fund's total return may be compared to data prepared by: Lipper Analytical
Services, Inc.; Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger
Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Europe, Asia
and Far East Index ("EAFE"); the Dow Jones Industrial Average; the Financial
Times World Stock Index; the Lipper International Fund Index; the Standard &
Poor's 500 Stock Index; the Wilshire 5000 Equity Indexes; or the Consumer Price
Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in the Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
- --------------------------------------------------------------------------------
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 40 million shares of Class
T Common Stock, 60 million shares of Class T--Special Series 3 Common Stock and
50 million shares of Class T--Special Series 5 Common Stock, representing
interests in the Fund; and additional classes of shares representing interests
in other investment portfolios of the Company. Class T Common Stock are the "A"
Shares; Class T--Special Series 3 Common Stock are the "B" Shares and Class
T--Special Series 5 Common Stock are the "K" Shares. As of the date of this
prospectus, B Shares have not been offered to the public. The Board of Directors
may similarly classify or reclassify any class of shares (including unissued
Class T Common Stock, Class T--Special Series 3 Common Stock or Class T--Special
Series 5 Common Stock) into one or more series. For more information about the
Company's other portfolios, contact the Company at the telephone number listed
on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund upon liquidation. Fund shares have no
preemptive rights and only such conversion and exchange rights as the Board may
grant in its discretion. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board
33
<PAGE> 35
of Directors). Only A Shares will vote on matters relating solely to A Shares,
and K Shares will vote on matters relating solely to K Shares. The Fund does not
presently intend to hold annual meetings of shareholders to elect directors or
for other business unless and until such time as less than a majority of the
directors holding office has been elected by the shareholders. At that time, the
directors then in office will call a shareholders' meeting for the election of
directors. Under certain circumstances, however, shareholders have the right to
call a shareholder meeting to consider the removal of one or more directors.
Such meetings will be held when requested by the shareholders of 10% or more of
the Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
FOR K SHARES.
- --------------------------------------------------------------------------------
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of the Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of the Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of the Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
34
<PAGE> 36
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, the Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of the Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing the Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Fund (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K shareholders of the Fund) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative Services Plan
include, but are not limited to, expenses incurred in connection with
administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting; and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by the Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of the Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of the Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of the Fund's K Shares. These amounts may
be reduced pursuant to undertakings by the Distributor. Payments for
distribution expenses under the Distribution Plan are subject to Rule 12b-1
under the 1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
35
<PAGE> 37
PACIFIC HORIZON MUTUAL FUNDS
INTERNATIONAL
EQUITY FUND
PROSPECTUS
JANUARY 1, 1997
NOT FDIC INSURED
IEQ-0001
<PAGE> 38
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
INTERNATIONAL EQUITY FUND
JANUARY 1, 1997
TABLE OF CONTENTS
PAGE
----
THE COMPANY............................................................... 2
INVESTMENT OBJECTIVES AND POLICIES........................................ 2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 21
ADDITIONAL INFORMATION CONCERNING TAXES................................... 29
MANAGEMENT................................................................ 32
GENERAL INFORMATION....................................................... 53
Appendix A................................................................A-1
This Statement of Additional Information applies to A and K Shares of
the Pacific Horizon International Equity Fund (the "Fund") of the Company. This
Statement of Additional Information is meant to be read in conjunction with the
Prospectus dated January 1, 1997, as it may from time to time be revised (the
"Prospectus"), and is incorporated by reference in its entirety into the
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, no investment in either A or K Shares of the Fund should be made
solely upon the information contained herein. Copies of the Prospectus relating
to the Fund may be obtained by calling Concord Financial Group, Inc. at
800-332-3863. Capitalized terms used but not defined herein have the same
meaning as in the Prospectus.
<PAGE> 39
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund commenced operations on May 13, 1996 by offering a single
series of shares known as A Shares and began offering K Shares on July 22, 1996.
Prior to September 1, 1996, the Fund operated as part of a master-feeder
structure and invested all of its assets in a diversified investment portfolio
of an open-end, management investment company (the "Master Portfolio") which had
an identical investment objective. On September 1, 1996, the Fund withdrew its
assets from the Master Portfolio and invested them directly in portfolio
securities.
The 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 describes the investment objective of the Fund. The
following information supplements and should be read in conjunction with the
descriptions of the investment objective and policies in the Prospectus.
PORTFOLIO TRANSACTIONS
- ----------------------
The portfolio turnover rate described in the Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions.
Subject to the general control of the Company's Board of Directors Bank
of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for the Fund.
Wellington Management Company ("Wellington Management" or the "sub-adviser")
serves as the Fund's sub-adviser. References in this Statement of Additional
Information to Bank of America's actions and responsibilities with respect to
the Fund shall be deemed to include Wellington Management unless the context
clearly indicates otherwise.
-2-
<PAGE> 40
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.
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, and the Sub-Advisory
Agreement with Wellington Management, provide that, in assessing the best
overall terms available for any transaction, Bank of America or Wellington
Management shall consider factors they deem 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, subject to the approval of the Board, 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 or Wellington Management to the
Company or the Fund. No prior approval of the Board is required so long as the
broker or dealer selected by Bank of America or Wellington obtains best price
and execution on a particular transaction. Brokerage and research services may
include: (1) advice as to the value of securities, the advisability of investing
in, purchasing or selling securities and the availability of securities or
purchasers or sellers of securities; and (2) analyses and reports concerning
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Company
or the Fund may be the primary beneficiary of the brokerage or research services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America or Wellington
Management and do not reduce the advisory fee payable to Bank of America. Such
services may be
-3-
<PAGE> 41
useful to Bank of America or Wellington Management in serving both the Company,
the Fund and other clients and, conversely, services obtained by the placement
of business of other clients may be useful to both Bank of America or Wellington
Management in carrying out their obligations to the Company and the Fund. In
connection with their investment management services with respect to the Fund,
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 Company, the Fund, 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.
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 or Wellington Management, in
their sole discretion, subject to guidelines adopted by the Board of Directors
of the Company, believes such practice to be in the interest of the Fund.
To the extent permitted by law, Bank of America or Wellington
Management may aggregate the securities to be sold or purchased on behalf of the
Fund with those to be sold or purchased for other investment companies or common
trust funds in order to obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Company as of the close of its most recent fiscal year. As
of February 29, 1996: (a) the Treasury Fund held the following securities,
Repurchase Agreement with Dean Witter, Reynolds, Inc. in the principal amount of
$130,000,000; Repurchase Agreement with Goldman Sachs & Co. in the principal
amount of $375,000,000; Repurchase Agreement with Merrill Lynch & Co., Inc. in
the principal amount of $130,000,000; and Repurchase Agreement with Morgan
Stanley, Inc. in the principal amount of $130,000,000; (b) the Government Fund
held the following securities, Repurchase Agreement with Morgan Stanley Group in
the principal amount of $20,000,000; (c) the Prime Fund held the following
securities, Merrill Lynch & Co., Inc. commercial paper in the principal amount
of $50,000,000; Bear Stearns Cos., Inc. monthly variable rate obligation in the
principal amount of $100,000,000; Merrill Lynch & Co., Inc.
