<PAGE> 1
As filed with the Securities and Exchange Commission on July 1, 1998
Registration Nos. 2-81110/811-4293
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Post-Effective Amendment No. 60 /x/
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 62 /x/
-----------
PACIFIC HORIZON FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
400 Bellevue Parkway
Wilmington, DE 19809
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (800) 332-3863
W. Bruce McConnel, III
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities being Registered - Shares of Common Stock
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<PAGE> 2
PACIFIC HORIZON FUNDS, INC.
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N1-A ITEM LOCATION IN SAI
- --------- ---------------
<S> <C> <C>
10. Cover Page and Table of Contents................................ Front Cover; Table of Contents
11. Fund History.................................................... Organization and Classification
12. Description of the Fund and Its Investments and Risks........... Non-Primary Investment Strategies and
Related Risks; Fundamental Policies;
Non-Fundamental Policies Temporary Defensive Positions; Appendix A; Appendix B
13. Management of the Fund.......................................... Management of the Funds
14. Control Persons and Principal Holders of Securities............. Principal Holders of Securities Miscellaneous
15. Investment Advisory and Other Services.......................... Investment Adviser; Administrator; Special
Management Services Plan; Shareholder Services Plan; Distributor; Custodian;
Transfer Agent; Independent Accountants; Counsel
</TABLE>
<PAGE> 3
PACIFIC HORIZON FUNDS, INC.
Y, HORIZON AND HORIZON SERVICE SHARES OF THE
PRIME FUND
TREASURY FUND
HORIZON AND HORIZON SERVICE SHARES OF THE
GOVERNMENT FUND
TREASURY ONLY FUND
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N1-A ITEM LOCATION IN PROSPECTUS
- --------- ----------------------
<S> <C> <C>
1. Front and Back Cover Pages...................................... Front and Bank Cover Pages
2. Risk/Return Summary: Investments, Risks, and Performance....... Fund Description
3. Risk/Return Summary: Fee Table................................. Fund Description
4. Investment Objectives, Principal Strategies, and Related Risks.. Fund Description
5. Management's Discussion of Fund Performance..................... Not Applicable
6. Management, Organization, and Capital Structure................. Management of the Funds
7. Shareholder Information......................................... Shareholder Information
8. Distribution Arrangements....................................... Distribution Arrangements
9. Financial Highlights Information................................ Fund Description
</TABLE>
<PAGE> 4
PACIFIC HORIZON FUNDS, INC.
Class A, B and K Shares of the
Asset Allocation Fund
--------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
<S> <C>
Part A
1. Cover Page............................ Cover Page
2. Synopsis.............................. Expense Summary
3. Condensed Financial Information....... Financial Highlights;
Measuring Performance
4. General Description of Registrant..... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund................ The Business of the Funds
5.A. Management's Discussion of
Fund Performance................. *
6. Capital Stock and Other
Securities....................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered.......................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase.............. How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings............. *
</TABLE>
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* Item inapplicable or answer negative.
<PAGE> 5
PACIFIC HORIZON FUNDS, INC.
X, HORIZON AND HORIZON SERVICE SHARES OF THE
PRIME FUND
TREASURY FUND
HORIZON AND HORIZON SERVICE SHARES OF THE
GOVERNMENT FUND
TREASURY ONLY FUND
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N1-A ITEM LOCATION IN PROSPECTUS
- --------- ----------------------
<S> <C> <C>
1. Front and Back Cover Pages...................................... Front and Bank Cover Pages
2. Risk/Return Summary: Investments, Risks, and Performance....... Fund Description
3. Risk/Return Summary: Fee Table................................. Fund Description
4. Investment Objectives, Principal Strategies, and Related Risks.. Fund Description
5. Management's Discussion of Fund Performance..................... Not Applicable
6. Management, Organization, and Capital Structure................. Management of the Funds
7. Shareholder Information......................................... Shareholder Information
8. Distribution Arrangements....................................... Distribution Arrangements
9. Financial Highlights Information................................ Fund Description
</TABLE>
<PAGE> 6
PACIFIC HORIZON FUNDS, INC.
S SHARES OF THE
PRIME FUND
TREASURY FUND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N1-A ITEM LOCATION IN PROSPECTUS
- --------- ----------------------
<S> <C> <C>
1. Front and Back Cover Pages...................................... Front and Bank Cover Pages
2. Risk/Return Summary: Investments, Risks, and Performance....... Fund Description
3. Risk/Return Summary: Fee Table................................. Fund Description
4. Investment Objectives, Principal Strategies, and Related Risks.. Fund Description
5. Management's Discussion of Fund Performance..................... Not Applicable
6. Management, Organization, and Capital Structure................. Management of the Funds
7. Shareholder Information......................................... Shareholder Information
8. Distribution Arrangements....................................... Distribution Arrangements
9. Financial Highlights Information................................ Fund Description
</TABLE>
<PAGE> 7
PACIFIC HORIZON FUNDS, INC.
X SHARES AND PACIFIC HORIZON SHARES OF
PRIME FUND
TREASURY FUND
PACIFIC HORIZON SHARES OF
GOVERNMENT FUND
TREASURY ONLY FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N1-A ITEM LOCATION IN PROSPECTUS
- --------- ----------------------
<S> <C> <C>
1. Front and Back Cover Pages...................................... Front and Bank Cover Pages
2. Risk/Return Summary: Investments, Risks, and Performance....... Fund Description
3. Risk/Return Summary: Fee Table................................. Fund Description
4. Investment Objectives, Principal Strategies, and Related Risks.. Fund Description
5. Management's Discussion of Fund Performance..................... Not Applicable
6. Management, Organization, and Capital Structure................. Management of the Funds
7. Shareholder Information......................................... Shareholder Information
8. Distribution Arrangements....................................... Distribution Arrangements
9. Financial Highlights Information................................ Fund Description
</TABLE>
<PAGE> 8
PACIFIC HORIZON FUNDS, INC.
PACIFIC HORIZON SHARE OF
TAX-EXEMPT MONEY FUND
X AND PACIFIC HORIZON SHARES OF
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N1-A ITEM LOCATION IN PROSPECTUS
- --------- ----------------------
<S> <C> <C>
1. Front and Back Cover Pages...................................... Front and Bank Cover Pages
2. Risk/Return Summary: Investments, Risks, and Performance....... Fund Description
3. Risk/Return Summary: Fee Table................................. Fund Description
4. Investment Objectives, Principal Strategies, and Related Risks.. Fund Description
5. Management's Discussion of Fund Performance..................... Not Applicable
6. Management, Organization, and Capital Structure................. Management of the Funds
7. Shareholder Information......................................... Shareholder Information
8. Distribution Arrangements....................................... Distribution Arrangements
9. Financial Highlights Information................................ Fund Description
</TABLE>
<PAGE> 9
PACIFIC HORIZON FUNDS, INC.
SRF Shares of the
Intermediate Bond (formerly, Flexible Bond) Fund, Blue Chip Fund and
Asset Allocation Fund
--------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
<S> <C>
Part A
- ------
1. Cover Page............................ Cover Page
2. Synopsis.............................. Expense Summary
3. Condensed Financial Information....... Financial Highlights;
Measuring Performance
4. General Description of Registrant..... Description of Shares; Cover
Page; Fund Investments; Other
Investment Practices;
Fundamental Limitations
5. Management of the Fund................ The Business of the Funds
5.A. Management's Discussion of
Fund Performance................. *
6. Capital Stock and Other
Securities....................... Description of Shares; How to
Invest in SRF Shares - Dividend
and Distribution Policies; Tax
Information
7. Purchase of Securities Being
Offered.......................... How to Invest in SRF Shares;
The Business of the Funds; Plan
Payments; Measuring Performance
8. Redemption or Repurchase.............. Redemption of SRF Shares; Plan
Payments
9. Pending Legal Proceedings............. *
</TABLE>
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* Item inapplicable or answer negative.
<PAGE> 10
PACIFIC HORIZON FUNDS, INC.
Class A and B Shares of the Short-Term Government Fund
Class A, B and K shares of the
National Municipal Bond Fund,
California Municipal (formerly, Tax-Exempt) Bond Fund,
Aggressive Growth Fund,
U.S. Government Securities Fund,
Capital Income Fund,
Intermediate Bond Fund,
Blue Chip Fund,
Asset Allocation Fund,
Flexible Income (formerly, Corporate Bond) Fund, and
International Equity Fund
Class SRF Shares of the
Intermediate Bond (formerly, Flexible Bond) Fund,
Blue Chip Fund and Asset Allocation Fund
--------------
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C>
10. Cover Page............................ Cover Page
11. Table of Contents..................... Table of Contents
12. General Information and History....... The Company
13. Investment Objectives and Policies... Investment Objectives and
Policies
14. Management of the Fund................ Management
15. Control Persons and Principal Holders
of Securities......................... Management; Miscellaneous
16. Investment Advisory and Other
Services.............................. Management-Investment Adviser;
Management-Administrator;
Management-Distributor and Plan
Payments; General Information-
Custodian, Accounting Agent and
Transfer Agent; General
Information-Independent
Accountants
17. Brokerage Allocation and Other
Practices............................ Portfolio Transactions
18. Capital Stock and Other Securities... General Information - Description
of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered............. Additional Purchase and Redemption
Information
20. Tax Status........................... Additional Information
Concerning Taxes
21. Underwriters......................... Management-Distributor and Plan
Payments
22. Calculation of Performance Data...... Yield and Total Return
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate Item,
so numbered in Part C to this Registration Statement.
<PAGE> 11
PACIFIC HORIZON FUNDS, INC.
Class A, B and K Shares of the
Flexible Income Fund (formerly, Corporate Bond Fund),
Intermediate Bond Fund, U.S. Government Securities Fund,
Short-Term Government Fund,
National Municipal Bond Fund and California Municipal Bond
(formerly, California Tax-Exempt Bond) Fund
--------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
<S> <C>
Part A
1. Cover Page............................ Cover Page
2. Synopsis.............................. Expense Summary
3. Condensed Financial Information....... Financial Highlights;
Measuring Performance
4. General Description of Registrant..... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund................ The Business of the Funds
5.A. Management's Discussion of
Fund Performance................. *
6. Capital Stock and Other
Securities....................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered.......................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase.............. How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings............. *
</TABLE>
- --------
* Item inapplicable or answer negative.
<PAGE> 12
PACIFIC HORIZON FUNDS, INC.
Class A, B and K Shares of the
Blue Chip Fund, Agressive Growth Fund,
Asset Allocation Fund,
Capital Income Fund and
International Equity Fund
--------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
<S> <C>
Part A
1. Cover Page............................ Cover Page
2. Synopsis.............................. Expense Summary
3. Condensed Financial Information....... Financial Highlights;
Measuring Performance
4. General Description of Registrant..... Description of Shares; Cover
Page; Fund Investments; Types
of Investments; Fundamental
Limitations; Other Investment
Practices and Considerations
5. Management of the Fund................ The Business of the Funds
5.A. Management's Discussion of
Fund Performance................. *
6. Capital Stock and Other
Securities....................... Description of Shares;
Dividend and Distribution
Policies; Tax Information
7. Purchase of Securities Being
Offered.......................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase.............. How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings............. *
</TABLE>
- --------
* Item inapplicable or answer negative.
<PAGE> 13
PACIFIC HORIZON FUNDS, INC.
Class A, B and K shares of the
Asset Allocation Fund
--------------
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C>
10. Cover Page............................ Cover Page
11. Table of Contents..................... Table of Contents
12. General Information and History....... The Company
13. Investment Objectives and Policies... Investment Objectives and
Policies
14. Management of the Fund................ Management
15. Control Persons and Principal Holders
of Securities......................... Management; Miscellaneous
16. Investment Advisory and Other
Services.............................. Management-Investment Adviser;
Management-Administrator;
Management-Distributor and Plan
Payments; General Information-
Custodian, Accounting Agent and
Transfer Agent; General
Information-Independent
Accountants
17. Brokerage Allocation and Other
Practices............................ Portfolio Transactions
18. Capital Stock and Other Securities... General Information - Description
of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered............. Additional Purchase and Redemption
Information
20. Tax Status........................... Additional Information
Concerning Taxes
21. Underwriters......................... Management-Distributor and Plan
Payments
22. Calculation of Performance Data...... Yield and Total Return
</TABLE>
PART C
Information to be included in Part C is set forth under the appropriate Item,
so numbered in Part C to this Registration Statement.
<PAGE> 14
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus gives vital information about these PRIME FUND
money market mutual funds, including information on -- Y Shares
investment policies, risks and fees. For your own -- Horizon Shares
benefit and protection, please read it before you -- Horizon Service Shares
invest, and keep it on hand for future reference.
TREASURY FUND
Please note that these Funds: -- Y Shares
-- Horizon Shares
- - are not bank deposits -- Horizon Service Shares
- - are not obligations of, or guaranteed or endorsed
by Bank of America NT&SA or any of its affiliates GOVERNMENT FUND
- - are not federally insured -- Horizon Shares
- - are not obligations of, or guaranteed or endorsed -- Horizon Service Shares
or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal TREASURY ONLY FUND
Reserve Board or any other governmental agency -- Horizon Shares
- - are not guaranteed to achieve their goal(s) -- Horizon Service Shares
- - may not be able to maintain a stable $1 share
price TAX-EXEMPT MONEY FUND
-- Horizon Shares
Like all mutual fund shares, these securities have -- Horizon Service Shares
not been approved or disapproved by the Securities
and Exchange Commission or any state securities CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
commission, nor has the Securities and Exchange -- Horizon Shares
Commission or any state securities commission -- Horizon Service Shares
passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a
criminal offense.
</TABLE>
Investment Portfolios Offered by
PHF-0004 Pacific Horizon Funds, Inc.
<PAGE> 15
OVERVIEW
GOAL OF THE MONEY MARKET FUNDS
The money market funds invest primarily in money market instruments and strive
to maintain a stable $1 share price. Each Fund employs its own strategy and has
its own risk/reward profile. Be sure to read all risk disclosure carefully
before investing.
THE INVESTMENT ADVISER
Pacific Horizon money market funds are managed by Bank of America NT&SA ("Bank
of America"), a subsidiary of BankAmerica Corporation, a registered bank holding
company. For more information on the Investment Adviser see the section entitled
"Management of the Funds."
<PAGE> 16
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A FUND-BY-FUND LOOK AT GOALS, FUND DESCRIPTION
STRATEGIES, RISKS, EXPENSES OVERVIEW
AND FINANCIAL HISTORY 2-9 PRIME FUND
10-16 TREASURY FUND
17-23 GOVERNMENT FUND
24-29 TREASURY ONLY FUND
30-35 TAX-EXEMPT MONEY FUND
36-40 CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
41 ADDITIONAL INVESTMENT RISKS
DETAILS THAT APPLY TO ALL MONEY
MARKET FUNDS IN THIS MANAGEMENT OF THE FUNDS
PROSPECTUS 41 INVESTMENT ADVISER
42 SERVICE PROVIDER CHART
POLICIES AND INSTRUCTIONS FOR
OPENING, MAINTAINING AND SHAREHOLDER INFORMATION
CLOSING AN ACCOUNT IN ANY OF 43 PRICING OF FUND SHARES
THE MONEY MARKET FUNDS 43 PURCHASE OF FUND SHARES
45 REDEMPTION OF FUND SHARES
46 EXCHANGE PRIVILEGE
DETAILS ON DISTRIBUTION AND 47 DIVIDENDS AND DISTRIBUTIONS
OTHER SHAREHOLDER SERVICE 47 TAXES
PLANS.
DISTRIBUTION ARRANGEMENTS
48 12b-1 AND SERVICE FEE PLANS
SEE BACK COVER FOR MORE INFORMATION
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Trust and Savings Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 17
PRIME FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: HPRXX
Horizon Service Shares: not applicable
Y Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund may invest in U.S. dollar-denominated money market securities (such as
bank certificates of deposit, bankers' acceptances and commercial paper),
including those issued by:
- - U.S. and foreign banks
- - U.S. and foreign corporate issuers
- - the U.S. government, its agencies and instrumentalities
- - municipalities
At least 95% of the Fund's investments will be in the highest short-term rating
category or will be issued by issuers with such ratings (or, if unrated, will be
of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund will concentrate its investments in the banking and finance industry
which means that it will invest at least 25% of its total assets in the
securities of that industry.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
2
<PAGE> 18
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - Because the Fund concentrates in the banking and finance industry, it is more
susceptible to economic and regulatory developments in that industry than a
money market fund which does not concentrate. In addition, the Fund's
investment in foreign banks and corporate issuers makes it susceptible to
future political and economic developments in countries in which it invests.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Shares of
the Fund for the last 10 calendar years. Past performance is not necessarily an
indicator of how the Fund will perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1988 7.76
1989 9.51
1990 8.4
1991 6.5
1992 4.01
1993 3.26
1994 4.2
1995 5.92
1996 5.38
1997 5.56
</TABLE>
The total return for Horizon Shares of the Fund for the fiscal quarter ended May
31, 1998 was 1.39%. Over the past 10 calendar years, the highest quarter total
return for Horizon Shares of the Fund was 2.43% (quarter ended June 30, 1989).
Over the past 10 calendar years, the lowest quarter total return for Horizon
Shares of the Fund was 0.80% (quarter ended June 30, 1993).
3
<PAGE> 19
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years compare with the average annual returns for the same
periods of a broad-based market index (the Lipper Institutional Money Market
Funds). Past performance is not necessarily an indicator of how the Fund or the
broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
PRIME FUND ------ ------- -------------- ---------------
<S> <C> <C> <C> <C>
Lipper Institutional Money Market Funds... 5.33% 4.64% 5.78% Not Applicable
Y Shares*, **............................. 4.75% 4.42% 5.61% Not Applicable
Horizon Shares............................ 5.56% 4.86% 6.03% Not Applicable
Horizon Service Shares***................. 5.29% 4.60% Not Applicable 5.75%
</TABLE>
- ---------------
* This example does not include the deduction at redemption of any contingent
deferred sales charges for Y Shares of the Prime Fund acquired through
exchange of B Shares of the Pacific Horizon Funds.
** Prime Fund -- Y Shares commenced operations on July 10, 1997. Performance
results from July 22, 1996 to July 9, 1997 reflect the past performance of
Prime Fund -- X Shares. Performance results prior to July 22, 1996 reflect
the past performance of Prime Fund -- Pacific Horizon Shares. Y Shareholders
are subject to a Rule 12b-1 Fee of 0.75% and a Shareholder Service Fee of
0.25%. X Shares are subject to a 0.30% Rule 12b-1 Fee and a 0.25%
Shareholder Service Fee. Pacific Horizon Shares are subject to a 0.32%
Special Management Services Fee. Performance data prior to July 10, 1997 for
the Prime Fund -- Y Shares has not been adjusted to reflect the higher
expenses of the Y Shares. If the performance data prior to July 10, 1997 had
been adjusted to reflect Y Share expenses, performance would have been
lower.