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<PAGE> 42
monthly variable rate obligation in the principal amount of $50,000,000; Merrill
Lynch & Co., Inc. quarterly variable rate obligation in the principal amount of
$50,000,000; Merrill Lynch & Co., Inc. quarterly variable rate obligation in the
principal amount of $50,000,000; Dean Witter Discover & Co. quarterly variable
rate obligation in the principal amount of $50,000,000; Goldman Sachs Group L.P.
master note in the principal amount of $220,000,000; Morgan Stanley Group, Inc.
master note in the principal amount of $200,000,000, Repurchase Agreement with
Dean Witter Reynolds, Inc. in the principal amount of $105,000,000; Repurchase
Agreement with Morgan Stanley Group, Inc. in the principal amount of
$105,000,000; Repurchase Agreement with Morgan Stanley Group, Inc. in the
principal amount of $105,000,000; (d) the U.S. Government Securities Fund held
the following securities, Merrill Lynch & Co., Inc. commercial paper in the
principal amount of $3,000,000; (e) the Corporate Bond master portfolio held the
following securities, Goldman Sachs Group LP corporate obligation in the
principal amount of $1,500,000; and Lehman Brothers corporate obligation in the
principal amount of $1,000,000; (f) the Intermediate Bond master portfolio held
the following securities, Morgan Stanley Group medium term note in the amount of
$2,000,000 and Merrill Lynch Mtg. Inv. Inc. $16,000; (g) the Blue Chip master
portfolio held the following securities, Dean Witter common stock in the
principal amount of $2,821,875; and (h) the Asset Allocation master portfolio
held the following securities, Dean Witter common stock in the principal amount
of $1,085,750; Lehman Brothers corporate obligations in the principal amount of
$1,000,000; Morgan Stanley Group medium term note in the principal amount of
$1,500,000; Merrill Lynch & Co., Inc. collateralized mortgage obligation in the
principal amount of $8,000; and Merrill Lynch commercial paper in the principal
amount of $3,500,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co.,
Inc., Morgan Stanley & Co. Incorporated, Lehman Brothers, Inc., Dean Witter
Reynolds, Inc. and Paine Webber are considered to be regular brokers and dealers
of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
- ------------------------------------------------------------------------
The following discussion supplements the descriptions of such
investments in the Prospectus.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Certificates of deposit, bankers' acceptances and time deposits are eligible
investments for the Fund. 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
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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.
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
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.
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Commercial paper and short-term notes will consist of issues rated at
the time of purchase A-1 or higher by Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Prime-1 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 or Wellington Management to be of comparable quality under procedures
established by the Board.
OTHER INVESTMENT COMPANIES. In connection with the management of its
daily cash position, the Fund may invest in the securities of a money market
mutual fund (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 a money market mutual fund; except that with respect to the
investment in a money market mutual fund advised by Bank of America, the Fund is
permitted to invest the greater of 5% of its net assets or $2.5 million.
However, no more than 10% of the Fund's total assets may be invested in the
securities of money market mutual funds in the aggregate. Additionally, the Fund
may acquire shares of open and closed-end investment companies. Securities of
other investment companies will be acquired 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. Although securities subject
to a repurchase agreement may bear maturities exceeding ten years, the Fund
intends only to 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
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repurchase agreements along with any other illiquid securities will not exceed
15% of the net assets of the Fund. The Fund is 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. The repurchase price generally equals the price paid by the Fund
plus interest negotiated on the basis of current short-term rates (which may be
more or less than the rate on the underlying portfolio security). Securities
subject to repurchase agreements will be held by the Fund's custodian or
sub-custodian or in the Federal Reserve/Treasury Book-Entry System. The seller
under a repurchase agreement will be required to deliver instruments the value
of which is 102% of the repurchase price (excluding accrued interest), provided
that notwithstanding such requirement, the investment 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, 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 instrumentality. No assurance can be given that the U.S.
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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. The Fund may acquire variable
and floating rate instruments. 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 the Fund, 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 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 a 15%
of net assets limitation on illiquid securities. Variable and floating rate
instruments may be secured by bank letters of credit.
CONVERTIBLE SECURITIES. The 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 the Fund, the investment
adviser and sub-adviser will consider, among other factors, their evaluation of
the creditworthiness of the issuers of the securities; the interest or dividend
income generated by
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<PAGE> 47
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 Fund as to issuers; and whether the securities are rated by Moody's, S&P,
Duff & Phelps Credit Co. ("D&P") or Fitch Investors Service, Inc. ("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
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.
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 or Wellington Management 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.
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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. In addition, the Fund may acquire options relating to
foreign currencies in order to hedge against changes in exchange rates. Such
options may be traded on U.S. exchanges, over-the-counter, and on foreign
exchanges to the extent permitted by law.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the market price of the
underlying security, index or currency increases or decreases, the option
buyer's risk is limited to the amount of the original premium paid for the
purchase of the option. However, options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. A listed call option for a particular
security or amount of currency gives the purchaser of the option the right to
buy from a clearing corporation, and a writer has the obligation to sell to the
clearing corporation the underlying security or currency amount at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security or currency. The premium paid to the writer is
in consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security or amount of currency at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security or currency. In contrast to an option on a
particular security, an option on a stock index provides the holder with the
right to make or receive a cash settlement upon exercise of the option. The
amount of this settlement will be equal to the difference between the closing
price of the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple. Unlisted options are not
subject to the protections afforded purchases 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 the Fund. Any losses
realized by the Fund in connection with its purchase of put options will be
limited to
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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 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
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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 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, 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.
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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 engage in futures contracts. A futures contract
is a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the value of a specified obligation or stock index (which
assigns relative values to the common stocks included in the index) at the close
of the last trading day of the contract and the price at which the futures
contract is originally struck. No physical delivery of the underlying securities
is normally made. 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 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 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.
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It is also possible that, where the Fund has sold futures contracts to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Fund may decline. If this occurred, the Fund
would lose money on the futures contract and also experience a decline in value
in its portfolio securities.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. Due to the possibility of price distortion in the futures market,
and because of the imperfect correlation between the movement in the cash market
and movements in the price of futures contracts, a correct forecast of general
market trends or interest rate movements by Bank of America 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 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.
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 the Fund the right (but not the obligation), for
a specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
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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 contact, which may have a value higher than the exercise
price. Conversely, the writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, the Fund becomes obligated to purchase a
futures contact, 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. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
FOREIGN INVESTMENTS. In considering whether to invest in the securities
of a foreign company, Bank of America or Wellington Management consider 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 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 Fund also 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 International
Bank for Reconstruction and Development (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 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 Fund's investments will be allocated among
securities denominated in the
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<PAGE> 54
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 in determining whether to increase or decrease the emphasis placed
upon a particular type of security within the Fund.
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 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 are 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.
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
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company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. Foreign brokerage commissions and custodian fees are
generally higher than in the United States. With respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation, or
diplomatic developments which could affect investment in those countries.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
The Fund may agree to purchase securities on a "when-issued," and "forward
commitment" or "delayed settlement" basis. When the Fund agrees to purchase
securities on a "when-issued," "forward commitment" or "delayed settlement"
basis, its custodian will set aside cash or liquid portfolio securities equal to
the amount of the commitment in a separate account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment. In such a case,
the Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the commitment. It may be expected that the net assets of the Fund
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. The Fund does not
intend to engage in these transactions for speculative purposes but primarily in
order to hedge against anticipated changes in interest rates. Because the Fund
will set aside cash or liquid portfolio securities to satisfy its purchase
commitments in the manner described, its liquidity and the ability of the
investment adviser and sub-adviser to manage it may be affected in the event the
forward commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 25% of the value of the Fund's assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss.
When the Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and
any subsequent fluctuations in their
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<PAGE> 56
market value is taken into account when determining the market value of the Fund
starting on the day the Fund agrees to purchase the securities. The Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date.
SECURITIES LENDING. The Fund may lend securities. 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. Cash
collateral may be invested in short-term U.S. Government securities, U.S.
Treasury Notes, certificates of deposit, other high-grade, short-term
obligations or interest-bearing cash equivalents. 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 the Fund if a material event affecting the investment is to occur.
ILLIQUID SECURITIES. It is possible that unregistered securities
purchased by the 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.
ADDITIONAL INFORMATION
- ----------------------
The investment adviser's and 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 the Fund. 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 the Fund).
OTHER INVESTMENT LIMITATIONS
- ----------------------------
The Prospectus for the Fund sets forth certain fundamental policies
that may not be changed with respect to the Fund without the affirmative vote of
the holders of the majority of the Fund's outstanding shares (as defined below
under "GENERAL INFORMATION - Miscellaneous"). The following is a complete list
of the Fund's fundamental policies which may not be changed for the Fund without
such a vote of shareholders.
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<PAGE> 57
THE FUND MAY NOT:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result more than 5% of
its total assets will be invested in the securities of any one issuer, except
that up to 25% of its total assets may be invested without regard to this 5%
limitation; provided that all of the assets of the Fund may be invested in the
Master Portfolio or another investment company.
2. Underwrite the securities of other issuers, provided that all of the
assets of the Fund may be invested in the Master Portfolio or 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 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.
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
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<PAGE> 58
purposes of this policy; and (c) wholly-owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents.
9. Purchase securities of any issuer if as a result it would own more
than 10% of the voting securities of such issuer; provided that all of the
assets of the Fund may be invested in the 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 the Fund may
borrow from banks for temporary purposes and in an amount not exceeding 10% of
the value of the total assets of the Fund; or mortgage, pledge or hypothecate
any assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of its
total assets at the time of such borrowing. The Fund will not purchase
securities while its borrowings (including reverse repurchase agreements) in
excess of 5% of its total assets are outstanding. 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 investments in debt securities, repurchase
agreements and securities loans.
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 purpose of investment limitation number 8 in this Statement of
Additional Information the Fund treats, in accordance with the current views of
the staff of the SEC and as a matter of non-fundamental policy that may be
changed without a vote of shareholders, all supranational organizations as a
single industry and each foreign government (and all of its agencies) as a
separate industry.
* * *
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectus. Additional information is
contained below.
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<PAGE> 59
Portfolio securities for which market quotations are readily available
(other than debt securities with remaining maturities of 60 days or less) are
valued at the last reported sale price or (if none is available) the mean
between the current quoted bid and asked prices provided by investment dealers.
Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the Board. 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 Board. Valuation of options is described above
under "Investment Objectives and Policies - Options Trading."
SUPPLEMENTARY PURCHASE INFORMATION
- ----------------------------------
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges available to certain shareholders as described in the
Prospectus, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) although more than one
beneficiary is involved; or "a qualified group" which has been in existence for
more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount, provided
that the purchases are made through a central administrator or a single dealer,
or by other means which result in economy of sales effort or expense. A
"qualified group" must have more than 10 members, must be available to arrange
for group
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<PAGE> 60
meetings between representatives of the Fund and the members, and must be able
to arrange for mailings to members at reduced or no cost to the Distributor. The
value of shares eligible for the Right of Accumulation privilege may also be
used as a credit toward completion of the Letter of Intent privilege. Such
shares will be valued at their offering price prevailing on the date of
submission of the Letter of Intent. Distributions on shares held in escrow
pursuant to the Letter of Intent privilege will be credited to the shareholder,
but such shares are not eligible for the Fund's Exchange Privilege.
The computation of the hypothetical offering prices per share of an A
and K Share of the Fund based on the value of the Fund's net assets on August
31, 1996 and the Fund's A and K Shares outstanding on such date are as follows:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
-------------------------
A SHARES K SHARES
-------- --------
<S> <C> <C>
Net Assets..... $9,188,711 $990
Outstanding
Securities..... 945,748 102
Net Asset Value
Per Share...... $9.72 $9.71
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share)..... $0.46 --
Maximum
Offering Price
to Public...... $10.18 $9.71
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION
- ------------------------------------
Shares in the Fund for which orders for wire redemption are received on
a business day before the close of regular trading hours on the New York Stock
Exchange (currently 4:00 p.m. Eastern time) will be redeemed as of the close of
regular trading hours on such Exchange and the proceeds of redemption (less any
applicable contingent deferred sales charge on A Shares subject to the Large
Purchase Exemption) will normally be wired in federal funds on the next business
day to the commercial bank specified by the investor on the Account Application
(or other
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<PAGE> 61
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 (currently 4:00 p.m. Eastern time) or on a non-business day will
be redeemed as of the close of regular trading hours on such Exchange on the
next day on which shares of the particular Fund are priced and the proceeds
(less any applicable contingent deferred sales charge on A Shares subject to the
Large Purchase Exemption) will normally be wired in federal funds on the next
business day thereafter. Redemption proceeds (less any applicable contingent
deferred sales charge on A Shares subject to the Large Purchase Exemption) will
be wired to a correspondent member bank if the investor's designated bank is not
a member of the Federal Reserve System. Immediate notification by the
correspondent bank to the investor's bank is necessary to avoid a delay in
crediting the funds to the investor's bank account. Proceeds of less than $1,000
will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the 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 AND REDEMPTION 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
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<PAGE> 62
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (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. Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the Fund
and described in the Prospectus. Purchase orders will be effected only on
business days.
A Shares in the Fund are sold with a sales load, except for such
exemptions as noted in the Prospectus. A Shares which are subject to the Large
Purchase Exemption are also subject to a contingent deferred sales load. The
contingent deferred sales load discussed under the Large Purchase Exemption does
not apply to A Shares under the Daily Advantage or Advantage Plus Programs. 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.
Service Organizations may be paid by the Distributor at the Company's expense
for shareholder services. Depending on the terms of the particular account, Bank
of America, its affiliates, and Service Organizations also may charge their
customers fees for automatic investment, redemption and other services provided.
Such fees may include, for example, account maintenance fees, compensating
balance requirements or fees based upon account transactions, assets or income.
Bank of America or the particular Service Organization is responsible for
providing information concerning these services and any charges to any customer
who must authorize the purchase of Fund shares prior to such purchase.
Persons or organizations wishing to purchase Company shares through
their accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions.
Initial purchases of shares into a new account may not be made by wire.
However, persons wishing to make a subsequent purchase of Company shares into an
already existing account by wire should telephone the Transfer Agent at (800)
346-2087. The investor's bank must be instructed to wire federal funds to the
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<PAGE> 63
Transfer Agent, referring in the wire to the particular Fund in which such
investment is to be made; the investor's portfolio account number; and the
investor's name.
The Transfer Agent may charge a fee to act as Custodian for IRAs,
payment of which could require the liquidation of shares. A Shares subject to
the Large Purchase Exemption which are liquidated by the Transfer Agent as fees
for custodial services to IRA accounts will not be subject to the contingent
deferred sales charge. All fees charged are described in the appropriate form.
Shares may be purchased in connection with these plans only by direct remittance
to the Transfer Agent. Purchases for IRA accounts will be effective only when
payments received by the Transfer Agent are converted into federal funds.
Purchases for these plans may not be made in advance of receipt of funds.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
EXCHANGE PRIVILEGE. Shareholders in the Pacific Horizon Family of Funds
have an exchange privilege whereby they may exchange all or part of their shares
for like shares of another investment portfolio in the Pacific Horizon Family of
Funds or for like shares of an investment portfolio of Time Horizon Funds. By
use of the exchange privilege, the investor authorizes the Transfer Agent to act
on telephonic, telegraphic or written exchange instructions from any person
representing himself or herself to be the investor and believed by the Transfer
Agent to be genuine. The Transfer Agent's records of such instructions are
binding. The exchange privilege may be modified or terminated at any time upon
notice to shareholders. For federal income tax purposes, exchange transactions
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
Exchange transactions described in Paragraphs A, B, C, D, E and F below
will be made on the basis of the relative net
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<PAGE> 64
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 subject to the Large Purchase Exemption acquired pursuant
to an exchange transaction will continue to be subject to any
applicable contingent deferred sales charge. However, A Shares
subject to the Large Purchase Exemption that have been acquired
through an exchange of A Shares may be exchanged for other A
Shares or for like shares of Time Horizon Funds without the
payment of a contingent deferred sales charge at the time of
exchange. In determining the holding period for calculating the
contingent deferred sales charge payable on redemption of A
Shares, the holding period of the shares originally held will be
added to the holding period of the shares acquired through
exchange.
C. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds or like shares of the Time Horizon Funds acquired
by a previous exchange transaction involving shares on which a
sales load has directly or indirectly been paid (e.g. A Shares
purchased with a sales load or issued in connection with an
exchange transaction involving A Shares that had been purchased
with a sales load), as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may be
redeemed and the proceeds used to purchase without a sales load A
Shares of any other investment portfolio within 90 days of your
redemption trade date. To accomplish an exchange transaction under
the provisions of this paragraph, investors must notify the
Transfer Agent of their prior ownership of shares and their
account number.
D. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for shares
of any other investment portfolio in the Pacific Horizon Family of
Funds that is offered without a sales load.