*** Prime Fund Horizon Service Shares commenced operations on February 18, 1988.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Y HORIZON HORIZON
SHARES(1) SHARES SERVICE SHARES(2)
--------- ------- -----------------
<S> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases.................. None None None
Maximum sales charge imposed on reinvested dividends....... None None None
Maximum deferred sales charge.............................. None(3) None None
Redemption fees(4)......................................... None None None
Exchange fees.............................................. None None None
</TABLE>
4
<PAGE> 20
<TABLE>
<CAPTION>
HORIZON
Y HORIZON SERVICE
SHARES(1) SHARES SHARES(2)
--------- ------- -----------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(5)......................................... .20% .20% .20%
Rule 12b-1 fees(6)......................................... .75% 0% 0%
Shareholder services fees.................................. .25% 0% .25%
All other expenses......................................... .02% .03% .04%
---- --- ---
Total annual operating expenses(7)......................... 1.22% .23% .49%
==== === ===
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(3) Although there is no contingent deferred sales charge, any Y Shares of the
Prime Fund which were acquired through an exchange of B Shares of Pacific
Horizon Funds (which are offered with a contingent deferred sales charge)
will be subject to a contingent deferred sales charge of up to a maximum of
5.0% upon redemption in accordance with the applicable Pacific Horizon
Fund -- B Share prospectus.
(4) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(5) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets. Due to established breakpoints, management fees decrease as the
Fund's assets increase. AS OF FEBRUARY 28, 1998, THE EFFECTIVE ADVISORY FEE
WAS .09%, THE EFFECTIVE ADMINISTRATION FEE WAS .10% AND THE EFFECTIVE
MANAGEMENT FEE WAS .19% OF THE FUND'S AVERAGE NET ASSETS.
(6) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(7) AS OF FEBRUARY 28, 1998, THE EFFECTIVE TOTAL OPERATING EXPENSES, AS A
PERCENTAGE OF AVERAGE NET ASSETS, WERE 1.21% FOR Y SHARES, .22% FOR HORIZON
SHARES AND .48% FOR HORIZON SERVICE SHARES. The amount of current total
operating expenses may increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
5
<PAGE> 21
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
PRIME FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
Y Shares*.................................................. $124 $387 $670 $1,477
Horizon Shares............................................. $ 24 $ 74 $130 $ 293
Horizon Service Shares..................................... $ 50 $157 $274 $ 616
</TABLE>
- ---------------
* This example does not include the deduction at redemption of any contingent
deferred sales charges for Y Shares of the Prime Fund acquired through
exchange of B Shares of the Pacific Horizon Funds.
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
6
<PAGE> 22
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1998(a)
------------
<S> <C>
Y SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00
--------
Income from Investment Operations:
Net investment income..................................... 0.0290
Net realized gains/(losses) on investment transactions.... --
--------
Total income from investment operations..................... 0.0290
Less dividends to shareholders from net investment income... (0.0290)
--------
Net change in net asset value per share..................... --
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00
========
Total return................................................ 2.93%(d)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (millions).................... $ 559
Ratio of expenses to average net assets................... 1.21%(c)
Ratio of net investment income to average net assets...... 4.48%(c)
Ratio of expenses to average net assets*.................. (b)
Ratio of net investment income to average net assets*..... (b)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 10, 1997 (inception date) to February 28,
1998.
(b) Fee waivers and fees paid by third parties had no effect on
the ratios.
(c) Annualized.
(d) Not annualized.
</TABLE>
7
<PAGE> 23
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.0546 0.0524 0.0571 0.0461 0.0319
Net realized gains/(losses) on
investment transactions........... -- -- 0.0004 (0.0232) (0.0016)
-------- -------- -------- -------- --------
Total income from investment
operations........................... 0.0546 0.0524 0.0575 0.0229 0.0303
Less dividends to shareholders from net
investment income.................... (0.0547) (0.0522) (0.0571) (0.0454) (0.0319)
Increase due to voluntary capital
contribution from Investment
Advisor.............................. -- -- -- 0.0233 --
-------- -------- -------- -------- --------
Net change in net asset value per
share................................ (0.0001) 0.0002 0.0004 0.0008 (0.0016)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................... 5.60% 5.34% 5.86% 4.63%+ 3.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (millions)... $ 2,415 $ 1,710 $ 1,651 $ 662 $ 3,840
Ratio of expenses to average net
assets............................... 0.22% 0.23% 0.23% 0.16% 0.20%
Ratio of net investment income to
average net assets................... 5.47% 5.24% 5.69% 4.11% 3.19%
Ratio of expenses to average net
assets*.............................. (a) (a) 0.24% 0.23% 0.21%
Ratio of net investment income to
average net assets*.................. (a) (a) 5.68% 4.04% 3.18%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
(a) Fee waivers and fees paid by third parties had no effect on
the ratios.
</TABLE>
8
<PAGE> 24
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income.................... 0.0521 0.0499 0.0546 0.0431 0.0294
Net realized gains/(losses) on investment
transactions.......................... -- -- 0.0004 (0.0227) (0.0016)
-------- -------- -------- -------- --------
Total income from investment operations.... 0.0521 0.0499 0.0550 0.0204 0.0278
Less dividends to shareholders from net
investment income........................ (0.0522) (0.0497) (0.0546) (0.0429) (0.0294)
Increase due to voluntary capital
contribution from Investment Advisor..... -- -- -- 0.0233 --
-------- -------- -------- -------- --------
Net change in net asset value per share.... (0.0001) 0.0002 0.0004 0.0008 (0.0016)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF YEAR..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............................... 5.34% 5.08% 5.60% 4.37%+ 2.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (millions)..... $ 3,374 $ 2,945 $ 1,561 $ 864 $ 839
Ratio of expenses to average net
assets................................ 0.48% 0.48% 0.48% 0.44% 0.45%
Ratio of net investment income to average
net assets............................ 5.23% 5.00% 5.44% 4.31% 2.94%
Ratio of expenses to average net
assets*............................... (a) (a) 0.49% 0.48% 0.46%
Ratio of net investment income to average
net assets*........................... (a) (a) 5.43% 4.27% 2.93%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
(a) Fee waivers and fees paid by third parties had no effect on
the ratios.
</TABLE>
9
<PAGE> 25
TREASURY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: HTRXX
Horizon Service Shares: not applicable
Y Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests solely in direct obligations of the U.S. Treasury, including:
- - U.S. Treasury bills, notes and bonds
- - repurchase agreements backed by U.S. Treasury bills, notes and bonds
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and generally does
not invest in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other
10
<PAGE> 26
service providers to successfully address year 2000 issues could result in
interruptions in the Fund's business and have a material adverse impact on the
Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other
banks, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Shares of
the Fund for the last 10 calendar years. Past performance is not necessarily an
indicator of how the Fund will perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1988 7.38
1989 9.12
1990 8.12
1991 6.01
1992 3.71
1993 2.98
1994 4.03
1995 5.78
1996 5.24
1997 5.36
</TABLE>
The total return for Horizon Shares of the Fund for the fiscal quarter ended May
31, 1998 was 1.35%. Over the past 10 calendar years, the highest quarter total
return for Horizon Shares of the Fund was 2.30% (quarter ended June 30, 1989).
Over the past 10 calendar years, the lowest quarter total return for Horizon
Shares of the Fund was 0.72% (quarter ended June 30, 1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years (and since inception with respect to the Horizon Service
Shares) compare with the average annual returns for the same periods of a
broad-based market index (the Lipper Institutional U.S. Treasury Money Market
Funds). Past performance is not necessarily an indicator of how the Fund or the
broad-based market index will perform in the future.
11
<PAGE> 27
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
TREASURY FUND ------- ------- -------------- ---------------
<S> <C> <C> <C> <C>
Lipper Institutional U.S Treasury Money
Market Funds............................. 5.11% 4.47% 5.62% Not applicable
Y Shares*.................................. 4.56% 4.24% 5.36% Not applicable
Horizon Shares............................. 5.36% 4.67% 5.76% Not applicable
Horizon Service Shares**................... 5.10% 4.41% Not applicable 5.51%
</TABLE>
- ---------------
* Treasury Fund -- Y Shares commenced operations on July 10, 1997. Performance
results from July 22, 1996 to July 9, 1997 reflect the past performance of
the Treasury Fund -- X Shares. Performance results prior to July 22, 1996
reflect the past performance of the Prime Fund -- Pacific Horizon Shares. Y
Shareholders are subject to a Rule 12b-1 Fee of 0.75% and a Shareholder
Services Fee of 0.25%. X Shares are subject to a 0.30% Rule 12b-1 Fee and a
0.25% Shareholder Service Fee. Pacific Horizon Shares are subject to a 0.32%
Special Management Services Fee. Performance data prior to July 10, 1997 for
the Treasury Fund -- Y Shares has not been adjusted to reflect the higher
expenses of the Y Shares. If the performance data prior to July 10, 1997 had
been adjusted to reflect Y Share expenses, performance would have been lower.
** Treasury Fund -- Horizon Service Shares commenced operations on February 18,
1988.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Y HORIZON HORIZON
SHARES(1) SHARES SERVICE SHARES(2)
--------- ------- -----------------
<S> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None None
Maximum sales charge imposed on reinvested dividends........ None None None
Maximum deferred sales charge............................... None None None
Redemption fees (3)......................................... None None None
Exchange fees............................................... None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(4).......................................... .20% .20% .20%
Rule 12b-1 fees(5).......................................... .75% 0% 0%
Shareholder services fees................................... .25% 0% .25%
All other expenses.......................................... .02% .05% .05%
---- ---- ----
Total annual Fund operating expenses........................ 1.22% .25% .50%
==== ==== ====
</TABLE>
12
<PAGE> 28
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(3) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(4) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(5) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Y Shares................................................... $124 $387 $670 $1,477
Horizon Shares............................................. $ 26 $ 80 $141 $ 318
Horizon Service Shares..................................... $ 51 $160 $280 $ 628
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
13
<PAGE> 29
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1998(a)
------------
<S> <C>
Y SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00
Income from Investment Operations:
Net investment income..................................... 0.0276
--------
Total income from investment operations..................... 0.0276
Less dividends to shareholders from net investment income... (0.0276)
Net change in net asset value per share..................... --
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00
========
Total return................................................ 2.80%(e)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 82
Ratio of expenses to average net assets................... 1.22%(d)
Ratio of net investment income to average net assets...... 4.28%(d)
Ratio of expenses to average net assets*.................. (b)(c)
Ratio of net investment income to average net assets*..... (b)(c)
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 10, 1997 (inception date) to February 28,
1998.
(b) There were no fee waivers or expense reimbursements during
the period.
(c) Fees paid by third parties had no effect on the ratios.
(d) Annualized.
(e) Not annualized.
</TABLE>
14
<PAGE> 30
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................. 0.0527 0.0509 0.0559 0.0437 0.0294
Net realized gains/(losses) on
investment transactions............ -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations............................ 0.0527 0.0509 0.0570 0.0438 0.0292
Less dividends to shareholders from net
investment income..................... (0.0527) (0.0509) (0.0559) (0.0437) (0.0294)
-------- -------- -------- -------- --------
Net change in net asset value per
share................................. -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............................ 5.40% 5.21% 5.73% 4.46% 2.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)......................... $ 702 $ 618 $ 722 469 $ 487
Ratio of expenses to average net
assets............................. 0.25% 0.25% 0.25% 0.23% 0.23%
Ratio of net investment income to
average net assets................. 5.27% 5.09% 5.56% 4.36% 2.94%
Ratio of expenses to average net
assets*............................ (a)(b) (b) 0.26% (a) (a)
Ratio of net investment income to
average net assets*................ (a)(b) (b) 5.55% (a) (a)
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
15
<PAGE> 31
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.0502 0.0484 0.0534 0.0412 0.0269
Net realized gains/(losses) on
investment transactions........... -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations........................... 0.0502 0.0484 0.0545 0.0413 0.0267
Less dividends to shareholders from net
investment income.................... (0.0502) (0.0484) (0.0534) (0.0412) (0.0269)
-------- -------- -------- -------- --------
Net change in net asset value per
share................................ -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................... 5.14% 4.97% 5.47% 4.20% 2.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)........................ $ 1,713 $ 1,557 $ 1,031 $ 364 $ 541
Ratio of expenses to average net
assets............................ 0.50% 0.50% 0.50% 0.48% 0.48%
Ratio of net investment income to
average net assets................ 5.03% 4.84% 5.31% 4.01% 2.69%
Ratio of expenses to average net
assets*........................... (a)(b) (b) 0.51% (a) (a)
Ratio of net investment income to
average net assets*............... (a)(b) (b) 5.30% (a) (a)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
16
<PAGE> 32
GOVERNMENT FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: PGOXX
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in short-term debt obligations issued or guaranteed (as to
principal and interest) by the U.S. Government, its agencies, instrumentalities,
or sponsored entities (and in repurchase agreements relating to such
obligations) including those obligations backed by the:
- - full faith and credit of the United States
- - right of the issuer to borrow from the U.S. Treasury
- - discretionary authority of the U.S. Government to purchase the agency's
obligations
- - credit of the agency or instrumentality issuing the obligation
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of
17
<PAGE> 33
America that it has a team in place working on year 2000 systems compliance
and that Bank of America expects to have its systems ready by the year 2000.
Certain other service providers have provided similar information to the Fund.
Nevertheless, the inability of Bank of America and the other service providers
to successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Service
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 2.56
1994 3.91
1995 5.55
1996 5.00
1997 5.15
</TABLE>
* Represents the period from March 1, 1993 to December 31, 1993.
The total return for Horizon Service Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.30%. Since inception (March 1, 1993), the highest
calendar quarter total return for Horizon Service Shares of the Fund was 1.42%
(quarter ended June 30, 1995). Since inception (March 1, 1993), the lowest
calendar quarter total return for Horizon Service Shares of the Fund was 0.73%
(quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index
18
<PAGE> 34
(the Lipper Institutional U.S. Government Money Market Funds). Past performance
is not necessarily an indicator of how the Fund or the broad-based market index
will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
GOVERNMENT FUND -------- -----------------
<S> <C> <C>
Lipper Institutional U.S Government Money Market Funds...... 5.25% Not applicable
Horizon Shares*............................................. 5.41% 4.92%
Horizon Service Shares**.................................... 5.15% 4.58%
</TABLE>
- ---------------
* Government Fund -- Horizon Shares commenced operations on June 14, 1993.
** Government Fund -- Horizon Services Shares commenced operations on March 1,
1993.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON HORIZON SERVICE
SHARES SHARES(1)
------- ---------------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3)(4)....................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .12% .12%
---- ----
Total annual fund operating expenses(4)..................... .32% .57%
==== ====
</TABLE>
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(4) The adviser has agreed to limit the management fee. AS OF FEBRUARY 28, 1998,
THE EFFECTIVE MANAGEMENT FEE AND TOTAL OPERATING EXPENSES, AS A PERCENTAGE
OF AVERAGE NET ASSETS, WERE .15% AND .27%, RESPECTIVELY, FOR THE HORIZON
SHARES, AND .15% AND .52%, RESPECTIVELY, FOR THE HORIZON
19
<PAGE> 35
SERVICE SHARES. The management fee limitation may be terminated at any time
at the option of the investment adviser. If this were to occur, the amount
of the current management fee and total operating expenses may increase
without shareholder approval up to the maximum total operating expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $33 $103 $180 $406
Horizon Service Shares..................................... $58 $183 $318 $714
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
20
<PAGE> 36
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(b)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............. 0.0532 0.0513 0.0600 0.0454 0.0227
Net realized gains/(losses) on
investment transactions........ 0.0001 -- (0.0042)** (0.0092) (0.0006)
-------- -------- -------- -------- --------
Total income from investment
operations........................ 0.0533 0.0513 0.0558 0.0362 0.0221
Less dividends to shareholders from
net investment income............. (0.0533) (0.0512) (0.0556) (0.0452) (0.0227)
Increase due to voluntary capital
contribution from Investment
Advisor........................... -- -- -- 0.0085 --
-------- -------- -------- -------- --------
Net change in net asset value per
share............................. -- 0.0001 0.0002 (0.0005) (0.0006)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................ 5.46% 5.25% 5.71% 4.61%+ 2.29%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)..................... $ 63 $ 61 $ 55 $ 235 $ 370
Ratio of expenses to average net
assets......................... 0.27% 0.22% 0.24% 0.17% 0.28%(c)
Ratio of net investment income to
average net assets............. 5.32% 5.15% 5.66% 4.67% 3.17%(c)
Ratio of expenses to average net
assets*........................ 0.32% 0.29%(a) 0.30% 0.25% 0.28%(c)
Ratio of net investment income to
average net assets*............ 5.27% 5.08%(a) 5.60% 4.59% 3.17%(c)
</TABLE>
21
<PAGE> 37
- ---------------
<TABLE>
<S> <C>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** Net realized loss for the period is a direct result of a
decrease in outstanding shares between February 28, 1995 and
the date of the gain realization.
(a) Fees paid by third parties had no effect on the ratios.
(b) Period from June 14, 1993 (inception date) to February 28,
1994.
(c) Annualized.
(d) Not annualized.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
</TABLE>
22
<PAGE> 38
PACIFIC HORIZON GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income.............. 0.0507 0.0488 0.0537 0.0429 0.0300
Net realized gains/(losses) on
investment transactions......... 0.0001 -- (0.0004)** (0.0092) (0.0006)
-------- -------- -------- -------- --------
Total income from investment
operations......................... 0.0508 0.0488 0.0533 0.0337 0.0294
Less dividends to shareholders from
net investment income.............. (0.0508) (0.0487) (0.0531) (0.0427) (0.0300)
Increase due to voluntary capital
contribution from Investment
Advisor............................ -- -- -- 0.0085 --
-------- -------- -------- -------- --------
Net change in net asset value per
share.............................. -- 0.0001 0.0002 (0.0005) (0.0006)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return......................... 5.20% 4.98% 5.44% 4.35%+ 3.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)...................... $ 264 $ 263 $ 213 $ 289 $ 326
Ratio of expenses to average net
assets.......................... 0.52% 0.48% 0.49% 0.43% 0.48%
Ratio of net investment income to
average net assets.............. 5.07% 4.89% 5.41% 4.32% 2.99%
Ratio of expenses to average net
assets*......................... 0.57% 0.54%(a) 0.56% 0.51% 0.53%
Ratio of net investment income to
average net assets*............. 5.02% 4.83%(a) 5.34% 4.24% 2.94%
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** Net realized loss for the period is a direct result of a
decrease in outstanding shares between February 28, 1995 and
the date of the gain realization.
(a) Fees paid by third parties had no effect on the ratios.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
</TABLE>
23
<PAGE> 39
TREASURY ONLY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: PATXX
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests solely in obligations of the U.S. Treasury. U.S. Treasury
securities are backed by the full faith and credit of the U.S. Government, and
include:
- - U.S. Treasury bills, notes and bonds
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
24
<PAGE> 40
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Service
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 2.31
1994 3.61
1995 5.17
1996 4.78
1997 4.87
</TABLE>
*Represents the period from March 1, 1993 to December 31, 1993.