E. A Shares of any investment portfolio in the Pacific Horizon Family
of Funds purchased without a sales load
-27-
<PAGE> 65
may be exchanged without a sales load for A Shares in any other
portfolio in the Pacific Horizon Family of Funds.
F. 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.
MISCELLANEOUS. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of America or a
Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1997, the holidays on
which the New York Stock Exchange is closed are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and
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<PAGE> 66
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in the Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The contingent
deferred sales charge with respect to A Shares subject to the Large Purchase
Exemption is not charged on involuntary redemptions. The Company will not
require a shareholder to redeem shares of the Fund if the balance held of record
by the shareholder is less than $500 solely because of a decline in the net
asset value of the 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.
In such an event, a shareholder would incur transaction costs in selling the
securities or other property. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the net asset value at the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
- -------
The Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, the Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year the Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
Fund and would be eligible for the dividends received deduction in the case of
corporate shareholders.
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<PAGE> 67
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 and interest, and 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 the Fund
distributes such income (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 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 the Fund and net gain from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and any loss on closing purchase transactions is treated as short-term
capital loss. See Appendix B -- "Accounting and Tax Treatment" -- for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments, including their treatment under the
Short-Short test.
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<PAGE> 68
Any distribution of the excess of net long-term capital gains 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 more than six months, any loss on the sale or exchange of those
shares will be treated as long-term capital loss to the extent of the capital
gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum 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 gains 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 that they are not subject to backup withholding or
that they are "exempt recipients."
OTHER INFORMATION
- -----------------
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Fund may be subject to the tax laws of such states or localities.
Income distributions may be taxable to shareholders under state or
local law as dividend income even though all or a portion of such distributions
may be derived from interest on
-31-
<PAGE> 69
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 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 WITH
-------------
NAME AND ADDRESS AGE COMPANY PRINCIPAL OCCUPATIONS
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 62 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Chairman of the
Board and Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II
(registered investment
companies) (since 1993);
President and Chairman of
the Board of Pacific
Horizon Funds, Inc. (1982
to August 31, 1995)
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
</TABLE>
-32-
<PAGE> 70
<TABLE>
<CAPTION>
POSITION WITH
------------
NAME AND ADDRESS AGE COMPANY PRINCIPAL OCCUPATIONS
- ---------------- --- ------ ---------------------
<S> <C> <C> <C>
Suite 100 Incorporated,
Newport Beach, CA 92660-2629 (registered
investment adviser) 1991
to date; Partner, Newport
Partners (private venture
capital firm), 1981 to
date; Chairman of the
Board and Chief Executive
Officer, First Pacific
Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 64 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from 1979
to 1991; Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1993); Director, Morgan
Grenfell Small Cap Fund
(since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989) (registered
investment companies);
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
</TABLE>
-33-
<PAGE> 71
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME AND ADDRESS AGE COMPANY PRINCIPAL OCCUPATIONS
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
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* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
J. David Huber 49 Executive Employee of BISYS Fund
BISYS Fund Services Vice President Services, Inc., June
3435 Stelzer Road 1987 to present;
Columbus, OH 43219 President of Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement
Funds (since 1996).
Irimga McKay 35 Vice Senior Vice President,
1230 Columbia Street President July 1993 to date, prior
5th Floor thereto First Vice
La Jolla, CA 92037 President of the
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
</TABLE>
-34-
<PAGE> 72
<TABLE>
<CAPTION>
POSITION WITH
------------
NAME AND ADDRESS AGE COMPANY PRINCIPAL OCCUPATIONS
- ---------------- --- ------ ---------------------
<S> <C> <C> <C>
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
Michael Brascetta 37 Vice President Senior Vice President
BISYS Fund Services of Shareholder
3435 Stelzer Road Services, BISYS Fund
Columbus, OH 43219 Services, Inc., April
1996 to present;
Employee, The Vanguard
Group, 1981 to April
1996.
Stephanie L. Blaha 37 Vice President Director of Client
BISYS Fund Services Services of the
3435 Stelzer Road Administrator, March
Columbus, OH 43219 1995 to date, prior
thereto Assistant Vice
President of the
Administrator and
Distributor, October 1991
to March 1995; Vice
President, Seafirst
Retirement Funds, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1996); Account Manager,
AT&T American Transtech,
Mutual Fund Division,
July 1989 to October
1991.
Kevin L. Martin 35 Treasurer Vice President, Fund
BISYS Fund Services Accounting BISYS Fund
3435 Stelzer Road Services, Inc. February
Columbus, OH 43219 1996 to Present;
Treasurer, Seafirst
Retirement Funds and
Master Investment Trust,
Series II (since 1996)
Senior Audit Manager,
Ernst & Young LLP (1984
to February 1996).
Lisa Ling 36 Assistant Employee, BISYS Fund
BISYS Fund Services Treasurer Services, Inc., November
3435 Stelzer Road 1995 to present;
Columbus, OH 43219 Assistant Treasurer,
</TABLE>
-35-
<PAGE> 73
<TABLE>
<CAPTION>
POSITION WITH
------------
NAME AND ADDRESS AGE COMPANY PRINCIPAL OCCUPATIONS
- ---------------- --- ------ ---------------------
<S> <C> <C> <C>
Master Investment Trust
Series II and Seafirst
Retirement Funds (since
1996); employee,
Federated Investors,
October 1982 to November
1995.
W. Bruce McConnel, III 53 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath.
Building, Suite 1100
Philadelphia, PA 19107
George O. Martinez 36 Assistant Senior Vice President
BISYS Fund Services Secretary and Director of Admini-
3435 Stelzer Road strative and Regulatory
Columbus, OH 43219 Services of the
Administrator, since
April 1995; Assistant
Secretary, Seafirst
Retirement Funds and
Master Investment Trust,
Series II (since 1995);
prior thereto, Vice
President and Associate
General Counsel, Alliance
Capital Management, L.P.
Alaina V. Metz 28 Assistant Chief Administrator,
BISYS Fund Services Secretary Administrative and
3435 Stelzer Road Regulatory Services,
Columbus, OH 43219 BISYS Fund Services,
Inc., June 1995 to
present; Assistant
Secretary of Seafirst
Retirement Funds (since
1996); Supervisor, Mutual
Fund Legal Department,
Alliance Capital
Management, May 1989 to
June 1995.
- ----------------
<FN>
* Dr. Pings is an "interested director" of the Company as defined in the
1940 Act.
</TABLE>
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
-36-
<PAGE> 74
all or a part of a Board meeting; the President receives an additional $20,000
per annum for his services as President; Mr. Collins, in consideration of his
years of service as President and Chairman of the Board, receives an additional
$40,000 per annum in recognition of his years of service to the Company until
February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Fund, and each other fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 29, 1996, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $388,155; none of this amount was allocated to the Fund.
Each director is also reimbursed for out-of-pocket expenses incurred as a
director. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Company. As of the date of this Statement of
Additional Information, the directors and officers of the Company, as a group,
own less than 1% of the outstanding shares of each of the Company's investment
portfolios.
Under a retirement plan approved by the Board, 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.
-37-
<PAGE> 75
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). On August 31, 1996, Dr. Kenneth L.
Trefftzs retired from the Board of Directors. In honor of his years of service
to the Company, the Board of Directors designated Dr. Trefftzs as a "director
emeritus" of the Company. Additionally, in recognition of Dr. Trefftzs' years of
service to the Company prior to March 1, 1994 as director and Chairman of the
Company's Audit Committee, the Board of Directors, including a majority of the
directors who are not "interested persons" of the Company, authorized a single
sum cash payment retirement benefit of $60,000 payable January 1, 1997.
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.