The total return for Horizon Service Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.21%. Since inception (March 1, 1993), the highest
calendar quarter total return for Pacific Horizon Service Shares of the Fund was
1.30% (quarter ended June 30, 1995). Since inception (March 1, 1993), the lowest
calendar quarter total return for Horizon Service Shares of the Fund was 0.67%
(quarter ended June 30, 1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper Institutional U.S.
Treasury Money Market Funds). Past performance is not necessarily an indicator
of how the Fund or the broad-based market index will perform in the future.
25
<PAGE> 41
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-------------------------
1 YEAR SINCE INCEPTION
TREASURY ONLY FUND ------ ---------------
<S> <C> <C>
Lipper Institutional U.S. Treasury Money Market Funds....... 5.11% Not applicable
Horizon Shares*............................................. 5.13% 5.10%
Horizon Service Shares**.................................... 4.87% 4.28%
</TABLE>
- ---------------
* Treasury Only Fund -- Horizon Shares commenced operations on September 20,
1995.
** Treasury Only Fund -- Horizon Service Shares commenced operations on March 1,
1993.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON SERVICE
HORIZON SHARES SHARES(2)
-------------- ---------------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(1).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .09% .09%
---- ----
Total annual Fund operating expenses........................ .29% .54%
==== ====
</TABLE>
- ---------------
(1) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(2) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
26
<PAGE> 42
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your cost would be.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
TREASURY ONLY FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $30 $ 93 $163 $368
Horizon Service Shares..................................... $55 $173 $302 $677
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
27
<PAGE> 43
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TREASURY ONLY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------- PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996(a)
------------ ------------ ------------
<S> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD........... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from Investment Operations:
Net investment income.................................. 0.0504 0.0490 0.0227
Net realized gains/(losses) on investment
transactions........................................ -- 0.0001 (0.0001)
-------- -------- --------
Total income from investment operations........ 0.0504 0.0491 0.0226
Less dividends to shareholders from net investment
income................................................. (0.0504) (0.0490) (0.0227)
-------- -------- --------
Net change in net asset value per share.................. -- 0.0001 (0.0001)
-------- -------- --------
NET ASSET VALUE PER SHARE, END OF PERIOD................. $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return................................... 5.16% 5.02% 2.30%(e)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions)................. $ 30 $ 30 $ 7
Ratio of expenses to average net assets................ 0.29% 0.27% 0.70%(d)
Ratio of net investment income to average net assets... 5.04% 4.94% 11.88%(d)
Ratio of expenses to average net assets*............... (b)(c) (b)(c) (b)
Ratio of net investment income to average net
assets*............................................. (b)(c) (b)(c) (b)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from September 20, 1995 (inception date) to February
29, 1996.
(b) There were no fee waivers or expense reimbursements during
the period.
(c) Fees paid by third parties had no effect on the ratios.
(d) Annualized.
(e) Not annualized.
</TABLE>
28
<PAGE> 44
PACIFIC HORIZON TREASURY ONLY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE,
BEGINNING OF YEAR................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............ 0.0480 0.0465 0.0502 0.0391 0.0273
Net realized gains/(losses) on
investment transactions....... -- 0.0001 0.0003 (0.0002) (0.0002)
-------- -------- -------- -------- --------
Total income from
investment
operations............. 0.0480 0.0466 0.0505 0.0389 0.0271
Less dividends to shareholders from
net investment income............ (0.0480) (0.0465) (0.0502) (0.0391) (0.0273)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................ -- 0.0001 0.0003 (0.0002) (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............. 4.90% 4.75% 5.14% 3.98% 2.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions).................... $ 177 $ 260 $ 186 $ 194 $ 272
Ratio of expenses to average net
assets........................ 0.54% 0.53% 0.56% 0.55% 0.39%
Ratio of net investment income to
average net assets............ 4.80% 4.66% 5.01% 3.86% 2.73%
Ratio of expenses to average net
assets*....................... (a)(b) (a)(b) (a) 0.56% 0.64%
Ratio of net investment income to
average net assets*........... (a)(b) (a)(b) (a) 3.85% 2.48%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
29
<PAGE> 45
TAX-EXEMPT MONEY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: HTEXX
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income exempt from federal income taxes, a stable share
price, and daily liquidity. The Fund is a Money Market Fund and intends to
maintain a stable $1 share price. The Fund's investment objective may be changed
without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in a diversified portfolio of federally tax-exempt short-term
debt obligations issued by, or on behalf of, states, territories and possessions
of the United States, including those issued by:
- - the U.S. government, its agencies and instrumentalities
- - municipalities, local governments, other political subdivisions and their
agencies.
Under normal market conditions, all of the Fund's investments will be in the
highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality). The Fund may also
invest in investments in the second-highest short-term rating category (or
securities issued by issuers with such ratings or unrated equivalents) for
temporary defensive purposes or if the investment adviser does not feel that
suitable securities in the highest short-term rating category are available. The
Fund may invest in taxable obligations or hold uninvested cash reserves for
temporary defensive purposes.
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities, and no more than 20% of the Fund?s total assets
will be invested in taxable obligations.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
30
<PAGE> 46
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Shares of
the Fund for the last 10 calendar years. Past performance is not necessarily an
indicator of how the Fund will perform in the future.
<TABLE>
<S> <C>
1988 5.42%
1989 6.42%
1990 5.87%
1991 4.42%
1992 2.90%
1993 2.27%
1994 2.69%
1995 3.68%
1996 3.28%
1997 3.47%
</TABLE>
The total return for Horizon Shares of the Fund for the fiscal quarter ended May
31, 1998 was 0.86%. Over the past 10 calendar years, the highest quarter total
return for Horizon Shares of the Fund was 1.67% (quarter ended June 30, 1989).
Over the past 10 calendar years, the lowest quarter total return for Horizon
Shares of the Fund was 0.52% (quarter ended March 31, 1993).
31
<PAGE> 47
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years (and since inception with respect to the Horizon Service
Shares) compare with the average annual returns for the same periods of a
broad-based market index (the Lipper Institutional Tax-Exempt Money Market
Funds). Past performance is not necessarily an indicator of how the Fund or the
broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
---------------------------------------------------
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
TAX-EXEMPT MONEY FUND ------ ------- --------------- --------------
<S> <C> <C> <C> <C>
Lipper Institutional Tax-Exempt Money Market
Funds....................................... 3.39% 2.96% 3.93% Not applicable
Horizon Shares................................ 3.47% 3.07% 4.03% Not applicable
Horizon Service Shares........................ 3.21% 2.82% Not applicable* 3.75%
</TABLE>
- ---------------
* Tax-Exempt Money Fund -- Horizon Service Shares commenced operations on
February 18, 1988.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON HORIZON SERVICE
SHARES SHARES(1)
------- ---------------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .08% .08%
------- ----
Total annual Fund operating expenses........................ .28% .53%
======= ====
</TABLE>
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
32
<PAGE> 48
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your cost would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
TAX-EXEMPT MONEY FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $29 $ 90 $157 $356
Horizon Service Shares..................................... $54 $170 $296 $665
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
33
<PAGE> 49
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the past 5 years. This information reflects financial
results for a single Fund share. The total returns in each table represent the
rate that a shareholder would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Price Waterhouse LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request.
PACIFIC HORIZON TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.0342 0.0322 0.0359 0.0285 0.0225
Less dividends to shareholders from net
investment income.................... (0.0342) (0.0322) (0.0359) (0.0285) (0.0225)
-------- -------- -------- -------- --------
Net change in net asset value per
share................................ -- -- -- -- --
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................... 3.47% 3.27% 3.65% 2.89% 2.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)........................ $ 344 $ 264 $ 303 $ 382 $ 515
Ratio of expenses to average net
assets............................ 0.28% 0.28% 0.31% 0.28% 0.28%
Ratio of net investment income to
average net assets................ 3.41% 3.22% 3.58% 2.81% 2.25%
Ratio of expenses to average net
assets*........................... (a)(b) (a) (a) (a) 0.29%
Ratio of net investment income to
average net assets*............... (a)(b) (a) (a) (a) 2.24%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
34
<PAGE> 50
PACIFIC HORIZON TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR.................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................... 0.0317 0.0297 0.0334 0.0260 0.0200
Less dividends to shareholders from net
investment income....................... (0.0317) (0.0297) (0.0334) (0.0260) (0.0200)
-------- -------- -------- -------- --------
Net change in net asset value per share... -- -- -- -- --
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF YEAR.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return.............................. 3.22% 3.01% 3.39% 2.63% 2.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (millions).... $ 186 $ 169 $ 35 $ 39 $ 48
Ratio of expenses to average net
assets............................... 0.53% 0.53% 0.56% 0.53% 0.53%
Ratio of net investment income to
average net assets................... 3.17% 2.98% 3.34% 2.57% 2.04%
Ratio of expenses to average net
assets*.............................. (a)(b) (a) (a) (a) 0.57%
Ratio of net investment income to
average net assets*.................. (a)(b) (a) (a) (a) 2.00%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
35
<PAGE> 51
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: not applicable
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income free from federal income tax and California state
personal income tax, a stable share price, and daily liquidity. The Fund is a
Money Market Fund and intends to maintain a stable $1 share price. The Fund's
investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests primarily in municipal securities issued by or on behalf of the
State of California and other governmental issuers.
All of the Fund's investments will be in either the highest or the
second-highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities which are exempt from California state personal
income tax, and no more than 5% of the Fund's net assets will be invested in any
one category of taxable securities. The Fund may invest in taxable obligations
or hold uninvested cash reserves for temporary defensive purposes.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - Because the Fund is a non-diversified investment portfolio, the change in
value of any one security may affect the overall value of the Fund more than
it would if the Fund was a diversified portfolio.
- - The Fund's concentration in California issuers brings greater risk than that
of a less geographically concentrated investment portfolio. Since the Fund
invests heavily in California, events in California are likely to affect the
Fund's investments.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
36
<PAGE> 52
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America or any other
bank, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Service
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 1.70
1994 2.37
1995 3.40
1996 2.96
1997 3.14
</TABLE>
*Represents the period from March 1, 1993 to December 31, 1993.
The total return for Horizon Service Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 0.78%. Since inception (March 1, 1993), the highest
calendar quarter total return for Horizon Service Shares of the Fund was 0.88%
(quarter ended June 30, 1995). Since inception (March 1, 1993), the
37
<PAGE> 53
lowest calendar quarter total return for Horizon Service Shares of the Fund was
0.44% (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (The Lipper California Tax-Exempt
Money Market Funds). Past performance is not necessarily an indicator of how the
Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
---------------------------------
1 YEAR SINCE INCEPTION
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND -------------- ---------------
<S> <C> <C>
Lipper California Tax-Exempt Money Market Funds............. 3.00% Not applicable
Horizon Shares*............................................. Not applicable Not applicable
Horizon Service Shares**.................................... 3.14% 2.80%
</TABLE>
- ---------------
* California Tax-Exempt Money Market Fund -- Horizon Shares have not yet
commenced operations.
** California Tax-Exempt Money Market Fund -- Horizon Service Shares commenced
operations on March 1, 1993.
CURRENT YIELD
You may obtain the fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON
HORIZON SERVICE
SHARES SHARES(1)
------- ----------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .05% .05%
---- ----
Total annual Fund operating expenses........................ .25% .50%
==== ====
</TABLE>
38
<PAGE> 54
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
EXAMPLE. This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 over the various time frames
indicated. The example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $26 $ 80 $141 $318
Horizon Service Shares..................................... $51 $160 $280 $628
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
39
<PAGE> 55
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. This information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that a shareholder would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Price Waterhouse LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request. Horizon Shares of the California Tax-Exempt Money
Market Fund had not commenced operations as of February 28, 1998, therefore no
financial highlights information is available.
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................. 0.0309 0.0291 0.0331 0.0256 0.0198
Net realized gains/(losses) on
investment transactions............ -- -- 0.0001 (0.0001) (0.0001)
-------- -------- -------- -------- --------
Total income from investment
operations............................ 0.0309 0.0291 0.0332 0.0255 0.0197
Less dividends to shareholders from net
investment income..................... (0.0309) (0.0291) (0.0331) (0.0256) (0.0198)
-------- -------- -------- -------- --------
Net change in net asset value per
share................................. -- -- 0.0001 (0.0001) (0.0001)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............................ 3.13% 2.95% 3.36% 2.59% 2.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)......................... $ 671 $ 472 $ 203 $ 88 $ 124
Ratio of expenses to average net
assets............................. 0.50% 0.50% 0.55% 0.55% 0.53%
Ratio of net investment income to
average net assets................. 3.06% 2.92% 3.43% 2.50% 1.98%
Ratio of expenses to average net
assets*............................ (a)(b) (b) 0.55%** (a) 0.60%
Ratio of net investment income to
average net assets*................ (a)(b) (b) 3.42% (a) 1.91%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** During the year ended February 29, 1996 the Portfolio
received credits from its custodian for interest earned on
uninvested cash balances which were used to offset custodian
fees and expenses. If such credits had not occurred, the
expense ratio would have been as indicated. The ratio of net
investment income was not affected.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
40
<PAGE> 56
ADDITIONAL INVESTMENT RISKS
The following is a general list of the types of risks that may apply to a given
Fund. Additional information about a Fund's investments is available in the
Statement of Additional Information.
CREDIT RISK: The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
FOREIGN SECURITY RISK: The risk of losses due to political, regulatory,
economic, social or other uncontrollable forces in a foreign country.
INTEREST RATE RISK: The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK: Associated with securities or practices (such as when-issued and
forward commitment transactions) that multiply small market movements into
larger changes in value.
LIQUIDITY RISK: The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
MARKET RISK: The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably.
OPPORTUNITY RISK: The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
PREPAYMENT RISK: The risk that a debt security may be paid off and proceeds
invested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
VALUATION RISK: The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America, which has principal offices located at 555 California Street,
San Francisco, California 94104, serves as the Funds' investment adviser and is
responsible for all purchases and sales of the Funds' portfolio securities. Bank
of America is a national banking association formed in 1904 which 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 37 foreign countries. Bank of
America is the successor by merger to Security Pacific National Bank, which
previously served as investment adviser to Pacific Horizon Funds, Inc. since it
commenced operations in 1984. Bank of America and its affiliates have over $77
billion in assets under management, including $22 billion in mutual fund assets.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation announced
a definitive agreement to merge and form a new holding company to be named
BankAmerica Corporation (the "Merger"). The Merger is anticipated to close by
the end of 1998, however, it is subject to a number of approvals including
shareholder and regulatory approvals.
For the fiscal year ended February 28, 1998, Bank of America received the
following fees, as a percentage of each Fund's average net assets:
Prime Fund .09%, Government Fund .05%, Treasury Fund .10%, Treasury Only Fund
.10%, California Tax-Exempt Money Market Fund .10%, Tax-Exempt Money Fund .10%.
The chart on the next page shows the Funds' other service providers and includes
their addresses and principal activities.
41
<PAGE> 57
<TABLE>
<S> <C>
--------------------------------
SHAREHOLDERS -----------
--------------------------------
Distribution and Shareholder
Services
--------------------------------
SERVICE ORGANIZATIONS
----------- Provide shareholder services. ----------
--------------------------------
------------------------------------- --------------------------------
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, Inc. PFPC Inc.
Four Falls Corporate Center, 6th Floor 400 Bellevue Parkway
West Conshohocken, PA 19428 Wilmington, DE 19809
-----------------
Distributes shares through selling Handles shareholders services,
brokers, Financial planners and other including recordkeeping and
financial representatives. statements, distribution of
------------------------------------- dividends and processing of buy
and sell requests.
--------------------------------
------------------------------------- --------------------------------
INVESTMENT ADVISER CUSTODIAN
Bank of America The Bank of New York
555 California Street 90 Washington Street
San Francisco, CA 94104 New York, NY 10286
--------
Manages the Funds' business and Holds the Funds' assets,
investment activities. settles all portfolio trades and
------------------------------------- collects most of the valuation
data required for calculating
each Fund's NAV.
--------------------------------
Asset
Management
-------------------------------------
ADMINISTRATOR
Bank of America
Fund 555 California Street
Operations San Francisco, CA 94104
and --------
SUB-ADMINISTRATOR
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provide Facilities, equipment
and personnel to carry out
administrative services related
to the Funds.
-------------------------------------
-------------------------------------
ACCOUNTING AGENT
The Bank of New York
90 Washington Street ------------------------------------
New York, NY 10286
Calculates each Fund's NAV,
dividends and distributions.
-------------------------------------
--------------------------------
BOARD OF DIRECTORS
Supervise the Funds' activities.
--------------------------------
</TABLE>
42
<PAGE> 58
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
To help each Fund maintain its $1 constant share price, portfolio securities are
valued at cost, and any discount or premium created by market movements is
amortized to maturity. The net asset value (NAV) per share class for each Fund
for purposes of pricing purchase and redemption orders is determined
independently of that for other Pacific Horizon Funds.
The Transfer Agent makes purchases or redemptions at the NAV per share next
determined after receipt of the purchase or sell order. NAVs for each share
class are calculated each Business Day (each day that both the New York Stock
Exchange (the "Exchange") and the Federal Reserve Bank are open for business)
using the following schedule:
<TABLE>
<CAPTION>
FUND CALCULATION TIME
- ---- ----------------
<S> <C>
Prime and Treasury As of 5:00 p.m. Eastern time
Government As of 2:30 p.m. Eastern time
Treasury Only As of 11:30 a.m. Eastern time
California Tax-Exempt Money Market As of 10:30 a.m. Eastern time
Tax-Exempt Money As of 12:00 noon Eastern time
</TABLE>
Fund shares will not be priced on those days the Funds are closed as follows:
Independence Day (observed) -- Friday, July 3, 1998
Labor Day -- Monday, September 7, 1998
Columbus Day -- Monday, October 12, 1998
Veterans Day -- Wednesday, November 11, 1998
Thanksgiving Day -- Thursday, November 26, 1998
Christmas Day -- Friday, December 25, 1998
New Year's Day -- Friday, January 1, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999
President's Day -- Monday, February 15, 1999
Good Friday -- Friday, April 2, 1999
Memorial Day (observed) -- Monday, May 31, 1999
PURCHASE OF FUND SHARES
Fund shares can only be purchased on a Business Day through the means described
below. Customers of Service Organizations (brokers, financial institutions or
other industry professionals who maintain accounts on behalf of shareholders and
provide additional services to their clients) should refer to their Service
Organization for the terms and conditions under which Fund shares can be
purchased, including minimum initial and subsequent purchase limits, minimum
average balance requirements and deadlines for purchases. Service Organizations
may be authorized to accept on Pacific Horizon Funds, Inc.'s behalf orders
placed by or on behalf of their customers. Under those circumstances, a Fund
will be deemed to have received an order when it is accepted by a Service
Organization on a Business Day. The order will be priced at a Fund's net asset
value per share next determined after such acceptance. Service Organizations
will be responsible for transmitting accepted orders to the Fund within the
period agreed upon by them. Customers should contact their Service Organizations
to learn whether they are authorized to accept orders for Pacific Horizon Funds,
Inc.
43
<PAGE> 59
Each share class described below represents a different level of service
available to a select group of clients. Fees paid by the Fund for each share
class vary according to the level of service provided.
Y SHARES: Y Shares of the Prime, Treasury and California Tax-Exempt Money Market
Funds are available only to customers who purchase such shares through cash
management services and are offered to customers of selected Service
Organizations and departments of Bank of America and its affiliates who have
executed the appropriate account documentation. On any Business Day that
deposits and credits exceed withdrawals and charges in your transaction account,
it is the responsibility of the Service Organization to transmit a purchase
order on your behalf to the transfer agent and deliver required funds on a
timely basis.
HORIZON AND HORIZON SERVICE SHARES: Horizon and Horizon Service Shares of the
Prime, Treasury, Government, Treasury Only, Tax-Exempt Money and California
Tax-Exempt Money Market Funds are offered to institutional clients or to
customers of selected Service Organizations who have executed the appropriate
account documentation.
The table below addresses Fund requirements for institutions and Service
Organizations investing in HORIZON AND HORIZON SERVICE SHARES:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN EXISTING ACCOUNT
------------------ -----------------------------
<S> <C> <C>
Minimum Investment: $500,000 No minimum.
By Mail: Complete and sign an Account Purchases by checks are NOT
Application and mail to permitted.
Transfer Agent. Purchases by
checks are NOT permitted.
By Telephone or Terminal Call 1-800-426-3863 for Call 1-800-426-3863 for
Access: instructions. Wire only Federal instructions. Wire only Federal
funds or other funds funds or other funds
immediately available. immediately available.
</TABLE>
The schedule below addresses the Fund's deadlines for placing purchase orders
for HORIZON OR HORIZON SERVICE SHARES:
<TABLE>
<CAPTION>
FUND DEADLINE FOR RECEIPT OF A
(INCLUDES BOTH SHARE CLASSES PURCHASE ORDER BY DEADLINE FOR RECEIPT OF RELATED
UNLESS OTHERWISE NOTED.) TRANSFER AGENT PAYMENT BY THE CUSTODIAN
---------------------------- ------------------------- -------------------------------
<S> <C> <C>
Prime or Treasury (Horizon
Shares) 5:00 p.m. Eastern time 6:00 p.m. Eastern time
Prime or Treasury (Horizon
Service Shares) 2:30 p.m. Eastern time 4:00 p.m. Eastern time
Government 2:30 p.m. Eastern time 4:00 p.m. Eastern time
Treasury Only 11:30 a.m. Eastern time 4:00 p.m. Eastern time
Tax-Exempt Money 12:00 noon Eastern time 4:00 p.m. Eastern time
California Tax-Exempt Money
Market 10:30 a.m. Eastern time 4:00 p.m. Eastern time
</TABLE>
44
<PAGE> 60
NOTES SPECIFIC TO THE PURCHASE OF HORIZON AND HORIZON SERVICE SHARES:
- - Fund may, in its discretion, reject any order for shares. Orders received
after the Fund cut-off times and orders for which payment has not been
received in a timely manner, will not be accepted. Payment for orders not
accepted by a Fund or not received or paid for in a timely manner, will be
returned with prompt notification to the sending institution.
- - You will be charged compensation for each wire or Electronic Funds Transfer
purchase that is returned unpaid or not received by the deadline, and you will
be responsible for any resulting losses suffered by the Funds.
- - The Funds reserve the right to suspend the sale of shares to the public at any
time in response to conditions in the securities markets or otherwise.
REDEMPTION OF FUND SHARES
Fund shares can only be redeemed on a Business Day through the means described
below. Customers of Service Organizations should refer to their Service
Organization for the terms and conditions under which Fund shares can be
redeemed, including the deadlines for redemptions.
Y SHARES: On any Business Day that withdrawals and charges in your transaction
account exceed deposits and credits, it is the responsibility of the Service
Organization to transmit a redemption order on your behalf to the Transfer Agent
and to credit your account with the proceeds on a timely basis. Y Shares of the
Prime Fund acquired through exchange of B Shares of the Pacific Horizon Funds
are subject to a contingent deferred sales charge ("CDSC") upon redemption. For
purposes of computing the CDSC, the length of time of ownership will be measured
from the date of original purchase of B Shares and will include any period of
ownership of the Y Shares of the Prime Fund.
HORIZON AND HORIZON SERVICE SHARES: Redemption orders must be transmitted to the
Transfer Agent via telephone or terminal access. To effect a redemption call
1-800-426-3863. Proceeds for orders received by the times specified below will
be wired in Federal funds to the redeeming shareholder on the same day.
NOTES SPECIFIC TO THE REDEMPTION OF HORIZON AND HORIZON SERVICE SHARES:
- - Certificates, which previously had been issued, may not be redeemed unless the
certificates have been submitted to the Transfer Agent and appropriately
endorsed for transfer.
- - Proceeds for redemption orders received after the times stated above will
normally be wired in Federal funds to the redeeming shareholder on the next
Business Day.
- - To allow effective management of the Funds' portfolios, investors are urged to
initiate sales of shares as early in the day as possible and to notify the
Transfer Agent at least one day in advance of redemptions in excess of $5
million.
- - In making redemption requests, the names of the registered shareholders and
their account numbers must be supplied.
- - Each Fund reserves the right to wire redemption proceeds up to seven days
after receiving the redemption order, if in the judgment of the Investment
Adviser, an earlier payment would adversely affect the Fund.
45
<PAGE> 61
The schedule below addresses the Funds' deadlines for ALL SHARE CLASSES (unless
otherwise indicated) for receipt of redemption orders by the Transfer Agent:
<TABLE>
<CAPTION>
FUND DEADLINE FOR RECEIPT OF A
(INCLUDES BOTH SHARE CLASSES PURCHASE ORDER BY
UNLESS OTHERWISE NOTED.) TRANSFER AGENT
---------------------------- -------------------------
<S> <C>
Prime or Treasury (Horizon Shares) 5:00 p.m. Eastern time
Prime or Treasury (All Other Share Classes) 2:30 p.m. Eastern time
Government 2:30 p.m. Eastern time
Treasury Only 11:30 a.m. Eastern time
Tax-Exempt Money 12:00 noon Eastern time
California Tax-Exempt Money Market 10:30 a.m. Eastern time
</TABLE>
NOTES SPECIFIC TO THE REDEMPTION OF ALL SHARE CLASSES:
- - The Funds impose no charge when shares are redeemed.
- - Each Fund reserves the right to redeem shares in any account at their NAV if
the value of the account is less than $500 as a result of the redemption. A
shareholder having such an account will first be notified in writing that
their account has a value of less than $500 and will be allowed 60 days to
make additional investments to bring the value of the account to $500.
- - A Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of the
transfer of its share) for such periods as are permitted under the Investment
Company Act of 1940.
- - In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller. Neither Pacific
Horizon Funds, Inc. nor any of its service providers will be liable for any
loss or expense for acting upon telephone instructions that are reasonably
believed to be genuine.
- - A Fund may redeem shares involuntarily under certain special circumstances as
described in the SAI.
EXCHANGE PRIVILEGE: B Shares of Pacific Horizon Funds offered with a CDSC may
be exchanged for Y Shares of the Prime Fund. Y Shares may only be exchanged back
to B Shares of Pacific Horizon Funds. In each case, in order to exchange shares,
such shares must be able to be legally sold in the state of the investor's
residence. Such exchange-acquired shares however, will be subject to a CDSC upon
redemption in accordance with the prospectus for the particular B Shares
exchanged. For purposes of computing the CDSC, the length of time of ownership
will be measured from the date of the original purchase of B Shares and will not
include any period of ownership of the Prime Fund.
The shares that are exchanged must have a current value of at least $500 and in
establishing a new account through use of this feature, the shares being
exchanged must have a value at least equal to the minimum initial investment
required by the particular Fund into which the exchange is being made. Should
you desire to use the Exchange Privilege you should read the SAI and consult
your Service Organization for further information, including Pacific Horizon
Funds Prospectuses. Read the prospectuses carefully before making any exchanges.
You may telephone exchange instructions by calling the Transfer Agent at
1-800-426-3863. Pacific Horizon Funds, Inc. reserves the right to reject any
exchange
46
<PAGE> 62
request and the exchange privilege may be modified or terminated at any time. In
attempting to confirm that telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller.
DIVIDENDS AND DISTRIBUTIONS
As a shareholder of a Fund, you are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Fund. Generally, each Fund's net income is declared
daily as a dividend. Dividends are paid within five business days after the end
of each month. Although the Funds do not expect to realize net long-term capital
gains, any capital gains realized will be distributed not more than twice a year
after reduction for any available capital loss carry-forward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the NAV of such
shares on the payment date. However, holders of the Funds' Horizon and Horizon
Service Shares may elect to receive dividends in cash. This election or
revocation must be made in writing to the Transfer Agent and becomes effective
upon receipt of your instructions by the Transfer Agent.
NOTES SPECIFIC TO DIVIDENDS AND DISTRIBUTIONS FOR THE HORIZON AND HORIZON
SERVICE AND HORIZON SHARES:
- - If you elect to receive distributions in cash, and if your checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share
NAV determined as of the date of payment of the distribution. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share NAV determined as
of the date of cancellation.
- - Reinvestment dividends receive the same tax treatment as dividends paid in
cash.
TAXES
As long as a Fund meets the requirements for being a tax-qualified regulated
investment company, which each Fund has done in the past and intends to do in
the future, it pays no Federal income tax on the earnings it distributes to
shareholders.
TAXABLE FUNDS: Dividends you receive from a Fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a Fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. It is anticipated that substantially all
of the dividends from the Funds will be taxable as ordinary income and not
capital gains.
Any time you sell or exchange shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you sell or
exchange, you may have a gain or a loss on the transaction. You are responsible
for any tax liabilities generated by your transactions.
TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: Both Funds
intend to meet certain Federal tax requirements so that distribution of the
tax-exempt interest it earns may be treated as "exempt-interest dividends."
However, any portion of exempt-interest dividends attributable to
47
<PAGE> 63
interest on private activity bonds may increase certain shareholders'
alternative minimum tax. Dividends from a Fund's short- and long-term capital
gains are taxable.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: This Fund intends to comply with
certain state tax requirements so that its income and dividends will be exempt
from state and local personal income taxes. Dividends derived from interest on
securities other than California Municipal Securities will be subject to
California personal income tax.
NOTES SPECIFIC TO ALL FUNDS REGARDING FEDERAL TAXES:
- - Taxable dividends paid in January may be taxable as if they had been paid the
previous December.
- - The Form 1099 that is mailed to you in January details your dividends and
their Federal tax category, although you should verify your tax liability with
your tax professional.
STATE AND LOCAL TAXES: Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the Federal income tax law, and with respect to the
California Tax-Exempt Money Market Fund, the California state personal income
tax. Exempt-interest dividends generally will be exempt from state and local
taxes as well. However, except as noted with respect to California state
personal income tax, dividends paid by the Funds may be taxable to investors
under state or local law as dividend income even through all or a portion of
such dividends may be derived from interest on obligations that, if realized
directly, would be exempt from such taxes.
DISTRIBUTION ARRANGEMENTS
12b-1 AND SERVICE FEE PLANS
Pacific Horizon Funds offer share classes other than those described in this
Prospectus. The major distinctions among the share classes are the fee plans
related to each share class. Pacific Horizon Funds, Inc. has adopted three fee
plans. Participants in any of these plans must enter into a specific agreement
with Pacific Horizon Funds, Inc. pursuant to the related adopted plan. Because
fees associated with the distribution and service plans are paid out of the
Fund's assets on an on-going basis, over time holders of the shares discussed
below may pay more than the economic equivalent of the maximum front-end sales
charge permitted by NASD Regulation, Inc.
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Shareholder Services Horizon Service Paid to Shareholder Service Each Shareholder Service
Plan Organizations who provide Organization receives a fee
support services to their of up to 0.25% (annualized)
customers (the beneficial of the average daily net
owners of the Horizon asset value of Horizon
Service Shares). Service Shares owned by
their customers. Holders of
a Fund's Horizon Service
Shares bear this expense.
</TABLE>
48
<PAGE> 64
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
- --------- ------------ ------------- -----
<S> <C> <C> <C>
Distribution and S, Y and X Paid to the Distributor for Payments by an X Share Class
Services Plan distribution expenses for distribution expenses
intended to result in the and shareholder servicing
sale of S, Y and X Shares of expenses may not exceed
the Prime and California 0.30% and 0.25%,
Tax-Exempt Money Market respectively, of the average
Funds, X and Y Shares of the daily net assets of a Fund's
Treasury Fund and S Shares X Shares. Holders of the X
of the Tax-Exempt Money Fund Shares bear these expenses.
and for shareholder
servicing expenses. Payments by the S and Y
Share Classes for
distribution expenses and
shareholder servicing
expenses may not exceed
0.75% and 0.25%,
respectively, of the average
daily net assets of a Fund's
S and Y Shares. Holders of
the S and Y Shares bear
these expenses.
Special Management Pacific Horizon Paid to Shareholder Service Each Shareholder Service
Services Plan Organizations who provide Organization receives a fee
support services to their equal to 0.32% (annualized)
customers (the beneficial of the average daily net
owners of Pacific Horizon asset value of the Prime,
Shares of the Prime, Treasury, Government,
Treasury, Government, Treasury Only and Tax-Exempt
Treasury Only, Tax-Exempt Money Fund's Pacific Horizon
Money and California Tax- Shares and 0.35%
Exempt Money Market Funds). (annualized) of the average
daily net asset value of the
California Tax-Exempt Money
Market Fund's Pacific
Horizon Shares (.03% of
which is being voluntarily
waived by the Distributor)
owned by their customers.
Holders of these Funds'
Pacific Horizon Service
Shares bear this expense.
</TABLE>
49
<PAGE> 65
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for a Fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a fuller technical and legal
description of a Fund's policies, investment restrictions, risks, and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:
PACIFIC HORIZON FUNDS, INC.
P.O. Box 8968
Wilmington, Delaware 19899-8968
1-800-426-3863
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov. The Funds' investment company registration number is
811-04293.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-426-3863
Monday thru Friday
9:00 am to 5:00 pm (EST)
<PAGE> 66
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus gives vital information about these PRIME FUND
money market mutual funds, including information on -- X Shares
investment policies, risks and fees. For your own -- Horizon Shares
benefit and protection, please read it before you -- Horizon Service Shares
invest, and keep it on hand for future reference. TREASURY FUND
Please note that these Funds: -- X Shares
- - are not bank deposits -- Horizon Shares
- - are not obligations of, or guaranteed or endorsed -- Horizon Service Shares
by Bank of America NT&SA or any of its affiliates GOVERNMENT FUND
- - are not federally insured -- Horizon Shares
- - are not obligations of, or guaranteed or endorsed -- Horizon Service Shares
or otherwise supported by the U.S. Government, the TREASURY ONLY FUND
Federal Deposit Insurance Corporation, the Federal -- Horizon Shares
Reserve Board or any other governmental agency -- Horizon Service Shares
- - are not guaranteed to achieve their goal(s) TAX-EXEMPT MONEY FUND
- - may not be able to maintain a stable $1 share -- Horizon Shares
price -- Horizon Service Shares
Like all mutual fund shares, these securities have CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
not been approved or disapproved by the Securities -- Horizon Shares
and Exchange Commission or any state securities -- Horizon Service Shares
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.
</TABLE>
Investment Portfolios Offered by
PHF-0003 Pacific Horizon Funds, Inc.
<PAGE> 67
OVERVIEW
GOAL OF THE MONEY MARKET FUNDS
The money market funds invest primarily in money market instruments and strive
to maintain a stable $1 share price. Each Fund employs its own strategy and has
its own risk/reward profile. Be sure to read all risk disclosure carefully
before investing.
THE INVESTMENT ADVISER
Pacific Horizon money market funds are managed by Bank of America NT&SA ("Bank
of America"), a subsidiary of BankAmerica Corporation, a registered bank holding
company. For more information on the Investment Adviser see the section entitled
"Management of the Funds."
<PAGE> 68
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A FUND-BY-FUND LOOK AT GOALS,
FUND DESCRIPTION
STRATEGIES, RISKS, EXPENSES
OVERVIEW
AND FINANCIAL HISTORY 2 PRIME FUND
9 TREASURY FUND
16 GOVERNMENT FUND
22 TREASURY ONLY FUND
27 TAX-EXEMPT MONEY FUND
33 CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
39 ADDITIONAL INVESTMENT RISKS
DETAILS THAT APPLY TO ALL MONEY
MANAGEMENT OF THE FUNDS
MARKET FUNDS IN THIS 39 INVESTMENT ADVISER
PROSPECTUS 40 SERVICE PROVIDER CHART
POLICIES AND INSTRUCTIONS FOR
SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND 41 PRICING OF FUND SHARES
CLOSING AN ACCOUNT IN ANY OF 41 PURCHASE OF FUND SHARES
THE MONEY MARKET FUNDS 43 REDEMPTION OF FUND SHARES
44 DIVIDENDS AND DISTRIBUTIONS
44 TAXES
DETAILS ON DISTRIBUTION AND
DISTRIBUTION ARRANGEMENTS
OTHER SHAREHOLDER SERVICE 45 12B-1 AND SERVICE FEE PLANS
PLANS
SEE BACK COVER FOR MORE INFORMATION
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Trust and Savings Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 69
PRIME FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: HPRXX
Horizon Service Shares: not applicable
X Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund may invest in U.S. dollar-denominated money market securities (such as
bank certificates of deposit, bankers' acceptances and commercial paper),
including those issued by:
- - U.S. and foreign banks
- - U.S. and foreign corporate issuers
- - the U.S. government, its agencies and instrumentalities
- - municipalities
At least 95% of the Fund's investments will be in the highest short-term rating
category or will be issued by issuers with such ratings (or, if unrated, will be
of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund will concentrate its investments in the banking and finance industry
which means that it will invest at least 25% of its total assets in the
securities of that industry.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
2
<PAGE> 70
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - Because the Fund concentrates in the banking and finance industry, it is more
susceptible to economic and regulatory developments in that industry than a
money market fund which does not concentrate. In addition, the Fund's
investment in foreign banks and corporate issuers makes it susceptible to
future political and economic developments in countries in which it invests.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Shares of
the Fund for the last 10 calendar years. Past performance is not necessarily an
indicator of how the Fund will perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1988 7.76
1989 9.51
1990 8.4
1991 6.5
1992 4.01
1993 3.26
1994 4.2
1995 5.92
1996 5.38
1997 5.56
</TABLE>
The total return for Horizon Shares of the Fund for the fiscal quarter ended May
31, 1998 was 1.39%. Over the past 10 calendar years, the highest quarter total
return for Horizon Shares of the Fund was 2.43% (quarter ended June 30, 1989).
Over the past 10 calendar years, the lowest quarter total return for Horizon
Shares of the Fund was 0.80% (quarter ended June 30, 1993).