-38-
<PAGE> 76
The following chart provides certain information for the fiscal year ended
February 29, 1996 about the fees received by directors of the Company as
directors and/or officers of the Company and as directors and/or trustees of the
Fund Complex:
<TABLE>
<CAPTION>
================================================================================
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS ESTIMATED REGISTRANT
AGGREGATE ACCRUED AS ANNUAL AND FUND
COMPENSATION PART OF BENEFITS COMPLEX**
NAME OF PERSON/ FROM THE FUND UPON PAID TO
POSITION COMPANY EXPENSES* RETIREMENT DIRECTORS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $76,215 $ 0 $ 0 $85,000
Director+
- --------------------------------------------------------------------------------
Douglas B. Fletcher $28,555 $ 0 $ 0 $29,055
Vice Chairman of
the Board
- --------------------------------------------------------------------------------
Robert E. Greeley $31,395 $ 0 $ 0 $44,055
Director
- --------------------------------------------------------------------------------
Kermit O. Hanson $27,485 $ 0 $ 0 $32,055
Director
- --------------------------------------------------------------------------------
Cornelius J. Pings $29,555 $ 0 $ 0 $30,055
President and
Chairman of the
Board++
- --------------------------------------------------------------------------------
Kenneth L. Trefftzs $28,555 $ 0 $ 0 $29,055
Director+++
- --------------------------------------------------------------------------------
- ------------------------------
<FN>
* For the fiscal year ended February 29, 1996, the Company accrued on the
part of all of the directors an aggregate of $65,739 in retirement
benefits.
** The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Trust I, Master Trust II, Time Horizon Funds and World Horizon
Funds.
+ Mr. Collins was President and Chairman of the Board of the Company until
August 31, 1995.
++ Dr. Pings became President and Chairman of the Board of the Company
effective September 1, 1995. At
February 29, 1996, $10,000, $3,500 and $3,500 in deferred compensation
was payable to Dr. Pings for services as President of the Company,
trustee of Master Trust I and trustee of Master Trust II, respectively.
+++ Dr. Trefftzs retired from the Board of the Company on August 31, 1996.
</TABLE>
-39-
<PAGE> 77
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. Until September 1, 1996, the
Fund had no investment adviser since it sought to achieve its objective by
investing all of its assets in the Master Portfolio. Effective September 1,
1996, Bank of America serves as the investment adviser for the Fund. In the
Investment Advisory Agreement with the Company, Bank of America has agreed to
provide investment advisory services as described in the Prospectus. Bank of
America has also agreed to pay all expenses incurred by it in connection with
its activities under its agreement other than the cost of securities, including
brokerage commissions, if any, purchased for the Fund. In rendering its advisory
services, 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 Agreement provides that Bank
of America may, in its discretion, provide advisory services through its own
employees or employees of one or more of its affiliates that are under the
common control of Bank of America's parent, BankAmerica Corporation; provided
such employees are under the management of Bank of America.
For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement, the Fund has agreed to pay Bank of America fees,
accrued daily and payable monthly, at the annual rate of 0.75% of the average
daily net assets of the Fund. The fees payable to Bank of America are not
subject to reduction as the value of the Fund's net assets increases. From time
to time, Bank of America may prospectively waive fees or reimburse the Fund for
expenses voluntarily or as required by certain state securities laws.
The Investment Advisory Agreement between Bank of America and the
Company will be in effect until October 31, 1997, and will continue in effect
from year to year thereafter only so long as such continuation is approved at
least annually by (i) the Board of Directors of the Company or the vote of a
"majority," as defined in the 1940 Act, of the outstanding voting securities of
the Fund, and (ii) a majority of those directors of the Company who are not
"interested persons," as defined in the 1940 Act, of any party to the Investment
Advisory Agreement, acting in person at a meeting called for the purpose of
voting on such approval. The Investment Advisory Agreement will terminate
automatically in the event of its "assignment," as defined in the 1940 Act. In
addition, the Investment Advisory Agreement is
-40-
<PAGE> 78
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 Fund.
The Investment Advisory Agreement provides that Bank of America shall
not be liable for any error of judgment or mistake of law or for any loss
suffered in connection with the performance of the Investment Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
Bank of America is authorized by the Investment Advisory Agreement to
employ or associate with itself such persons as it believes are appropriate to
assist it in the performance of its duties. Any such person is required to be
compensated by Bank of America, not by the Fund, and to be approved by the
shareholders of the Fund as required by the 1940 Act. As of January 1, 1997,
Bank of America has entered into a Sub-Advisory Agreement with Wellington
Management.
SUB-ADVISER
- -----------
Wellington Management, with principal offices at 75 State Street,
Boston, Massachusetts 02109, serves as sub-adviser to the 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. As of September 30, 1996,
Wellington Management had investment management authority with respect to
approximately $123.8 billion of assets. 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 Fund, including investment research and
management with respect to all securities and investments and cash equivalents
in the Fund. The Sub-Adviser also determines from time to time what securities
and other investments will be purchased, retained or sold by the Fund. The
Sub-Advisory Agreement provides that Bank of America will pay Wellington
Management a monthly fee based on the average daily net assets of
-41-
<PAGE> 79
the Fund, at the annual rate of 0.40% of the first $50 million of the Fund's net
assets, plus 0.30% of the next $100 million of the Fund's net assets, plus 0.25%
of the next $350 million of the Fund's net assets, plus 0.20% of the Fund's 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 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
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 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 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.
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
-42-
<PAGE> 80
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 were properly presented,
a court should hold that Bank of America may perform the services for the Fund
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 Fund 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 Fund's Prospectus.)
On the other hand, as described herein, the Fund is currently
distributed by Concord Financial Group, Inc., Concord Holding Corporation, its
parent, provides the Fund with administrative services. If current restrictions
under the Glass-Steagall Act preventing a bank from sponsoring, organizing,
controlling, or distributing shares of an investment company were relaxed, the
Company expects that Bank of America would consider the possibility of offering
to perform some or all of the services now provided by Concord Holding
Corporation or Concord Financial Group, Inc. From time to time, legislation
modifying such restriction has been introduced in Congress which, if enacted,
would permit a bank holding company to establish a non-bank subsidiary having
the authority to organize, sponsor and distribute shares of an investment
company. If this or similar legislation were enacted, the Company expects that
Bank of America's parent bank holding company would consider the
-43-
<PAGE> 81
possibility of one of its non-bank subsidiaries offering to perform some or all
of the services now provided by Concord Holding Corporation or Concord Financial
Group, Inc. It is not possible, of course, to predict whether or in what form
such legislation might be enacted or the terms upon which Bank of America or
such a non-bank affiliate might offer to provide services for consideration by
the Company's Board of Directors.
ADMINISTRATOR
- -------------
The BISYS Group, Inc. through its wholly-owned subsidiary BISYS Fund
Services, L.P. (the "Administrator" or "BISYS"), with offices at 150 Clove Road,
Little Falls, New Jersey 07424 and 3435 Stelzer Road, Columbus, Ohio 43219
serves as administrator. The Administrator also serves as administrator to
several other investment companies. Prior to November 1, 1996, Concord Holding
Corporation, an indirect wholly owned subsidiary of BISYS served as the Fund's
Administrator.
The Administrator provides administrative services to the Fund as
described in the Fund's Prospectus pursuant to the Administration Agreement for
the Fund. The Company's Administration Agreement will continue in effect until
October 31, 1997 and thereafter will be extended for successive periods of one
year, provided that each such extension is specifically approved by (a) vote of
a majority of those members of the Company's Board of Directors who are not
interested persons of any party to the agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) the Company's Board
of Directors or by vote of a majority of the outstanding voting securities of
the Fund. The agreement is terminable at any time without penalty by the
Company's Board of Directors or by a vote of a majority of the outstanding
securities upon 60 days' notice to the Administrator, or by the Administrator
upon 90 days' notice to the Company.
The Company has agreed to pay the Administrator a fee for its services
as Administrator, accrued daily and payable monthly, at the annual rate of 0.20%
of the average daily net assets of the Fund. The fees payable to the
Administrator are not subject to reduction as the value of the Fund's net assets
increase. From time to time, the Administrator may waive fees or reimburse the
Fund for expenses, either voluntarily or as required by certain state securities
laws.