3
<PAGE> 71
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years (and since inception with respect to Horizon Service
Shares) compare with the average annual returns for the same periods of a
broad-based market index (the Lipper Institutional Money Market Funds). Past
performance is not necessarily an indicator of how the Fund or the broad-based
market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
PRIME FUND ------ ------- -------------- ---------------
<S> <C> <C> <C> <C>
Lipper Institutional Money Market Funds..... 5.33% 4.64% 5.78% Not applicable
X Shares*................................... 4.98% 4.46% 5.64% Not applicable
Horizon Shares.............................. 5.56% 4.86% 6.03% Not applicable
Horizon Service Shares**.................... 5.29% 4.60% Not applicable 5.75%
</TABLE>
- ---------------
* Prime Fund -- X Shares commenced operations on July 22, 1996. The performance
results shown prior to that date reflect the past performance of Prime
Fund -- Pacific Horizon Shares. Prime Fund -- X Shareholders are subject to a
Shareholder Service Fee of 0.25% and a 12b-1 Fee of 0.30%. Prime Fund-Pacific
Horizon Shareholders are subject to a 0.32% Special Management Services Fee.
Performance data for Prime Fund -- X Shares prior to July 22, 1996 has not
been adjusted to reflect the higher expenses of the X Shares. If the
performance data prior to July 22, 1996 had been adjusted to reflect X Shares
expenses, performance would have been lower.
** Prime Fund -- Horizon Service Shares commenced operations on February 18,
1988.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON
X HORIZON SERVICE
SHARES(1) SHARES SHARES(2)
--------- ------- ---------
<S> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None None
Maximum sales charge imposed on reinvested dividends........ None None None
Maximum deferred sales charge............................... None None None
Redemption fees(3).......................................... None None None
Exchange fees............................................... None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(4).......................................... .20% .20% .20%
Rule 12b-1 fees(5).......................................... .30% 0% 0%
Shareholder services fees................................... .25% 0% .25%
All other expenses.......................................... .03% .03% .04%
Total annual operating expenses(6).......................... .78% .23% .49%
</TABLE>
4
<PAGE> 72
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(3) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(4) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets. Due to established breakpoints, management fees decrease as the
Fund's assets increase. AS OF FEBRUARY 28, 1998, THE EFFECTIVE ADVISORY FEE
WAS .09%, THE EFFECTIVE ADMINISTRATION FEE WAS .10% AND THE EFFECTIVE
MANAGEMENT FEE WAS .19% OF THE FUND'S AVERAGE NET ASSETS.
(5) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(6) AS OF FEBRUARY 28, 1998, THE EFFECTIVE TOTAL OPERATING EXPENSES, AS A
PERCENTAGE OF AVERAGE NET ASSETS, WERE .77% FOR X SHARES, .22% FOR HORIZON
SHARES AND .48% FOR HORIZON SERVICE SHARES. The amount of current total
operating expenses may increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
PRIME FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
X Shares................................................... $80 $249 $433 $966
Horizon Shares............................................. $23 $ 74 $130 $293
Horizon Service Shares..................................... $50 $157 $274 $616
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
5
<PAGE> 73
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(A)
------------ ------------
<S> <C> <C>
X SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00 $ 1.00
-------- --------
Income from Investment Operations:
Net investment income..................................... 0.0491 0.0282
Net realized gains/(losses) on investment transactions.... -- --
-------- --------
Total income from investment operations..................... 0.0491 0.0282
Less dividends to shareholders from net investment income... (0.0491) (0.0281)
-------- --------
Net change in net asset value per share..................... -- 0.0001
-------- --------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00 $ 1.00
======== ========
Total return................................................ 5.03% 2.84%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 869 $ 204
Ratio of expenses to average net assets................... 0.77% 0.78%(c)
Ratio of net investment income to average net assets...... 4.92% 4.73%(c)
Ratio of expenses to average net assets*.................. (b) (b)
Ratio of net investment income to average net assets*..... (b) (b)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Fee waivers and fees paid by third parties had no effect on the ratios.
(c) Annualized.
(d) Not annualized.
6
<PAGE> 74
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.0546 0.0524 0.0571 0.0461 0.0319
Net realized gains/(losses) on
investment transactions........... -- -- 0.0004 (0.0232) (0.0016)
-------- -------- -------- -------- --------
Total income from investment
operations........................... 0.0546 0.0524 0.0575 0.0229 0.0303
Less dividends to shareholders from net
investment income.................... (0.0547) (0.0522) (0.0571) (0.0454) (0.0319)
Increase due to voluntary capital
contribution from Investment
Advisor.............................. -- -- -- 0.0233 --
-------- -------- -------- -------- --------
Net change in net asset value per
share................................ (0.0001) 0.0002 0.0004 0.0008 (0.0016)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................... 5.60% 5.34% 5.86% 4.63%+ 3.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)........................ $ 2,415 $ 1,710 $ 1,651 $ 662 $ 3,840
Ratio of expenses to average net
assets............................ 0.22% 0.23% 0.23% 0.16% 0.20%
Ratio of net investment income to
average net assets................ 5.47% 5.24% 5.69% 4.11% 3.19%
Ratio of expenses to average net
assets*........................... (a) (a) 0.24% 0.23% 0.21%
Ratio of net investment income to
average net assets*............... (a) (a) 5.68% 4.04% 3.18%
</TABLE>
- ---------------
* During the year, certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
+ Total return includes the effect of the voluntary capital contribution from
the Investment Adviser. Without this capital contribution, the total return
would have been lower.
(a) Fee waivers and fees paid by third parties had no effect on the ratios.
7
<PAGE> 75
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............. 0.0521 0.0499 0.0546 0.0431 0.0294
Net realized gains/(losses) on
investment transactions........ -- -- 0.0004 (0.0227) (0.0016)
-------- -------- -------- -------- --------
Total income from investment
operations........................ 0.0521 0.0499 0.0550 0.0204 0.0278
Less dividends to shareholders from
net investment income............. (0.0522) (0.0497) (0.0546) (0.0429) (0.0294)
Increase due to voluntary capital
contribution from Investment
Advisor........................... -- -- -- 0.0233 --
-------- -------- -------- -------- --------
Net change in net asset value per
share (0.0001) 0.0002 0.0004 0.0008 (0.0016)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................ 5.34% 5.08% 5.60% 4.37%+ 2.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)..................... $ 3,374 $ 2,945 $ 1,561 $ 864 $ 839
Ratio of expenses to average net
assets......................... 0.48% 0.48% 0.48% 0.44% 0.45%
Ratio of net investment income to
average net assets............. 5.23% 5.00% 5.44% 4.31% 2.94%
Ratio of expenses to average net
assets*........................ (a) (a) 0.49% 0.48% 0.46%
Ratio of net investment income to
average net assets* (a) (a) 5.43% 4.27% 2.93%
</TABLE>
- ---------------
* During the year, certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
+ Total return includes the effect of the voluntary capital contribution from
the Investment Adviser. Without this capital contribution, the total return
would have been lower.
(a) Fee waivers and fees paid by third parties had no effect on the ratios.
8
<PAGE> 76
TREASURY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: HTRXX
Horizon Service Shares: not applicable
X Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests solely in direct obligations of the U.S. Treasury, including:
- - U.S. Treasury bills, notes and bonds
- - repurchase agreements backed by U.S. Treasury bills, notes and bonds
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and generally does
not invest in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other
banks, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance
9
<PAGE> 77
Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Shares of
the Fund for the last 10 calendar years. Past performance is not necessarily an
indicator of how the Fund will perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1988 7.38
1989 9.12
1990 8.12
1991 6.01
1992 3.71
1993 2.98
1994 4.03
1995 5.78
1996 5.24
1997 5.36
</TABLE>
The total return for Horizon Shares of the Fund for the fiscal quarter ended May
31, 1998 was 1.35%. Over the past 10 calendar years, the highest quarter total
return for Horizon Shares of the Fund was 2.30% (quarter ended June 30, 1989).
Over the past 10 calendar years, the lowest quarter total return for Horizon
Shares of the Fund was 0.72% (quarter ended June 30, 1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years compare with the average annual returns for the same
periods of a broad-based market index (the Lipper Institutional U.S. Treasury
Money Market Funds). Past performance is not necessarily an indicator of how the
Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
TREASURY FUND ------ ------- -------------- ---------------
<S> <C> <C> <C> <C>
Lipper Institutional U.S. Treasury Money
Market Funds.............................. 5.11% 4.42% 5.62% Not applicable
X Shares(*)................................. 4.79% 4.28% 5.38% Not applicable
Horizon Shares.............................. 5.36% 4.67% 5.76% Not applicable
Horizon Service Shares(**).................. 5.10% 4.41% Not applicable 5.51%
</TABLE>
10
<PAGE> 78
- ---------------
* Treasury Fund -- X Shares commenced operations on July 22, 1996. The
performance results shown prior to that date reflect the past performance of
Treasury Fund -- Pacific Horizon Shares. Treasury Fund -- X Shareholders are
subject to a Shareholder Service Fee of 0.25% and a 12b-1 Fee of 0.30%.
Treasury Fund -- Pacific Horizon Shareholders are subject to a 0.32% Special
Management Services Fee. Performance data prior to July 22, 1996 for the
Treasury Fund -- X Shares has not been adjusted to reflect the higher
expenses of the X Shares. If performance data prior to July 22, 1996 had been
adjusted to reflect X Share expenses, performance would have been lower.
** Treasury Fund -- Horizon Service Shares commenced operations on February 18,
1988.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON
X HORIZON SERVICE
SHARES(1) SHARES SHARES(2)
--------- ------- ----------
<S> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None None
Maximum sales charge imposed on reinvested dividends........ None None None
Maximum deferred sales charge............................... None None None
Redemption fees(3).......................................... None None None
Exchange fees............................................... None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(4).......................................... .20% .20% .20%
Rule 12b-1 fees(5).......................................... .30% 0% 0%
Shareholder services fees................................... .25% 0% .25%
All other expenses.......................................... .03% .05% .05%
Total annual Fund operating expenses........................ .78% .25% .50%
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(3) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(4) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(5) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
11
<PAGE> 79
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
X Shares................................................... $80 $249 $433 $966
Horizon Shares............................................. $26 $ 80 $141 $318
Horizon Service Shares..................................... $51 $160 $280 $628
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
12
<PAGE> 80
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(A)
------------ ------------
<S> <C> <C>
X SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00 $ 1.00
-------- --------
Income from Investment Operations:
Net investment income..................................... 0.0472 0.0271
-------- --------
Total income from investment operations..................... 0.0472 0.0271
Less dividends to shareholders from net investment income... (0.0472) (0.0271)
-------- --------
Net change in net asset value per share..................... -- --
-------- --------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00 $ 1.00
======== ========
Total return................................................ 4.83% 2.74%(e)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 183 $ 6
Ratio of expenses to average net assets................... 0.78% 0.81%(d)
Ratio of net investment income to average net assets...... 4.73% 4.58%(d)
Ratio of expenses to average net assets*.................. (b)(c) (b)(c)
Ratio of net investment income to average net assets*..... (b)(c) (b)(c)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 22, 1996 (inception date) to February 28,
1997.
(b) There were no fee waivers or expense reimbursements during
the period.
(c) Fees paid by third parties had no effect on the ratios.
(d) Annualized.
(e) Not annualized.
</TABLE>
13
<PAGE> 81
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............. 0.0527 0.0509 0.0559 0.0437 0.0294
Net realized gains/(losses) on
investment transactions........ -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations........................ 0.0527 0.0509 0.0570 0.0438 0.0292
Less dividends to shareholders from
net investment income............. (0.0527) (0.0509) (0.0559) (0.0437) (0.0294)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................. -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................ 5.40% 5.21% 5.73% 4.46% 2.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)..................... $ 702 $ 618 $ 722 469 $ 487
Ratio of expenses to average net
assets......................... 0.25% 0.25% 0.25% 0.23% 0.23%
Ratio of net investment income to
average net assets............. 5.27% 5.09% 5.56% 4.36% 2.94%
Ratio of expenses to average net
assets*........................ (a)(b) (b) 0.26% (a) (a)
Ratio of net investment income to
average net assets*............ (a)(b) (b) 5.55% (a) (a)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
14
<PAGE> 82
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............. 0.0502 0.0484 0.0534 0.0412 0.0269
Net realized gains/(losses) on
investment transactions........ -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations........................ 0.0502 0.0484 0.0545 0.0413 0.0267
Less dividends to shareholders from
net investment income............. (0.0502) (0.0484) (0.0534) (0.0412) (0.0269)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................. -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................ 5.14% 4.97% 5.47% 4.20% 2.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)..................... $ 1,713 $ 1,557 $ 1,031 $ 364 $ 541
Ratio of expenses to average net
assets......................... 0.50% 0.50% 0.50% 0.48% 0.48%
Ratio of net investment income to
average net assets............. 5.03% 4.84% 5.31% 4.01% 2.69%
Ratio of expenses to average net
assets*........................ (a)(b) (b) 0.51% (a) (a)
Ratio of net investment income to
average net assets*............ (a)(b) (b) 5.30% (a) (a)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
15
<PAGE> 83
GOVERNMENT FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: PGOXX
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in short-term debt obligations issued or guaranteed (as to
principal and interest) by the U.S. Government, its agencies, instrumentalities,
or sponsored entities (and in repurchase agreements relating to such
obligations) including those obligations backed by the:
- - full faith and credit of the United States
- - right of the issuer to borrow from the U.S. Treasury
- - discretionary authority of the U.S. Government to purchase the agency's
obligations
- - credit of the agency or instrumentality issuing the obligation
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other
16
<PAGE> 84
service providers to successfully address year 2000 issues could result in
interruptions in the Fund's business and have a material adverse impact on the
Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Service
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 2.56
1994 3.91
1995 5.55
1996 5.00
1997 5.15
</TABLE>
* Represents period from March 1, 1993 to December 31, 1993.
The total return for Horizon Service Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.35%. Since inception (March 1, 1993), the highest
quarter total return for Horizon Service Shares of the Fund was 1.42% (quarter
ended June 30, 1995). Since inception (March 1, 1993), the lowest quarter total
return for Horizon Service Shares of the Fund was 0.73% (quarter ended March 31,
1994).
17
<PAGE> 85
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper Institutional U.S.
Government Money Market Funds). Past performance is not necessarily an indicator
of how the Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
GOVERNMENT FUND -------- -----------------
<S> <C> <C>
Lipper Institutional U.S. Government Money Market Funds..... 5.25% Not applicable
Horizon Shares*............................................. 5.41% 4.92%
Horizon Service Shares**.................................... 5.15% 4.58%
</TABLE>
- ---------------
* Government Fund -- Horizon Shares commenced operations on June 14, 1993.
** Government Fund -- Horizon Service Shares commenced operations on March 1,
1993.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON SERVICE
HORIZON SHARES SHARES(1)
-------------- ---------------
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3)(4)....................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .12% .12%
Total annual fund operating expenses(4)..................... .32% .57%
</TABLE>
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(4) The adviser has agreed to waive a portion of the management fee. AS OF
FEBRUARY 28, 1998, THE EFFECTIVE MANAGEMENT FEE AND TOTAL OPERATING
EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS, WERE .15% AND .27%,
RESPECTIVELY, FOR THE HORIZON SHARES, AND .15% AND .52%, RESPECTIVELY, FOR
THE
18
<PAGE> 86
HORIZON SERVICE SHARES, AFTER FEE WAIVERS AND REIMBURSEMENTS. The management
fee limitation may be terminated at any time at the option of the investment
adviser. If this were to occur, the amount of the current management fee and
total operating expenses may increase without shareholder approval up to the
maximum total operating expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $33 $103 $180 $406
Horizon Service Shares..................................... $58 $183 $318 $714
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
19
<PAGE> 87
PACIFIC HORIZON GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(B)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............... 0.0532 0.0513 0.0600 0.0454 0.0227
Net realized gains/(losses) on
investment transactions.......... 0.0001 -- (0.0042)** (0.0092) (0.0006)
-------- -------- -------- -------- --------
Total income from investment
operations.......................... 0.0533 0.0513 0.0558 0.0362 0.0221
Less dividends to shareholders from
net investment income............... (0.0533) (0.0512) (0.0556) (0.0452) (0.0227)
Increase due to voluntary capital
contribution from Investment
Adviser............................. -- -- -- 0.0085 --
-------- -------- -------- -------- --------
Net change in net asset value per
share............................... -- 0.0001 0.0002 (0.0005) (0.0006)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return.......................... 5.46% 5.25% 5.71% 4.61%+ 2.29%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)....................... $ 63 $ 61 $ 55 $ 235 $ 370
Ratio of expenses to average net
assets........................... 0.27% 0.22% 0.24% 0.17% 0.28%(c)
Ratio of net investment income to
average net assets............... 5.32% 5.15% 5.66% 4.67% 3.17%(c)
Ratio of expenses to average net
assets*.......................... 0.32% 0.29%(a) 0.30% 0.25% 0.28%(c)
Ratio of net investment income to
average net assets*.............. 5.27% 5.08%(a) 5.60% 4.59% 3.17%(c)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** Net realized loss for the period is a direct result of a
decrease in outstanding shares between February 28, 1995 and
the date of the gain realization.
(a) Fees paid by third parties had no effect on the ratios.
(b) Period from June 14, 1993 (inception date) to February 28,
1994.
(c) Annualized.
(d) Not annualized.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
</TABLE>
20
<PAGE> 88
PACIFIC HORIZON GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............. 0.0507 0.0488 0.0537 0.0429 0.0300
Net realized gains/(losses) on
investment transactions........ 0.0001 -- (0.0004)** (0.0092) (0.0006)
-------- -------- -------- -------- --------
Total income from investment
operations........................ 0.0508 0.0488 0.0533 0.0337 0.0294
Less dividends to shareholders from
net investment income............. (0.0508) (0.0487) (0.0531) (0.0427) (0.0300)
Increase due to voluntary capital
contribution from Investment
Adviser........................... -- -- -- 0.0085 --
-------- -------- -------- -------- --------
Net change in net asset value per
share............................. -- 0.0001 0.0002 (0.0005) (0.0006)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................ 5.20% 4.98% 5.44% 4.35%+ 3.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)..................... $ 264 $ 263 $ 213 $ 289 $ 326
Ratio of expenses to average net
assets......................... 0.52% 0.48% 0.49% 0.43% 0.48%
Ratio of net investment income to
average net assets............. 5.07% 4.89% 5.41% 4.32% 2.99%
Ratio of expenses to average net
assets*........................ 0.57% 0.54%(a) 0.56% 0.51% 0.53%
Ratio of net investment income to
average net assets*............ 5.02% 4.83%(a) 5.34% 4.24% 2.94%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** Net realized loss for the period is a direct result of a
decrease in outstanding shares between February 28, 1995 and
the date of the gain realization.