If total expenses borne (directly or indirectly) by the Fund in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, the Company may deduct from the payments to be made with
respect to the Fund to Bank of America and the Administrator, respectively, or
Bank of America and the Administrator each will bear, the amount of such excess
to the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if
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<PAGE> 82
any, will be estimated, reconciled and effected or paid, as the case may be, on
a monthly basis. As of the date of this Statement of Additional Information, the
most restrictive expense limitation that may be applicable to the Company limits
aggregate annual expenses with respect to the Fund, including management and
advisory fees but excluding interest, taxes, brokerage commissions, and certain
other expenses, to 2-1/2% of the first $30 million of its average daily net
assets, 2% of the next $70 million, and 1-1/2% of its remaining average daily
net assets. During the course of the Company's fiscal year, the Administrator
and Bank of America may prospectively waive payment of fees and/or assume
certain expenses of the Fund as a result of competitive pressures and in order
to preserve and protect the business and reputation of the Administrator and
Bank of America. This will have the effect of increasing yield to investors at
the time such fees are not received or amounts are assumed and decreasing yield
when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the Administration Agreement with the
exception of the fees charged by PFPC, Inc. ("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 any
of their affiliates, SEC fees and state securities qualification fees, advisory
fees, administration fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, outside auditing and legal
expenses, costs of maintaining corporate existence, costs attributable to
investor services, including without limitation telephone and personnel
expenses, costs of preparing and printing prospectuses and Statements of
Additional Information for regulatory purposes, cost of shareholder reports and
corporate meetings and any extraordinary expenses. Certain distribution and
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 Company or the Fund in connection with the performance of the agreement,
except a loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from the reckless disregard by it of its
obligations and duties thereunder.
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DISTRIBUTOR AND PLAN PAYMENTS
- -----------------------------
Concord Financial Group, Inc. (the "Distributor"), a wholly owned
subsidiary of the Administrator, acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
the Company's shares although it is not obliged to sell any particular amount of
shares. The distribution agreement shall continue in effect until October 31,
1996. Thereafter, if not terminated, the distribution agreement shall continue
automatically for successive terms of one year, provided that such continuance
is specifically approved at least annually (a) by a vote of a majority of those
members of the Board of Directors of the Company who are not parties to the
distribution agreement or "interested persons" of any such party, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Board of Directors of the Company or by vote of a "majority of the outstanding
voting securities" of the Fund as to which the distribution agreement is
effective; PROVIDED, HOWEVER, that the distribution agreement may be terminated
by the Company at any time, without the payment of any penalty, by vote of a
majority of the entire Board of Directors of the Company or by a vote of a
"majority of the outstanding voting securities" of the Fund on 60 days' written
notice to the Distributor, or by the Distributor at any time, without the
payment of any penalty, on 90 days' written notice to the Company. The agreement
will automatically and immediately terminate in the event of its "assignment."
THE SHAREHOLDER SERVICES PLAN. The Distributor is entitled to payment
by the Company for certain shareholder servicing expenses in addition to the
sales loads on A Shares described above and in the Prospectus under the
Shareholder Services Plan (the "Plan") adopted by the Company for its A Shares.
Under the Plan for A Shares, the Company pays the Distributor, with respect to
the Fund for (a) non-distribution shareholder services provided by the
Distributor to Service Organizations and/or the beneficial owners of Fund
shares, including, but not limited to shareholder servicing provided by the
Distributor at facilities dedicated for use by the Company, provided such
shareholder servicing is not duplicative of the servicing otherwise provided on
behalf of the Fund, and (b) fees paid to Service Organizations (which may
include the Distributor itself) for the provision of support services for
shareholders for whom the Service Organization is the dealer of record or holder
of record or with whom the Service Organization has a servicing relationship
("Clients").
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (ii) processing dividend and distribution
payments from
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<PAGE> 84
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 0.25% of the
average daily net assets of the A Shares of the Fund during such month for
shareholder servicing expenses. The calculation of the Fund's average daily net
assets for these purposes does not include assets held in accounts opened via a
transfer of assets from trust and agency accounts of Bank of America. Further,
payments made out of or charged against the assets of the Fund must be in
payment for expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies than can
be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while the Plan is in effect
until such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under the Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under the Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
Payments for shareholder service expenses under the Plan are not
subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the Plan, the
Distributor provides that a report of the amounts expended under the Plan, and
the purposes for which such expenditures were incurred, will be made to the
Board of Directors for its review at least quarterly. In addition, the Plan
provides that the selection and nomination of the directors of the Company who
are not "interested persons" thereof have been committed to the discretion of
the directors who are neither "interested persons" (as defined in the 1940 Act)
of the Company nor have any direct or indirect financial interest in the
operation of the Plan (or related servicing agreements) (the "Non-Interested
Plan Directors").
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<PAGE> 85
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 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 the holders 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; expenses incurred in connection with printing and
mailing Prospectuses and Statements of Additional Information to other than
current K shareholders; (c) periodic payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, "a Distribution Organization") with respect to the 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;
(d) the direct or indirect cost of financing the payments or expenses included
in (a) and (c) above; or (e) for such other services as may be construed, by any
court or governmental agency or commission, including the SEC, to constitute
distribution services under the 1940 Act or rules and regulations thereunder.
With respect to K Shares, payments under the Distribution Plan are not intended
for distribution services to the extent they are not permitted under the
Employee Retirement Income Security Act of 1974, as amended.
Pursuant to the Administrative and Shareholder Services Plan with
respect to K Shares, the Company may also pay securities dealers, brokers,
financial institutions or other
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<PAGE> 86
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 the 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) providing Clients with a service that
invests the assets of their accounts pursuant to specific or pre-authorized
instructions; (ix) establishing and maintaining accounts and records relating to
Clients; (x) assisting Clients in changing dividend options, account
designations and addresses; or (xi) other similar services if requested by the
Company.
The Distribution 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.
Payments made out of or charged against the assets of a particular
class of shares of the Fund must be in payment for expenses incurred on behalf
of that class.
Payments for distribution expenses under the Distribution Plan (the
"12b-1 Plan") are subject to Rule 12b-1 (the "Rule") under the 1940 Act. The
Rule defines distribution expenses to include the cost of "any activity which is
primarily intended to result in the sale of [Company] shares." The Rule
provides, among other things, that an investment company may bear such expenses
only pursuant to a plan adopted in accordance with the Rule. In accordance with
the Rule, the 12b-1 Plan provides that a written report of the amounts expended
under the 12b-1 Plan, and the purposes for which such expenditures were
incurred, will be made to the Board of Directors for its review at least
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<PAGE> 87
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 to 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 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.
TOTAL RETURN
- ------------
From time to time, the total return 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
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<PAGE> 88
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 and sub-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 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, the Fund may reprint
articles (or excerpts) written regarding the Fund and provide them to
prospective shareholders. Performance information with respect to the Fund is
generally available by calling (800) 346-2087.
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 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:
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<PAGE> 89
ERV 1/n (exponent)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
The Fund computes its aggregate total returns separately for its
separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, the Fund's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales load charged in connection with the
purchase of A Shares.
Based on the foregoing calculations, the aggregate total returns for
the period beginning on May 13, 1996 to August 31, 1996 was -7.16% for the A
Shares and -2.90% for the K Shares of the Fund. Total return for the K shares
reflects the performance of the A Shares from May 13, 1996 to July 21, 1996. K
Shares have distribution, administrative and/or shareholder services of 1.00%
while A Shares have shareholder servicing expenses of 0.25%. Had K Shares'
expenses been reflected in the performance of the A Shares during the period May
13, 1996 to July 21, 1996, performance would be reduced.
The Fund may also advertise total return data without reflecting sales
charges in accordance with the rules of the SEC.