(a) Fees paid by third parties had no effect on the ratios.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
</TABLE>
21
<PAGE> 89
TREASURY ONLY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: PATXX
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests solely in obligations of the U.S. Treasury. U.S. Treasury
securities are backed by the full faith and credit of the U.S. Government, and
include:
- - U.S. Treasury bills, notes and bonds
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
22
<PAGE> 90
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Service
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 2.31
1994 3.61
1995 5.17
1996 4.78
1997 4.87
</TABLE>
* Represents period from March 1, 1993 to December 31, 1993.
The total return for Horizon Service Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.21%. Since inception (March 1, 1993), the highest
calendar quarter total return for Horizon Service Shares of the Fund was 1.30%
(quarter ended June 30, 1995). Since inception (March 1, 1993), the lowest
calendar quarter total return for Horizon Service Shares of the Fund was 0.67%
(quarter ended June 30, 1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper Institutional U.S.
Treasury Money Market Funds). Past performance is not necessarily an indicator
of how the Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
TREASURY ONLY FUND -------- -----------------
<S> <C> <C>
Lipper Institutional U.S. Treasury Money Market Funds....... 5.11% Not applicable
Horizon Shares(*)........................................... 5.13% 5.10%
Horizon Service Shares(**).................................. 4.87% 4.28%
</TABLE>
- ---------------
* Treasury Only Fund -- Horizon Shares commenced operations on September 20,
1995.
** Treasury Only Fund -- Horizon Service Shares commenced operations on March 1,
1993.
23
<PAGE> 91
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON HORIZON SERVICE
SHARES SHARES(1)
------- ---------------
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .09% .09%
Total annual Fund operating expenses........................ .29% .54%
</TABLE>
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period. Although
your actual cost may be higher or lower, based on these assumptions your cost
would be.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
TREASURY ONLY FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $30 $ 93 $163 $368
Horizon Service Shares..................................... $55 $173 $302 $677
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
24
<PAGE> 92
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TREASURY ONLY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------- PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996(A)
------------ ------------ ------------
<S> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD........... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from Investment Operations:
Net investment income.................................. 0.0504 0.0490 0.0227
Net realized gains/(losses) on investment
transactions........................................ -- 0.0001 (0.0001)
-------- -------- --------
Total income from investment operations.................. 0.0504 0.0491 0.0226
Less dividends to shareholders from net investment
income................................................. (0.0504) (0.0490) (0.0227)
-------- -------- --------
Net change in net asset value per share.................. -- 0.0001 (0.0001)
-------- -------- --------
NET ASSET VALUE PER SHARE, END OF PERIOD................. $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return............................................. 5.16% 5.02% 2.30%(e)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions)................. $ 30 $ 30 $ 7
Ratio of expenses to average net assets................ 0.29% 0.27% 0.70%(d)
Ratio of net investment income to average net assets... 5.04% 4.94% 11.88%(d)
Ratio of expenses to average net assets*............... (b)(c) (b)(c) (b)
Ratio of net investment income to average net
assets*............................................. (b)(c) (b)(c) (b)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from September 20, 1995 (inception date) to February
29, 1996.
(b) There were no fee waivers or expense reimbursements during
the period.
(c) Fees paid by third parties had no effect on the ratios.
(d) Annualized.
(e) Not annualized.
</TABLE>
25
<PAGE> 93
PACIFIC HORIZON TREASURY ONLY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............. 0.0480 0.0465 0.0502 0.0391 0.0273
Net realized gains/(losses) on
investment transactions........ -- 0.0001 0.0003 (0.0002) (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations........................ 0.0480 0.0466 0.0505 0.0389 0.0271
Less dividends to shareholders from
net investment income............. (0.0480) (0.0465) (0.0502) (0.0391) (0.0273)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................. -- 0.0001 0.0003 (0.0002) (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................ 4.90% 4.75% 5.14% 3.98% 2.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)..................... $ 177 $ 260 $ 186 $ 194 $ 272
Ratio of expenses to average net
assets......................... 0.54% 0.53% 0.56% 0.55% 0.39%
Ratio of net investment income to
average net assets............. 4.80% 4.66% 5.01% 3.86% 2.73%
Ratio of expenses to average net
assets*........................ (a)(b) (a)(b) (a) 0.56% 0.64%
Ratio of net investment income to
average net assets*............ (a)(b) (a)(b) (a) 3.85% 2.48%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
26
<PAGE> 94
TAX-EXEMPT MONEY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: HTEXX
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income exempt from federal income taxes, a stable share
price, and daily liquidity. The Fund is a Money Market Fund and intends to
maintain a stable $1 share price. The Fund's investment objective may be changed
without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in a diversified portfolio of federally tax-exempt short-term
debt obligations issued by, or on behalf of, states, territories and possessions
of the United States, including those issued by:
- - the U.S. government, its agencies and instrumentalities
- - municipalities, local governments, other political subdivisions and their
agencies.
Under normal market conditions, all of the Fund's investments will be in the
highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality). The Fund may also
invest in investments in the second-highest short-term rating category (or
securities issued by issuers with such ratings or unrated equivalents) for
temporary defensive purposes or if the investment adviser does not feel that
suitable securities in the highest short-term rating category are available. The
Fund may invest in taxable obligations or hold uninvested cash reserves for
temporary defensive purposes.
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities, and no more than 20% of the Fund's total assets
will be invested in taxable obligations.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of
27
<PAGE> 95
America that it has a team in place working on year 2000 systems compliance
and that Bank of America expects to have its systems ready by the year 2000.
Certain other service providers have provided similar information to the Fund.
Nevertheless, the inability of Bank of America and the other service providers
to successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Shares of
the Fund for the last 10 calendar years. Past performance is not necessarily an
indicator of how the Fund will perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1988 5.42
1989 6.42
1990 5.87
1991 4.42
1992 2.9
1993 2.27
1994 2.69
1995 3.68
1996 3.28
1997 3.47
</TABLE>
The total return for Horizon Shares of the Fund for the fiscal quarter ended May
31, 1998 was 0.86%. Over the past 10 calendar years, the highest quarter total
return for Horizon Service Shares of the Fund was 1.67% (quarter ended June 30,
1989). Over the past 10 calendar years, the lowest quarter total return for
Horizon Shares of the Fund was 0.52% (quarter ended March 31, 1993).
28
<PAGE> 96
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years compare with the average annual returns for the same
periods of a broad-based market index (the Lipper Institutional Tax-Exempt Money
Market Funds). Past performance is not necessarily an indicator of how the Fund
or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------------------------------
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
TAX-EXEMPT MONEY FUND ------ ------- -------------- --------------
<S> <C> <C> <C> <C>
Lipper Institutional Tax-Exempt Money Market
Funds..................................... 3.39% 2.96% 3.93% Not applicable
Horizon Shares.............................. 3.47% 3.07% 4.03% Not applicable
Horizon Service Shares*..................... 3.21% 2.82% Not applicable 3.75%
</TABLE>
- ---------------
* Tax-Exempt Money Market Fund -- Horizon Service Shares commenced operations on
February 18, 1988.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON HORIZON SERVICE
SHARES SHARES(1)
------- ---------------
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .08% .08%
Total annual Fund operating expenses........................ .28% .53%
</TABLE>
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
29
<PAGE> 97
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
X you reinvested all dividends
X the average annual return was 5%
X the Fund's maximum total operating expenses are charged and remain the same
over the time periods
X you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your cost would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
TAX-EXEMPT MONEY FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $29 $ 90 $157 $356
Horizon Service Shares..................................... $54 $170 $296 $665
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
30
<PAGE> 98
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the past 5 fiscal years. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............... 0.0342 0.0322 0.0359 0.0285 0.0225
Less dividends to shareholders from
net investment income............... (0.0342) (0.0322) (0.0359) (0.0285) (0.0225)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................... -- -- -- -- --
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return.......................... 3.47% 3.27% 3.65% 2.89% 2.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)....................... $ 344 $ 264 $ 303 $ 382 $ 515
Ratio of expenses to average net
assets........................... 0.28% 0.28% 0.31% 0.28% 0.28%
Ratio of net investment income to
average net assets............... 3.41% 3.22% 3.58% 2.81% 2.25%
Ratio of expenses to average net
assets*.......................... (a)(b) (a) (a) (a) 0.29%
Ratio of net investment income to
average net assets*.............. (a)(b) (a) (a) (a) 2.24%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
31
<PAGE> 99
PACIFIC HORIZON TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE,
BEGINNING OF YEAR................... $ 1.00 $ 1.00 $ 1.00 1.$00...... $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............... 0.0317 0.0297 0.0334 0.0260.... 0.0200
Less dividends to shareholders from
net investment income............... (0.0317) (0.0297) (0.0334) (0.0260) (0.0200)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................... -- -- -- -- --
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return.......................... 3.22% 3.01% 3.39% 2.63% 2.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)....................... $ 186 $ 169 $ 35 $ 39 $ 48
Ratio of expenses to average net
assets........................... 0.53% 0.53% 0.56% 0.53% 0.53%
Ratio of net investment income to
average net assets............... 3.17% 2.98% 3.34% 2.57% 2.04%
Ratio of expenses to average net
assets*.......................... (a)(b) (a) (a) (a) 0.57%
Ratio of net investment income to
average net assets*.............. (a)(b) (a) (a) (a) 2.00%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
32
<PAGE> 100
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Horizon Shares: not applicable
Horizon Service Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income free from federal income tax and California state
personal income tax, a stable share price, and daily liquidity. The Fund is a
Money Market Fund and intends to maintain a stable $1 share price. The Fund's
investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests primarily in municipal securities issued by or on behalf of the
State of California and other governmental issuers.
All of the Fund's investments will be in either the highest or the
second-highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities which are exempt from California state personal
income tax, and no more than 5% of the Fund's net assets will be invested in any
one category of taxable securities. The Fund may invest in taxable obligations
or hold uninvested cash reserves for temporary defensive purposes.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - Because the Fund is a non-diversified investment portfolio, the change in
value of any one security may affect the overall value of the Fund more than
it would if the Fund was a diversified portfolio.
- - The Fund's concentration in California issuers brings greater risk than that
of a less geographically concentrated investment portfolio. Since the Fund
invests heavily in California, events in California are likely to affect the
Fund's investments.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
33
<PAGE> 101
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America or any other
bank, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Horizon Service
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 1.70
1994 2.37
1995 3.40
1996 2.96
1997 3.14
</TABLE>
* Represents the period from March 1, 1993 to December 31, 1993.
The total return for Horizon Service Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 0.78%. Since inception (March 1, 1993), the highest
calendar quarter total return for Horizon Service Shares of the Fund was 0.88%
(quarter ended June 30, 1995). Since inception (March 1, 1993), the lowest
calendar quarter total return for Horizon Service Shares of the Fund was 0.44%
(quarter ended March 31, 1994).
34
<PAGE> 102
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper California Tax-Exempt
Money Market Funds). Past performance is not necessarily an indicator of how the
Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
---------------------------------
1 YEAR SINCE INCEPTION
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND -------------- ---------------
<S> <C> <C>
Lipper California Tax-Exempt Money Market Funds............. 3.00% Not applicable
Horizon Shares*............................................. Not applicable Not applicable
Horizon Service Shares**.................................... 3.14% 2.80%
</TABLE>
- ---------------
* California Tax-Exempt Money Market Fund -- Horizon Shares have not yet
commenced operations.
** California Tax-Exempt Money Market Fund -- Horizon Service Shares commenced
operations on March 1, 1993.
CURRENT YIELD
You may obtain the fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
HORIZON HORIZON SERVICE
SHARES SHARES(1)
------- ---------------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Shareholder services fees................................... 0% .25%
All other expenses.......................................... .05% .05%
Total annual Fund operating expenses........................ .25% .50%
</TABLE>
- ---------------
(1) Institutions may charge fees to their customers who own Horizon Service
Shares in their accounts.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
35
<PAGE> 103
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Horizon Shares............................................. $26 $ 80 $141 $318
Horizon Service Shares..................................... $51 $160 $280 $628
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
36
<PAGE> 104
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request. Horizon Shares of the
California Tax-Exempt Money Market Fund had not commenced operations as of
February 28, 1998, therefore no financial highlights information is available.
37
<PAGE> 105
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
NET ASSET VALUE PER SHARE, BEGINNING
OF YEAR............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income............... 0.0309 0.0291 0.0331 0.0256 0.0198
Net realized gains/(losses) on
investment transactions.......... -- -- 0.0001 (0.0001) (0.0001)
-------- -------- -------- -------- --------
Total income from investment
operations.......................... 0.0309 0.0291 0.0332 0.0255 0.0197
Less dividends to shareholders from
net investment income............... (0.0309) (0.0291) (0.0331) (0.0256) (0.0198)
-------- -------- -------- -------- --------
Net change in net asset value per
share............................... -- -- 0.0001 (0.0001) (0.0001)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return................ 3.13% 2.95% 3.36% 2.59% 2.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)....................... $ 671 $ 472 $ 203 $ 88 $ 124
Ratio of expenses to average net
assets........................... 0.50% 0.50% 0.55% 0.55% 0.53%
Ratio of net investment income to
average net assets............... 3.06% 2.92% 3.43% 2.50% 1.98%
Ratio of expenses to average net
assets*.......................... (a)(b) (b) 0.55%** (a) 0.60%
Ratio of net investment income to
average net assets*.............. (a)(b) (b) 3.42% (a) 1.91%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** During the year ended February 29, 1996 the Portfolio
received credits from its custodian for interest earned on
uninvested cash balances which were used to offset custodian
fees and expenses. If such credits had not occurred, the
expense ratio would have been as indicated. The ratio of net
investment income was not affected.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
38
<PAGE> 106
ADDITIONAL INVESTMENT RISKS
The following is a general list of the types of risks that may apply to a given
Fund. Additional information about a Fund's investments is available in the
Statement of Additional Information.
CREDIT RISK: The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
FOREIGN SECURITY RISK: The risk of losses due to political, regulatory,
economic, social or other uncontrollable forces in a foreign country.
INTEREST RATE RISK: The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK: Associated with securities or practices (such as when-issued and
forward commitment transactions) that multiply small market movements into
larger changes in value.
LIQUIDITY RISK: The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
MARKET RISK: The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably.
OPPORTUNITY RISK: The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
PREPAYMENT RISK: The risk that a debt security may be paid off and proceeds
invested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
VALUATION RISK: The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America, which has principal offices located at 555 California Street,
San Francisco, California 94104, serves as the Funds' investment adviser and is
responsible for all purchases and sales of the Funds' portfolio securities. Bank
of America is a national banking association formed in 1904 which 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 37 foreign countries. Bank of
America is the successor by merger to Security Pacific National Bank, which
previously served as investment adviser to Pacific Horizon Funds, Inc. since it
commenced operations in 1984. Bank of America and its affiliates have over $77
billion in assets under management, including $22 billion in mutual fund assets.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation announced
a definitive agreement to merge and form a new holding company to be named
BankAmercia Corporation (the "Merger"). The Merger is anticipated to close by
the end of 1998, however, it is subject to a number of approvals including
shareholder and regulatory approvals.
For the fiscal year ended February 28, 1998, Bank of America received the
following fees, as a percentage of each Fund's average net assets:
Prime Fund .09%, Government Fund .05%, Treasury Fund .10%, Treasury Only Fund
.10%, California Tax-Exempt Money Market Fund .10%, Tax-Exempt Money Fund .10%.
The chart on the next page shows the Funds' other service providers and includes
their addresses and principal activities.
39
<PAGE> 107
<TABLE>
<S> <C>
--------------------------------
SHAREHOLDERS -----------
--------------------------------
Distribution and Shareholder
Services
--------------------------------
SERVICE ORGANIZATIONS
----------- Provide shareholder services. ----------
--------------------------------
------------------------------------- --------------------------------
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, Inc. PFPC Inc.
Four Falls Corporate Center, 6th Floor 400 Bellevue Parkway
West Conshohocken, PA 19428 Wilmington, DE 19809
-----------------
Distributes shares through selling Handles shareholders services,
brokers, Financial planners and other including recordkeeping and
financial representatives. statements, distribution of
------------------------------------- dividends and processing of buy
and sell requests.
--------------------------------
------------------------------------- --------------------------------
INVESTMENT ADVISER CUSTODIAN
Bank of America The Bank of New York
555 California Street 90 Washington Street
San Francisco, CA 94104 New York, NY 10286
--------
Manages the Funds' business and Holds the Funds' assets,
investment activites. settles all portfolio trades and
------------------------------------- collects most of the valuation
data required for calculating
each Fund's NAV.
--------------------------------
Asset
Management
-------------------------------------
ADMINISTRATOR
Bank of America
Fund 555 California Street
Operations San Francisco, CA 94104
and --------
SUB-ADMINISTRATOR
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provide Facilities, equipment
and personnel to carry out
administrative services related
to the Funds.
-------------------------------------
-------------------------------------
ACCOUNTING AGENT
The Bank of New York
90 Washington Street ------------------------------------
New York, NY 10286
Calculates each Fund's NAV,
dividends and distributions.
-------------------------------------
--------------------------------
BOARD OF DIRECTORS
Supervise the Funds' activities.
--------------------------------
</TABLE>
40
<PAGE> 108
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
To help each Fund maintain its $1 constant share price, portfolio securities are
valued at cost, and any discount or premium created by market movements is
amortized to maturity. The net asset value (NAV) per share class for each Fund
for purposes of pricing purchase and redemption orders is determined
independently of that for other Pacific Horizon Funds.
The Transfer Agent makes purchases or redemptions at the NAV per share next
determined after receipt of the purchase or sell order. NAVs for each share
class are calculated each Business Day (each day that both the New York Stock
Exchange (the "Exchange") and the Federal Reserve Bank are open for business)
using the following schedule:
<TABLE>
<CAPTION>
FUND CALCULATION TIME
---- -----------------------------
<S> <C>
Prime and Treasury As of 5:00 p.m. Eastern time
Government As of 2:30 p.m. Eastern time
Treasury Only As of 11:30 a.m. Eastern time
California Tax-Exempt Money Market As of 10:30 a.m. Eastern time
Tax-Exempt Money As of 12:00 noon Eastern time
</TABLE>
Fund shares will not be priced on those days the Funds are closed as follows:
Independence Day (observed) -- Friday, July 3, 1998
Labor Day -- Monday, September 7, 1998
Columbus Day -- Monday, October 12, 1998
Veterans Day -- Wednesday, November 11, 1998
Thanksgiving Day -- Thursday, November 26, 1998
Christmas Day -- Friday, December 25, 1998
New Year's Day -- Friday, January 1, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999
President's Day -- Monday, February 15, 1999
Good Friday -- Friday, April 2, 1999
Memorial Day (observed) -- Monday, May 31, 1999
PURCHASE OF FUND SHARES
Fund shares can only be purchased on a Business Day through the means described
below. Customers of Service Organizations (brokers, financial institutions or
other industry professionals who maintain accounts on behalf of shareholders and
provide additional services to their clients) should refer to their Service
Organization for the terms and conditions under which Fund shares can be
purchased, including minimum initial and subsequent purchase limits, minimum
average balance requirements and deadlines for purchases. Service Organizations
may be authorized to accept on Pacific Horizon Funds, Inc.'s behalf orders
placed by or on behalf of their customers. Under those circumstances, a Fund
will be deemed to have received an order when it is accepted by a Service
Organization on a Business Day. The order will be priced at a Fund's net asset
value per share next determined after such acceptance. Service Organizations
will be responsible for transmitting accepted orders to the Fund within the
period agreed upon by them. Customers should contact their Service Organizations
to learn whether they are authorized to accept orders for Pacific Horizon Funds,
Inc.
41
<PAGE> 109
Each share class described below represents a different level of service
available to a select group of clients. Fees paid by the Fund for each share
class vary according to the level of service provided.
X SHARES: X Shares of the Prime and Treasury Funds are offered to customers of
selected Service Organizations who purchase such shares through cash management
services and have executed the appropriate account documentation. On any
Business Day that deposits and credits exceed withdrawals and charges in your
transaction account, it is the responsibility of the Service Organization to
transmit a purchase order on your behalf to the transfer agent and deliver
required funds on a timely basis.
HORIZON AND HORIZON SERVICE SHARES: Horizon and Horizon Service Shares of the
Prime, Treasury, Government, Treasury Only, Tax-Exempt Money and California
Tax-Exempt Money Market Funds are offered to institutional clients or to
customers of selected Service Organizations who have executed the appropriate
account documentation.
The table below addresses Fund requirements for institutions and Service
Organizations investing in HORIZON AND HORIZON SERVICE SHARES:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN EXISTING ACCOUNT
------------------ -----------------------------
<S> <C> <C>
Minimum Investment: $500,000 No minimum.
By Mail: Complete and sign an Account Purchases by checks are NOT
Application and mail to permitted.
Transfer Agent. Purchases by
checks are NOT permitted.
By Telephone or Terminal Call 1-800-426-3863 for Call 1-800-426-3863 for
Access: instructions. Wire only Federal instructions. Wire only Federal
funds or other funds funds or other funds
immediately available. immediately available.
</TABLE>
The schedule below addresses the Fund's deadlines for placing purchase orders
for HORIZON OR HORIZON SERVICE SHARES:
<TABLE>
<CAPTION>
FUND DEADLINE FOR RECEIPT OF A
(INCLUDES BOTH SHARE CLASSES PURCHASE ORDER BY DEADLINE FOR RECEIPT OF RELATED
UNLESS OTHERWISE NOTED.) TRANSFER AGENT PAYMENT BY THE CUSTODIAN
---------------------------- ------------------------- -------------------------------
<S> <C> <C>
Prime or Treasury (Horizon 5:00 p.m. Eastern time 6:00 p.m. Eastern time
Shares)
Prime or Treasury (Horizon 2:30 p.m. Eastern time 4:00 p.m. Eastern time
Service Shares)
Government 2:30 p.m. Eastern time 4:00 p.m. Eastern time
Treasury Only 11:30 a.m. Eastern time 4:00 p.m. Eastern time
Tax-Exempt Money 12:00 noon Eastern time 4:00 p.m. Eastern time
California Tax-Exempt Money 10:30 a.m. Eastern time 4:00 p.m. Eastern time
Market
</TABLE>
NOTES SPECIFIC TO THE PURCHASE OF HORIZON AND HORIZON SERVICE SHARES:
- - A Fund may, in its discretion, reject any order for shares. Orders received
after the Fund cut-off times and orders for which payment has not been
received in a timely manner, will not be accepted. Payment for orders not
accepted by a Fund or not received or paid for in a timely manner, will be
returned with prompt notification to the sending institution.
42
<PAGE> 110
- - You will be charged compensation for each wire or Electronic Funds Transfer
purchase that is returned unpaid or not received by the deadline, and you will
be responsible for any resulting losses suffered by the Funds.
- - The Funds reserve the right to suspend the sale of shares to the public at any
time in response to conditions in the securities markets or otherwise.
REDEMPTION OF FUND SHARES
Fund shares can only be redeemed on a Business Day through the means described
below. Customers of Service Organizations should refer to their Service
Organization for the terms and conditions under which Fund shares can be
redeemed, including the deadlines for redemptions.
X SHARES: On any Business Day that withdrawals and charges in your transaction
account exceed deposits and credits, it is the responsibility of the Service
Organization to transmit a redemption order on your behalf to the Transfer Agent
and to credit your account with the proceeds on a timely basis.
HORIZON AND HORIZON SERVICE SHARES: Redemption orders must be transmitted to
the Transfer Agent via telephone or terminal access. To effect a redemption call
1-800-426-3863. Proceeds for orders received by the times specified below will
be wired in Federal funds to the redeeming shareholder on the same day.
NOTES SPECIFIC TO THE REDEMPTION OF HORIZON AND HORIZON SERVICE SHARES:
- - Certificates, which previously had been issued, may not be redeemed unless the
certificates have been submitted to the Transfer Agent and appropriately
endorsed for transfer.
- - Proceeds for redemption orders received after the times stated above will
normally be wired in Federal funds to the redeeming shareholder on the next
Business Day.
- - To allow effective management of the Funds' portfolios, investors are urged to
initiate sales of shares as early in the day as possible and to notify the
Transfer Agent at least one day in advance of redemptions in excess of $5
million.
- - In making redemption requests, the names of the registered shareholders and
their account numbers must be supplied.
- - Each Fund reserves the right to wire redemption proceeds up to seven days
after receiving the redemption order, if in the judgment of the Investment
Adviser, an earlier payment would adversely affect the Fund.
The schedule below addresses the Funds' deadlines for ALL SHARE CLASSES (unless
otherwise indicated) for receipt of redemption orders by the Transfer Agent:
<TABLE>
<CAPTION>
DEADLINE FOR RECEIPT OF A
FUND REDEMPTION ORDER BY
(INCLUDES ALL SHARE CLASSES UNLESS OTHERWISE NOTED.) TRANSFER AGENT
---------------------------------------------------- -------------------------
<S> <C>
Prime or Treasury (Horizon Shares) 5:00 p.m. Eastern time
Prime or Treasury (All Other Share Classes) 2:30 p.m. Eastern time
Government 2:30 p.m. Eastern time
Treasury Only 11:30 a.m. Eastern time
Tax-Exempt Money 12:00 noon Eastern time
California Tax-Exempt Money Market 10:30 a.m. Eastern time
</TABLE>
43
<PAGE> 111
NOTES SPECIFIC TO THE REDEMPTION OF ALL SHARE CLASSES:
- - The Funds impose no charge when shares are redeemed.
- - Each Fund reserves the right to redeem shares in any account at their NAV if
the value of the account is less than $500 as a result of the redemption. A
shareholder having such an account will first be notified in writing that
their account has a value of less than $500 and will be allowed 60 days to
make additional investments to bring the value of the account to $500.
- - A Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of the
transfer of its share) for such periods as are permitted under the Investment
Company Act of 1940.
- - In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller. Neither Pacific
Horizon Funds, Inc. nor any of its service providers will be liable for any
loss or expense for acting upon telephone instructions that are reasonably
believed to be genuine.
- - A Fund may redeem shares involuntarily under certain special circumstances as
described in the SAI.
DIVIDENDS AND DISTRIBUTIONS
As a shareholder of a Fund, you are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Fund. Generally, each Fund's net income is declared
daily as a dividend. Dividends are paid within five business days after the end
of each month. Although the Funds do not expect to realize net long-term capital
gains, any capital gains realized will be distributed not more than twice a year
after reduction for any available capital loss carry-forward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the NAV of such
shares on the payment date. However, holders of the Funds' Horizon and Horizon
Service Shares may elect to receive dividends in cash. This election or
revocation must be made in writing to the Transfer Agent and becomes effective
upon receipt of your instructions by the Transfer Agent.
NOTES SPECIFIC TO DIVIDENDS AND DISTRIBUTIONS FOR THE HORIZON AND HORIZON
SERVICE SHARES:
- - If you elect to receive distributions in cash, and if your checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share
NAV determined as of the date of payment of the distribution. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share NAV determined as
of the date of cancellation.
- - Reinvestment dividends receive the same tax treatment as dividends paid in
cash.
TAXES
As long as a Fund meets the requirements for being a tax-qualified regulated
investment company, which each Fund has done in the past and intends to do in
the future, it pays no Federal income tax on the earnings it distributes to
shareholders.
TAXABLE FUNDS: Dividends you receive from a Fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a Fund's long-term
capital gains are taxable as capital gains;
44
<PAGE> 112
dividends from other sources are generally taxable as ordinary income. It is
anticipated that substantially all of the dividends from the Funds will be
taxable as ordinary income and not capital gains.
Any time you sell or exchange shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you sell or
exchange, you may have a gain or a loss on the transaction. You are responsible
for any tax liabilities generated by your transactions.
TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: Both Funds
intend to meet certain Federal tax requirements so that distribution of the
tax-exempt interest it earns may be treated as "exempt-interest dividends."
However, any portion of exempt-interest dividends attributable to interest on
private activity bonds may increase certain shareholders' alternative minimum
tax. Dividends from a Fund's short- and long-term capital gains are taxable.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: This Fund intends to comply with
certain state tax requirements so that its income and dividends will be exempt
from state and local personal income taxes. Dividends derived from interest on
securities other than California Municipal Securities will be subject to
California personal income tax.
NOTES SPECIFIC TO ALL FUNDS REGARDING FEDERAL TAXES:
- - Taxable dividends paid in January may be taxable as if they had been paid the
previous December.
- - The Form 1099 that is mailed to you in January details your dividends and
their Federal tax category, although you should verify your tax liability with
your tax professional.
STATE AND LOCAL TAXES: Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the Federal income tax law, and with respect to the
California Tax-Exempt Money Market Fund, the California state personal income
tax. Exempt-interest dividends generally will be exempt from state and local
taxes as well. However, except as noted with respect to California state
personal income tax, dividends paid by the Funds may be taxable to investors
under state or local law as dividend income even through all or a portion of
such dividends may be derived from interest on obligations that, if realized
directly, would be exempt from such taxes.
DISTRIBUTION ARRANGEMENTS
12b-1 AND SERVICE FEE PLANS
Pacific Horizon Funds offer share classes other than those described in this
prospectus. The major distinctions among the share classes are the fee plans
related to each share class. Pacific Horizon Funds, Inc. has adopted three fee
plans. Participants in any of these plans must enter into a specific agreement
with Pacific Horizon Funds Inc. pursuant to the related adopted plan. Because
fees associated with the distribution and service plans are paid out of the
Fund's assets on an on-going basis, over time holders of the shares discussed
below may pay more than the economic equivalent of the maximum front-end sales
charge permitted by NASD Regulation, Inc.
45
<PAGE> 113
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Shareholder Services Horizon Service Paid to Shareholder Service Each Shareholder Service
Plan Organizations who provide Organization receives a fee
support services to their of up to 0.25% (annualized)
customers (the beneficial of the average daily net
owners of the Horizon asset value of Horizon
Service Shares). Service Shares owned by
their customers. Holders of
a Fund's Horizon Service
Shares bear this expense.
Distribution and S, Y and X Paid to the Distributor for Payments by an X Share Class
Services Plan distribution expenses for distribution expenses
intended to result in the and shareholder servicing
sale of S, Y and X expenses may not exceed 0.30% and
Shares of the Prime and 0.25%, respectively, of the
California Tax-Exempt Money average daily net assets of
Market Funds, X and Y Shares a Fund's X Shares. Holders
of the Treasury Fund and S of the X Shares bear these
Shares of the Tax-Exempt expenses.
Money Fund and for Payments by the S and Y
shareholder servicing Share Classes for
expenses. distribution expenses and
shareholder servicing
expenses may not exceed
0.75% and 0.25%,
respectively, of the average
daily net assets of a Fund's
S and Y Shares. Holders of
the S and Y Shares bear
these expenses.
</TABLE>
46
<PAGE> 114
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Special Management Pacific Horizon Paid to Shareholder Each Shareholder Service
Services Plan Organizations who provide Organization receives a fee
support services to their equal to .32% (annualized)
customers (the beneficial of the average daily net
owners of Pacific Horizon asset value of the Prime.
Shares of the Prime, Treasury, Government,
Treasury, Government, Treasury Only and Tax-Exempt
Treasury Only, Tax-Exempt Money Fund's Pacific Horizon
and California Tax-Exempt Shares and 0.35%
Money Market Funds). (annualized) of the average
daily net asset value of the
California Tax-Exempt Money
Market Fund's Pacific
Horizon Shares (.03% of
which is being voluntarily
waived by the Distributor)
owned by their customers.
Holders of these Fund's
Pacific Horizon Service
Shares bear this expense.
</TABLE>
47
<PAGE> 115
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for a Fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a fuller technical and legal
description of a Fund's policies, investment restrictions, risks, and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:
PACIFIC HORIZON FUNDS, INC.
P.O. Box 8968
Wilmington, Delaware 19899-8968
1-800-426-3863
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov. The Funds' investment company registration number is
811-04293.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-426-3863
Monday thru Friday
9:00 am to 5:00 pm (EST)
<PAGE> 116
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus gives vital information about these PRIME FUND
money market mutual funds, including information on -- S Shares
investment policies, risks and fees. For your own TAX-EXEMPT MONEY FUND
benefit and protection, please read it before you -- S Shares
invest, and keep it on hand for future reference. CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Please note that these Funds: -- S Shares
- - are not bank deposits
- - are not obligations of, or guaranteed or endorsed
by Bank of America NT&SA or any of its affiliates
- - are not federally insured
- - are not obligations of, or guaranteed or endorsed
or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other governmental
agency
- - are not guaranteed to achieve their goal(s)
- - may not be able to maintain a stable $1 share
price
Like all mutual fund shares, 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.
</TABLE>
Investment Portfolios Offered by
PHF-0005 Pacific Horizon Funds, Inc.
<PAGE> 117
OVERVIEW
GOAL OF THE MONEY MARKET FUNDS
The money market funds invest primarily in money market instruments and strive
to maintain a stable $1 share price. Each Fund employs its own strategy and has
its own risk/reward profile. Be sure to read all risk disclosure carefully
before investing.
THE INVESTMENT ADVISER
Pacific Horizon money market funds are managed by Bank of America NT&SA ("Bank
of America"), a subsidiary of BankAmerica Corporation, a registered bank holding
company. For more information on the Investment Adviser see the section entitled
"Management of the Funds."
<PAGE> 118
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A FUND-BY-FUND LOOK AT GOALS,
FUND DESCRIPTION
STRATEGIES, RISKS, EXPENSES
OVERVIEW
AND FINANCIAL HISTORY 2-6 PRIME FUND
7-11 TAX-EXEMPT MONEY FUND
12-16 CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
17 ADDITIONAL INVESTMENT RISKS
DETAILS THAT APPLY TO ALL MONEY
MANAGEMENT OF THE FUNDS
MARKET FUNDS IN THIS 17 INVESTMENT ADVISER
PROSPECTUS 19 SERVICE PROVIDER CHART
POLICIES AND INSTRUCTIONS FOR
SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND 20 PRICING OF FUND SHARES
CLOSING AN ACCOUNT IN ANY OF 20 PURCHASE OF FUND SHARES
THE MONEY MARKET FUNDS 21 REDEMPTION OF FUND SHARES
21 DIVIDENDS AND DISTRIBUTIONS
22 TAXES
DETAILS ON DISTRIBUTION AND
DISTRIBUTION ARRANGEMENTS
OTHER SHAREHOLDER SERVICE 23 12b-1 AND SERVICE FEE PLANS
PLANS
SEE BACK COVER FOR MORE INFORMATION
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Trust and Savings Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 119
PRIME FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbol:
S Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund may invest in U.S. dollar-denominated money market securities (such as
bank certificates of deposit, bankers' acceptances and commercial paper),
including those issued by:
- - U.S. and foreign banks
- - U.S. and foreign corporate issuers
- - the U.S. government, its agencies and instrumentalities
- - municipalities
At least 95% of the Fund's investments will be in the highest short-term rating
category or will be issued by issuers with such ratings (or, if unrated, will be
of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund will concentrate its investments in the banking and finance industry
which means that it will invest at least 25% of its total assets in the
securities of that industry.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other
2
<PAGE> 120
service providers to successfully address year 2000 issues could result in
interruptions in the Fund's business and have a material adverse impact on the
Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - Because the Fund concentrates in the banking and finance industry, it is more
susceptible to economic and regulatory developments in that industry than a
money market fund which does not concentrate. In addition, the Fund's
investment in foreign banks and corporate issuers makes it susceptible to
future political and economic developments in countries in which it invests.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 10 calendar years. Past performance is not
necessarily an indicator of how the Fund will perform in the future.
<TABLE>
<S> <C>
1988 7.29%
1989 9.02%
1990 8.04%
1991 6.16%
1992 3.68%
1993 2.93%
1994 3.87%
1995 5.58%
1996 5.04%
1997 5.22%
</TABLE>
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.31%. Over the past 10 calendar years, the highest
quarter total return for Pacific Horizon Shares of the Fund was 2.32% (quarter
ended June 30, 1989). Over the past 10 calendar years, the lowest quarter total
return for Pacific Horizon Shares of the Fund was 0.72% (quarter ended June 30,
1993). Pacific Horizon Shares are not offered in this prospectus but have
substantially similar annual returns because the shares are invested in the same
investment portfolio of securities. Annual returns differ only to the extent
that Pacific Horizon Shares have a 0.32% Special Management Services Fee while S
Shares have a 0.75% Rule 12b-1 Fee and a 0.25% Shareholder Services Fee.
3
<PAGE> 121
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years compare with the average annual returns for the same
periods of a broad-based market index (the Lipper Money Market Instrument
Funds). Past performance is not necessarily an indicator of how the Fund or the
broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR 5 YEARS 10 YEARS
PRIME FUND ------ ------- --------
<S> <C> <C> <C>
Lipper Money Market Instrument Funds........................ 4.90% 4.32% 5.40%
S Shares*................................................... 4.98% 4.46% 5.64%
</TABLE>
- ---------------
* Prime Fund -- S Shares commenced operations on April 7, 1997. The performance
results reflect the past performance of the Prime Fund -- X Shares from July
22, 1996 to April 6, 1997 and the past performance of Prime Fund -- Pacific
Horizon Shares from March 1, 1987 to July 21, 1996. X Shareholders are subject
to a Rule 12b-1 Fee of 0.30% and a Shareholder Service Fee of 0.25%, which
differs from the Prime Fund -- Pacific Horizon Shares, which only have a
Special Management Fee of 0.32%. Performance data for the Prime Fund -- S
Shares prior to April 7, 1997 has not been adjusted to reflect the higher
expenses of the S Shares. If the performance data prior to April 7, 1997 had
been adjusted to reflect S Share expenses, performance would be lower.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
S SHARES(1)
------------
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None
Maximum sales charge imposed on reinvested dividends........ None
Maximum deferred sales charge............................... None
Redemption fees(2).......................................... None
Exchange fees............................................... None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20%
Rule 12b-1 fees(4).......................................... .75%(5)
Shareholder services fees................................... .25%
All other expenses.......................................... .02%
----
Total annual operating expenses(6).......................... 1.22%
====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
4
<PAGE> 122
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets. Due to established breakpoints, management fees decrease as the
Fund's assets increase. AS OF FEBRUARY 28, 1998, THE EFFECTIVE ADVISORY FEE
WAS .09%, THE EFFECTIVE ADMINISTRATION FEE WAS .10% AND THE EFFECTIVE
MANAGEMENT FEE WAS .19% OF THE FUND'S AVERAGE NET ASSETS.