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<PAGE> 90
Quotations which do not reflect such sales charges will, of course, be higher
than quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
- ---------------------
Pacific Horizon is an open-end management investment company organized
as a Maryland corporation on October 27, 1982. Pacific Horizon's Charter
authorizes the Board of Directors to issue up to two hundred billion full and
fractional common shares. Pursuant to the authority granted in the Charter, the
Board of Directors has authorized the issuance of twenty-two classes of stock -
Classes A through W Common Stock, $.001 par value per share, representing
interests in twenty-two separate investment portfolios; Class T represents
interests in the A Shares of the Fund, Class T -- Special Series 3 represents
interests in the B Shares of the Fund and Class T -- Special Series 5 represents
interests in the K Shares of the Fund. As of the date of this Statement of
Additional Information, B Shares have not been offered to the public. 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 fund's 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, sub-advisory
agreement or 12b-1 distribution plan or any change in a fundamental investment
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policy would be effectively acted upon with respect to the Fund only if approved
by a majority of the outstanding shares of the Fund. However, the rule also
provides that the ratification of independent public accountants, the approval
of principal underwriting contracts and the election of directors may be
effectively acted upon by shareholders of the Company voting 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
- ----------------------------------------------
PNC Bank, National Association ("PNC"), Broad and Chestnut Streets,
Philadelphia, PA 19101 has been appointed custodian for the Fund. PFPC provides
the Fund with certain accounting services pursuant to a Fund Accounting Services
Agreement with the Administrator. Both PFPC, which is located at Bellevue Park
Corporate Center, 400 Bellevue Parkway, Wilmington, DE 19809, and PNC are wholly
owned subsidiaries of PNC Bancorp, Inc., a bank holding company. Pursuant to 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 Agreement are borne by the Fund. As custodian, PNC maintains a
separate account or accounts in the name of the Fund, holds and disburses
portfolio securities, makes receipts and disbursements of money, collects and
receives income and other payments and distributions on account of portfolio
securities, responds to correspondence from security brokers and others relating
to their respective duties and makes periodic reports concerning their duties.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
serves as transfer and dividend disbursing agent for the Fund. BISYS Fund
Services, Inc. is a wholly-owned subsidiary of The BISYS Group, Inc., and an
affiliate of the Administrator and Distributor.
COUNSEL
- -------
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Company, is a partner), 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania 19107, serves as counsel to the Company and will pass upon the
legality of the shares offered hereby.
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<PAGE> 92
INDEPENDENT ACCOUNTANTS
- -----------------------
Price Waterhouse LLP, independent accountants, with offices at 1177
Avenue of the Americas, New York, New York, has been selected as the Fund's
independent accountants for the fiscal period ended February 28, 1997.
REPORTS
- -------
Shareholders will receive unaudited semi-annual reports describing the
Fund's investment operations and annual financial statements together with the
reports of the independent accountants of the Fund.
MISCELLANEOUS
- -------------
As used in the Prospectus and this Statement of Additional Information,
a "vote of a majority" of the outstanding shares of the Fund or a particular
class of shares means the affirmative vote of the lesser of (a) more than 50% of
the outstanding shares of the Fund or class of shares or (b) 67% of the shares
of the Fund or class of shares present at a meeting at which more than 50% of
the outstanding shares of the Fund or class of shares are represented in person
or by proxy.
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Only Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 128,849,896.28 shares (44.04%); VAR &
Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101,
31,981,230 shares (10.93%); BA Securities, Inc., 185 Berry Street, 3rd Floor,
San Francisco, CA 94107, 66,681,182.99 shares (22.79%); and Hare & Co., Bank of
New York and Short-Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 17,174,397.60 shares (5.87%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: Omnibus Account for
the Shareholder Accounts Maintained By Concord Financial Services, Inc., Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh,
PA 15222, 50,129,518.32 shares (31.77%); Comcare, Inc., 4001 North Third Street,
Suite 120, Phoenix, AZ 85012, 18,229,220.49 shares (11.55%); Comcare, Inc., 4001
North Third Street, Suite 120, Phoenix, AZ 85012, 17,284,833.02 shares (10.95%);
and Omnibus Account for the Shareholder Accounts Maintained by Concord Financial
Services, Inc., Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 22,570,985.47 shares (14.30%).
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<PAGE> 93
At October 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Shares of the Treasury Only Fund were as follows: Centinela Valley Health
Services, Attn: Sherwin L. Memel, 11355 West Olympic Boulevard, Los Angeles, CA
90064, 43,275,947.43 shares (8.28%).
At October 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: Bank of America
National Trust and Savings Association, Trustee/Custodian, Attn: Common Trust
Funds Unit 8329, P.O. Box 3577, Los Angeles, CA 90051, 93,699,582.79 shares
(10.45%); and BA Investment Services, Inc., Attn: Box Santilli, 185 Berry
Street, Third Floor, Unit 7852, San Francisco, CA 94107, 199,662,779.09 shares
(33.02%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Fund were as follows: Hare & Co., Bank of New
York and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 136,609,163.58 shares (15.91%); BA Investment Services, Inc.,
For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 199,862,702.99 shares (23.28%); and VAR & Co., Attn: Linda
Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 459,855,902 shares
(53.55%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 182,193,650.41 shares (12.23%); and BISYS Fund Services,
Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 487,156,119.47 shares (32.71%).
At October 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: Bank of America Financial
Management and Trust Services, Attn: Common Trust Funds Unit 8329, P.O. Box
3577, Terminal Annex, Los Angeles, CA 90051, 264,706,769.80 shares (9.00%); and
Bank of America Nevada Southern Commercial Bank, Attn: Cindy 2964, P.O. Box
98600, Las Vegas, NV 89193, 157,666,250.89 shares (5.35%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Treasury Fund were as follows: Bank of America TTEE/Cust. Invest.
Hor. Treas., Attn:
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<PAGE> 94
Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 242,604,374.22 shares (8.34%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Government Fund were as follows: BA Investment Services,
Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box
7042, San Francisco, CA 94120, 74,443,625.51 shares (32.51%); VAR & Co., Attn:
Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 29,073,405
shares (12.70%); BA Securities, Inc., 185 Berry Street, 3rd Floor, San
Francisco, CA 94107, 60,149,536.82 shares (26.27%); and Bank of America National
Trust and Savings Association and Private Bank, Attn: ACI Unit 8329, P.O. Box
3577, Terminal Annex, Los Angeles, CA 90051, 26,287,277.44 shares (11.48%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Omnibus Account for the
Shareholder Accounts Maintained By Concord Financial Services, Inc., Attn: Linda
Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 54,946,147.35 shares (18.52%); Viejas Band of Kumeyaay Indians, A
Federally Recognized Indian Tribe, 5000 Willows Road, Alpine, CA 91901,
20,684,502.32 shares (6.97%); 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,
15,954,998.54 shares (5.38%); Cohu Inc., 5755 Kearny Villa Road, San Diego, CA
92123, 15,114,279.28 shares (5.10%); and Good Health Plan of Washington, Attn:
Linda Lan Ha, 1501 4th Avenue, Suite 500, Seattle, WA 98101, 15,096,218.19
shares (5.09%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Government Fund were as follows: Sunquest Information Systems,
Inc., Attn: Trena Couch, 1407 Eisenhower Boulevard, Johnstown, PA 15904,
34,133,212.51 shares (6.14%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Prime Fund were as follows: BA Securities, Inc., 185 Berry
Street, 3rd Floor, San Francisco, CA 94107, 210,837,920.82 shares (9.32%); Hare
& Co., Bank of New York and Short Term Investment Funds, Attn: Bimal Saha, One
Wall Street, New York, NY 10286, 165,890,980.38 shares (7.34%); and BA
Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob
Santilli, P.O. Box 7042, San Francisco, CA 94120, 1,723,111,105.37 shares
(76.19%).
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<PAGE> 95
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 1,395,146,335.08 shares (50.54%); and BISYS Fund Services,
Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 345,706,323.96 shares (12.52%).
At October 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: Bank of America National Trust
and Savings Association, Financial Management & Trust Services, Attn: Common
Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
815,759,587.51 shares (12.50%); and Security Pacific Cash Management, c/o Bank
of America GPO M/C 5533, Attn: Regina Olsen, 1850 Gateway Boulevard, Concord, CA
94520, 552,092,600 shares (8.46%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Tax-Exempt Money Fund 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, 36,636,648.77 shares (68.23%); and VAR &
Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101,
12,115,711 shares (22.56%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 94,983,380.22 shares (70.97%); and
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 23,630,360.91 shares
(17.66%).
At October 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: Bank of America
Financial Management and Trust Services, Attn: Common Trust Funds Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 96,373,107.27 shares
(21.40%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Tax-Exempt Money Fund were as follows: Bank of America Cust. for
Invest. Hor T-E, Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal
-58-
<PAGE> 96
Annex, Los Angeles, CA 90051, 71,157,875.72 shares (15.80%); and Continental
Bank National Association Cust, FBO Cust & Co., Attn: Mary Chester, South
LaSalle Street 6Q, Chicago, IL 60697, 186,490,974.09 shares (41.42%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the California Tax-Exempt Money Market Fund were as follows:
BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
215,635,293.16 shares (42.60%); and BA Investment Services, Inc., For the
Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 251,101,485.35 shares (49.61%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the California Tax-Exempt Money Market Fund were as follows:
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 202,141,862.60 shares
(51.76%); and BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh,
PA 15222, 126,056,593.10 shares (32.28%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding A Shares of
the Corporate Bond Fund were as follows: Bank of America National Trust and
Savings Association and Private Bank, Attn: Common Trust Funds Unit 38329, P.O.
Box 3577 Terminal Annex, Los Angeles, CA 90051, 128,868.68 shares (6.55%); Smith
Barney, Inc., Custodian, 333 W. 34th Street, 3rd Floor, New York, NY 10001,
112,581.97 shares (5.72%); and Dean Witter Reynolds, Inc., Stock Record
Department, 5th Floor, 5 World Trade Center, New York, NY 10048, 105,583 shares
(5.36%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the Intermediate Bond Fund were as follows: Bank of America National
Trust and Savings Association and Private Bank, Attn: Common Trust Funds Unit
38329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, 423,376.34 shares
(23.85%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the National Municipal Bond Fund were as follows: BA Investment
Services, Inc., FBO 421981351, 185 Berry Street, 3rd Floor, 2640, San Francisco,
CA 94104, 78,122.07 shares (5.22%); and BA Investment Services, Inc., FBO
405084421, 555 California Street, 4th Floor, 2640, San Francisco, CA 94104,
88,776.96 shares (5.93%).
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<PAGE> 97
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the Short-Term Government Fund were as follows: Bank of America
National Trust and Savings Association and Private Bank, Attn: Common Trust
Funds Unit 38329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051,
589,639.98 shares (94.83%).
At October 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the International Equity Fund were as follows: Bank of America
National Trust and Savings Association, Agent for the Giannini Foundation for
Medical Research, TR 10100227313510, P.O. Box 3577, Terminal Annex, Los Angeles,
CA 90051, 99,595.59 shares (8.73%); Bank of America National Trust and Savings
Association, and Private Bank, Attn: Common Trust Funds Unit 38329, P.O. Box
3577, Terminal Annex, Los Angeles, CA 90051, 203,225 shares (17.81%).
At such dates, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any investment
portfolio of the Company.
The Prospectus relating to the Funds and this Statement of Additional
Information omit certain information contained in the Company's registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations.
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<PAGE> 98
FINANCIAL STATEMENTS
The financial statements and notes thereto in the Semi-Annual Reports
for the Fund and the Master Portfolio for the period May 13, 1996 (commencement
of operations) through August 31, 1996 are incorporated in this Statement of
Additional Information by reference. No other parts of the Semi-Annual Reports
are incorporated by reference herein.
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<PAGE> 99
APPENDIX A
----------
As stated in the Prospectus, the Fund may enter into futures contracts
and options for hedging purposes. Such transactions are described in this
Appendix A.
I. INTEREST RATE FUTURES CONTRACTS
-------------------------------
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most
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cases the contracts are closed out before the settlement date without the making
or taking of delivery of securities. Closing out a futures contract sale is
effected by the Fund's entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by the Fund's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Fund realizes a gain, and
if the purchase price exceeds the offsetting sale price, the Fund realizes a
loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. The Fund would deal only in standardized contracts
on recognized exchanges. Each exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed by
the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. The Fund may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
EXAMPLES OF FUTURES CONTRACT SALE. The Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in the Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury bonds"). The investment adviser or sub-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 or sub-adviser believes that, because of an anticipated rise
in interest rates, the value will decline to 95. The Fund might enter into
futures contract sales of Treasury bonds for an equivalent of 98. If the market
value of the portfolio security does indeed decline from 100 to 95, the
equivalent futures market price for the Treasury bonds might also decline from
98 to 93.
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<PAGE> 101
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 or sub-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 or sub-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
or sub-adviser believes that, because of an anticipated fall in interest rates,
the price will have risen to 105 (and the yield will have dropped to about 9
1/2%) in four months. The Fund might enter into futures contracts purchases of
Treasury bonds for an equivalent price of 98. At the same time, the Fund would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an assumed market price of 100. Assume these short-term
securities are yielding 15%. If the market price of the long-term bond does
indeed rise from 100 to 105, the equivalent futures market price for Treasury
bonds might also
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<PAGE> 102
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 or sub-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.
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
portfolio as
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<PAGE> 103
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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<PAGE> 104
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy 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>
FUND FUTURES
---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
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 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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<PAGE> 105
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy 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>
FUND FUTURES
---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
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>
III. 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 Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. 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
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<PAGE> 106
of which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when the Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the future contract has declined in response to a decrease in
the underlying instruments, the position would be less valuable and the Fund
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 or
sub-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 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.
V. 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
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<PAGE> 107
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, the Fund may buy or sell futures contracts in
a greater dollar amount than the dollar amount of securities being hedged if the
volatility over a particular time period of the prices of such securities has
been greater than the volatility over such time period of the future, or if
otherwise deemed to be appropriate by the investment adviser. Conversely, the
Fund may buy or sell fewer futures contracts if the volatility over a particular
time period of the prices of the securities being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by the investment adviser or sub-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
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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 or sub-adviser may still not result in a successful hedging transaction
over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by the Fund is also subject to the investment
adviser's or sub-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
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reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
VI. OPTIONS ON FUTURES CONTRACTS
----------------------------
The Fund may purchase options on the futures contracts described above.
A futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract at
a specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder, or writer, of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the 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).
VII. OTHER HEDGING TRANSACTIONS
--------------------------
The Fund presently intends to use interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts (and
related options) 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 or sub-adviser, transactions therein are necessary or advisable.
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VIII. ACCOUNTING AND TAX TREATMENT
----------------------------
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by
the Fund at the close of the Fund's taxable year will be treated for federal
income tax purposes as sold for their fair market value on the last business day
of such year, a process known as "marking-to-market." Forty percent of any gain
or loss resulting from such constructive sale will be treated as short-term
capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the length of time the Fund holds the
futures contract or option ("the 40%-60% rule"). The amount of any capital gain
or loss actually realized by the Fund in a subsequent sale or other disposition
of those futures contracts or options will be adjusted to reflect any capital
gain or loss taken into account by the Fund in a prior year as a result of the
constructive sale of the contracts or options. With respect to futures contracts
to sell, which will be regarded as parts of a "mixed straddle" because their
values fluctuate inversely to the values of specific securities held by the
Fund, losses as to such contracts to sell will be subject to certain loss
deferral rules which limit the amount of loss currently deductible on either
part of 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,
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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 Fund may be
subject to the "marking-to-market" process, but gain or loss will be treated as
100% ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts. As
of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Foreign currency contracts entered into by the Fund
may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument. However, regulated futures contracts and non-equity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
marking-to-market rules, unless an election is made to have such currency rules
apply. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions subject
to the
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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 the
Fund 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 the 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 the Fund satisfy certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of the 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 the Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by the 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.
An additional requirement for qualification as a regulated investment
company under the Code is that less than 30% of the Fund's gross income must be
derived from gains realized on the sale or other disposition of the following
investments held for less than three moths: (1) stock and securities (as defined
in section 2(a)(36) of the 1940 Act); (2) options, futures and forward contracts
other than those on foreign currencies; and (3) foreign currencies (and options,
futures and forward contracts on foreign currencies) that are not directly
related to the Fund's principal business of investing in stock and securities
(and options and futures with respect to stocks and securities). With respect to
futures contracts and other financial instruments subject to the
marking-to-market rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contract or financial
instrument will be
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treated as being derived from a security held for three months or more
(regardless of the actual period for which the contract or instrument is held)
if the gain arises as a result of a constructive sale under the
marking-to-market rules, and will be treated as being derived from a security
held for less than three months only if the contract or instrument is terminated
(or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of the 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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