(4) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(5) The Distributor has agreed to waive a portion of the Rule 12b-1 fee. This
waiver may be terminated at any time at the option of the Distributor. AS OF
FEBRUARY 28, 1998, THE EFFECTIVE RULE 12B-1 FEE AND TOTAL OPERATING EXPENSES
WERE .30% AND .77%, RESPECTIVELY, OF THE FUND'S AVERAGE NET ASSETS, AFTER
TAKING INTO EFFECT THE FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
(6) AS OF FEBRUARY 28, 1998, THE EFFECTIVE TOTAL OPERATING EXPENSES, AS A
PERCENTAGE OF AVERAGE NET ASSETS, WAS .77% FOR S SHARES. The amount of
current total operating expenses may increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
PRIME FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
S Shares................................................... $124 $387 $670 $1,477
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
5
<PAGE> 123
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1998(A)
------------
<S> <C>
S SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00
--------
Income from Investment Operations:
Net investment income..................................... 0.0444
Net realized gains/(losses) on investment transactions.... --
--------
Total income from investment operations..................... 0.0444
Less dividends to shareholders from net investment income... (0.0444)
--------
Net change in net asset value per share..................... --
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00
========
Total return................................................ 4.53%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 110
Ratio of expenses to average net assets................... 0.76%(c)
Ratio of net investment income to average net assets...... 4.92%(c)
Ratio of expenses to average net assets*.................. 1.20%(b)(c)
Ratio of net investment income to average net assets*..... 4.48%(b)(c)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from April 7, 1997 (inception date) to February 28,
1998.
(b) Fees paid by third parties had no effect on the ratios.
(c) Annualized.
(d) Not annualized.
</TABLE>
6
<PAGE> 124
TAX-EXEMPT MONEY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbol:
S Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income exempt from federal income taxes, a stable share
price, and daily liquidity. The Fund is a Money Market Fund and intends to
maintain a stable $1 share price. The Fund's investment objective may be changed
without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in a diversified portfolio of federally tax-exempt short-term
debt obligations issued by, or on behalf of, states, territories and possessions
of the United States, including those issued by:
- - the U.S. government, its agencies and instrumentalities
- - municipalities, local governments, other political subdivisions and their
agencies.
Under normal market conditions, all of the Fund's investments will be in the
highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality). The Fund may also
invest in investments in the second-highest short-term rating category (or
securities issued by issuers with such ratings or unrated equivalents) for
temporary defensive purposes or if the investment adviser does not feel that
suitable securities in the highest short-term rating category are available. The
Fund may invest in taxable obligations or hold uninvested cash reserves for
temporary defensive purposes.
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities, and no more than 20% of the Fund's total assets
will be invested in taxable obligations.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
7
<PAGE> 125
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 5 calendar years since inception (July 9, 1993).
Past performance is not necessarily an indicator of how the Fund will perform in
the future.
<TABLE>
<S> <C>
1993* 0.95%
1994 2.36%
1995 3.35%
1996 2.95%
1997 3.14%
</TABLE>
*Represents the period from July 9, 1993 to December 31, 1993.
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 0.78%. Since inception (July 9, 1993), the highest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.87%
(quarter ended September 30, 1995). Since inception (July 9, 1993), the lowest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.45%
(quarter ended March 31, 1994). Pacific Horizon Shares are not offered in this
prospectus but have substantially similar annual returns because the shares are
invested in the same investment portfolio of securities. Annual returns differ
only to the extent that Pacific Horizon Shares have a 0.32% Special Management
Services Fee while S Shares have a 0.75% Rule 12b-1 Fee and a 0.25% Shareholder
Services Fee.
8
<PAGE> 126
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper Tax-Exempt Money
Market Funds). Past performance is not necessarily an indicator of how the Fund
or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
TAX-EXEMPT MONEY FUND -------- -----------------
<S> <C> <C>
Lipper Tax-Exempt Money Market Funds........................ % Not applicable
S Shares*................................................... 3.03% 2.82%
</TABLE>
- ---------------
* Tax-Exempt Money Fund -- S Shares commenced operations on July 8, 1997. The
performance results prior to that date reflect the past performance of the
Tax-Exempt Money-Pacific Horizon Shares. Pacific Horizon Shareholders have a
Special Management Services Fee of 0.32%. Prior performance data for the S
Shares has not been adjusted to reflect the higher expenses of the S Shares.
If the performance data prior to July 8, 1997 had been adjusted to reflect S
Shares expenses, performance would be lower.
CURRENT YIELD
You may obtain the Funds current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
S SHARES(1)
------------
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None
Maximum sales charge imposed on reinvested dividends........ None
Maximum deferred sales charge............................... None
Redemption fees(2).......................................... None
Exchange fees............................................... None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20%
Rule 12b-1 fees(4).......................................... .75%(5)
Shareholder services fees................................... .25%
All other expenses.......................................... .05%
----
Total annual Fund operating expenses........................ 1.25%
====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
9
<PAGE> 127
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Funds average net
assets.
(4) Because of the Rule 12b-1 Fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(5) The Distributor has agreed to waive a portion of the Rule 12b-1 Fee. This
waiver may be terminated at any time at the option of the distributor. AS OF
FEBRUARY 28, 1998, THE EFFECTIVE RULE 12b-1 FEE AND TOTAL OPERATING EXPENSES
WERE .30% AND .81%, RESPECTIVELY, OF THE FUNDS AVERAGE NET ASSETS, AFTER
TAKING INTO CONSIDERATION THE FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Funds maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your cost would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TAX-EXEMPT MONEY FUND
S Shares................................................... $127 $397 $686 $1,511
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Funds actual expenses and returns, either past or future.
10
<PAGE> 128
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds
financial performance for the period presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Funds financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1998(a)
-------------
<S> <C>
S SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00
Income from Investment Operations:
Net investment income..................................... 0.0184
Less dividends to shareholders from net investment income... (0.0184)
--------
Net change in net asset value per share..................... --
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00
========
Total return................................................ 1.85%(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 27
Ratio of expenses to average net assets................... 0.81%(b)
Ratio of net investment income to average net assets...... 2.76%(b)
Ratio of expenses to average net assets*.................. 1.25%(b)(d)
Ratio of net investment income to average net assets*..... 2.32%(b)(d)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 8, 1997 (inception date) to February 28,
1998.
(b) Annualized.
(c) Not annualized.
(d) Fees paid by third parties had no effect on the ratios.
</TABLE>
11
<PAGE> 129
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbol:
S Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income free from federal income tax and California state
personal income tax, a stable share price, and daily liquidity. The Fund is a
Money Market Fund and intends to maintain a stable $1 share price. The Fund's
investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests primarily in municipal securities issued by or on behalf of the
State of California and other governmental issuers.
All of the Fund's investments will be in either the highest or the
second-highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities which are exempt from California state personal
income tax, and no more than 5% of the Fund's net assets will be invested in any
one category of taxable securities. The Fund may invest in taxable obligations
or hold uninvested cash reserves for temporary defensive purposes.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - Because the Fund is a non-diversified investment portfolio, the change in
value of any one security may affect the overall value of the Fund more than
it would if the Fund was a diversified portfolio.
- - The Fund's concentration in California issuers brings greater risk than that
of a less geographically concentrated investment portfolio. Since the Fund
invests heavily in California, events in California are likely to affect the
Fund's investments.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date
12
<PAGE> 130
value these systems will be able to accurately process. The Fund has been
informed by Bank of America that it has a team in place working on year 2000
systems compliance and that Bank of America expects to have its systems ready by
the year 2000. Certain other service providers have provided similar
information to the Fund. Nevertheless, the inability of Bank of America and
the other service providers to successfully address year 2000 issues could
result in interruptions in the Fund's business and have a material adverse
impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America or any other
bank, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 9 calendar years since inception (December 6,
1989). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1989* 0.38
1990 5.20
1991 3.97
1992 2.39
1993 1.87
1994 2.30
1995 3.32
1996 2.88
1997 3.07
</TABLE>
*Represents period from December 6, 1989 to December 31, 1989.
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 0.76%. Since inception (December 6, 1989), the highest
calendar quarter total return for Pacific Horizon Shares of the Fund was 1.34%
(quarter ended June 30, 1990). Since inception (December 6, 1989), the lowest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.42%
(quarter ended March 31, 1993). Pacific Horizon Shares are not offered in this
prospectus but have substantially similar annual returns because the shares are
invested in the same investment portfolio of securities. Annual returns differ
only to the extent that Pacific Horizon Shares have a 0.32% Special Management
Services Fee (after waivers) while S Shares have a 0.75% Rule 12b-1 Fee and a
0.25% Shareholder Services Fee.
13
<PAGE> 131
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1 and 5
calendar years, and since inception; compare with the average annual returns for
the same periods of a broad-based market index (the Lipper California Tax-Exempt
Money Market Funds). Past performance is not necessarily an indicator of how the
Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
<S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Lipper California Tax-Exempt Money Market Funds............. 3.00% 2.73% Not applicable
S Shares*................................................... 2.84% 2.63% 3.11%
</TABLE>
- ---------------
* California Tax-Exempt Money Market Fund -- S Shares commenced operations on
June 18, 1997. The performance results shown from October 2, 1996 to June 17,
1997 reflect the past performance of the X Shares of the Fund and past
performance of Pacific Horizon Shares of the Fund prior to October 2, 1996. X
Shareholders are subject to a Rule 12b-1 Fee of 0.30% and a Shareholder
Service Fee of 0.25%, which differs from the Pacific Horizon Shares, which
only have a Special Management Services Fee of 0.35%. Performance data for the
S Shares prior to June 18, 1997 has not been adjusted to reflect the higher
expenses of the S Shares. If performance data prior to June 18, 1997 had been
adjusted to reflect S Share expenses, performance would be lower.
CURRENT YIELD
You may obtain the fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
S SHARES (1)
------------
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None
Maximum sales charge imposed on reinvested dividends........ None
Maximum deferred sales charge............................... None
Redemption fees (2)......................................... None
Exchange fees............................................... None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees (3)......................................... .20%
Rule 12b-1 fees (4)......................................... .75%(5)
Shareholder services fees................................... .25%
All other expenses.......................................... .03%
----
Total annual Fund operating expenses........................ 1.23%
====
</TABLE>
14
<PAGE> 132
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(4) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(5) The Distributor has agreed to waive a portion of the Rule 12b-1 Fee. This
waiver may be terminated at any time at the option of the Distributor. AS OF
FEBRUARY 28, 1998, THE EFFECTIVE RULE 12b-1 FEE AND TOTAL OPERATING EXPENSES
WERE .30% AND .79%, RESPECTIVELY, OF THE FUND'S AVERAGE NET ASSETS, AFTER
TAKING INTO CONSIDERATION FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
S Shares................................................... $125 $390 $676 $1,489
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
15
<PAGE> 133
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1998(a)
------------
<S> <C>
S SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00
--------
Income from Investment Operations:
Net investment income..................................... 0.0194
Less dividends to shareholders from net investment income... (0.0194)
--------
Net change in net asset value per share..................... --
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00
========
Total return................................................ 1.96%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 141
Ratio of expenses to average net assets................... 0.79%(c)
Ratio of net investment income to average net assets...... 2.69%(c)
Ratio of expenses to average net assets*.................. 1.23%(b)(c)
Ratio of net investment income to average net assets*..... 2.25%(b)(c)
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from June 18, 1997 (inception date) to February 28,
1998.
(b) Fees paid by third parties had no effect on the ratios.
(c) Annualized.
(d) Not annualized.
</TABLE>
16
<PAGE> 134
ADDITIONAL INVESTMENT RISKS
The following is a general list of the types of risks that may apply to a given
Fund. Additional information about a Fund's investments is available in the
Statement of Additional Information.
CREDIT RISK: The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
FOREIGN SECURITY RISK: The risk of losses due to political, regulatory,
economic, social or other uncontrollable forces in a foreign country.
INTEREST RATE RISK: The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK: Associated with securities or practices (such as when-issued and
forward commitment transactions) that multiply small market movements into
larger changes in value.
LIQUIDITY RISK: The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
MARKET RISK: The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably.
OPPORTUNITY RISK: The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
PREPAYMENT RISK: The risk that a debt security may be paid off and proceeds
invested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
VALUATION RISK: The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America, which has principal offices located at 555 California Street,
San Francisco, California 94104, serves as the Funds' investment adviser and is
responsible for all purchases and sales of the Funds' portfolio securities. Bank
of America is a national banking association formed in 1904 which 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 37 foreign countries. Bank of
America is the successor by merger to Security Pacific National Bank, which
previously served as investment adviser to Pacific Horizon Funds, Inc. since it
commenced operations in 1984. Bank of America and its affiliates have over $77
billion in assets under management, including $22 billion in mutual fund assets.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation announced
a definitive agreement to merge and form a new holding company to be named
BankAmercia Corporation (the "Merger"). The Merger is anticipated to close by
the end of 1998, however, it is subject to a number of approvals including
shareholder and regulatory approvals.
17
<PAGE> 135
For the fiscal year ended February 28, 1998, Bank of America received the
following fees, as a percentage of each Fund's average net assets:
Prime Fund .09%, California Tax-Exempt Money Market Fund .10%, Tax-Exempt Money
Fund .10%.
The chart on the next page shows the Funds' other service providers and includes
their addresses and principal activities.
18
<PAGE> 136
Shareholder Flow Chart
<TABLE>
<S> <C>
--------------------------------
SHAREHOLDERS -----------
--------------------------------
Distribution and Shareholder
Services
--------------------------------
SERVICE ORGANIZATIONS
----------- Provide shareholder services. ----------
--------------------------------
------------------------------------- --------------------------------
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, Inc. PFPC Inc.
Four Falls Corporate Center, 6th Floor 400 Bellevue Parkway
West Conshohocken, PA 19428 Wilmington, DE 19809
-----------------
Distributes shares through selling Handles shareholders services,
brokers, Financial planners and other including recordkeeping and
financial representatives. statements, distribution of
------------------------------------- dividends and processing of buy
and sell requests.
--------------------------------
------------------------------------- --------------------------------
INVESTMENT ADVISER CUSTODIAN
Bank of America The Bank of New York
555 California Street 90 Washington Street
San Francisco, CA 94104 New York, NY 10286
--------
Manages the Funds' business and Holds the Funds' assets,
investment activites. settles all portfolio trades and
------------------------------------- collects most of the valuation
data required for calculating
each Fund's NAV.
--------------------------------
Asset
Management
-------------------------------------
ADMINISTRATOR
Bank of America
Fund 555 California Street
Operations San Francisco, CA 94104
and --------
SUB-ADMINISTRATOR
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provide Facilities, equipment
and personnel to carry out
administrative services related
to the Funds.
-------------------------------------
-------------------------------------
ACCOUNTING AGENT
The Bank of New York
90 Washington Street ------------------------------------
New York, NY 10286
Calculates each Fund's NAV,
dividends and distributions.
-------------------------------------
--------------------------------
BOARD OF DIRECTORS
Supervise the Funds' activities.
--------------------------------
</TABLE>
19
<PAGE> 137
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
To help each Fund maintain its $1 constant share price, portfolio securities are
valued at cost, and any discount or premium created by market movements is
amortized to maturity. The net asset value (NAV) per share class for each Fund
for purposes of pricing purchase and redemption orders is determined
independently of that for other Pacific Horizon Funds.
The Transfer Agent makes purchases or redemptions at the NAV per share next
determined after receipt of the purchase or sell order. NAVs for each share
class are calculated each Business Day (each day that both the New York Stock
Exchange (the "Exchange") and the Federal Reserve Bank are open for business)
using the following schedule:
<TABLE>
<CAPTION>
FUND CALCULATION TIME
---- ----------------
<S> <C>
Prime.................................... As of 5:00 p.m. Eastern time
California Tax-Exempt Money Market....... As of 10:30 a.m. Eastern time
Tax-Exempt Money......................... As of 12:00 noon Eastern time
</TABLE>
Fund shares will not be priced on those days the Funds are closed as follows:
Independence Day (observed) -- Friday, July 3, 1998
Labor Day -- Monday, September 7, 1998
Columbus Day -- Monday, October 12, 1998
Veterans Day -- Wednesday, November 11, 1998
Thanksgiving Day -- Thursday, November 26, 1998
Christmas Day -- Friday, December 25, 1998
New Year's Day -- Friday, January 1, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999
President's Day -- Monday, February 15, 1999
Good Friday -- Friday, April 2, 1999
Memorial Day (observed) -- Monday, May 31, 1999
PURCHASE OF FUND SHARES
Fund shares can only be purchased on a Business Day through the means described
below. Customers of Service Organizations (brokers, financial institutions or
other industry professionals who maintain accounts on behalf of shareholders and
provide additional services to their clients) should refer to their Service
Organization for the terms and conditions under which Fund shares can be
purchased, including minimum initial and subsequent purchase limits, minimum
average balance requirements and deadlines for purchases.
Service Organizations may be authorized to accept on Pacific Horizon Funds,
Inc.'s behalf orders placed by or on behalf of their customers. Under those
circumstances, a Fund will be deemed to have received an order when it is
accepted by a Service Organization on a Business Day. The order will be priced
at a Fund's net asset value per share next determined after such acceptance.
Service Organizations will be responsible for transmitting accepted orders to
the Fund within the period agreed upon by them. Customers should contact their
Service Organizations to learn whether they are authorized to accept orders for
Pacific Horizon Funds, Inc.
S SHARES: S Shares of the Prime, Tax-Exempt Money and California Tax-Exempt
Money Market Funds are offered to customers of selected Service Organizations
and departments of Bank of America, and its
20
<PAGE> 138
banking affiliates who purchase such shares through cash management services and
who have executed the appropriate account documentation. On any Business Day
that deposits and credits exceed withdrawals and charges in your transaction
account, it is the responsibility of the Service Organization to transmit a
purchase order on your behalf to the Transfer Agent and deliver required funds
on a timely basis.
REDEMPTION OF FUND SHARES
Fund shares can only be redeemed on a Business Day through the means described
below. Customers of Service Organizations should refer to their Service
Organization for the terms and conditions under which Fund shares can be
redeemed, including the deadlines for redemptions.
S SHARES: On any Business Day that withdrawals and charges in your transaction
account exceed deposits and credits, it is the responsibility of the Service
Organization to transmit a redemption order on your behalf to the Transfer Agent
and to credit your account with the proceeds on a timely basis.
The schedule below addresses the Funds' deadlines for all share classes (unless
otherwise indicated) for receipt of redemption orders by the Transfer Agent:
<TABLE>
<CAPTION>
DEADLINE FOR RECEIPT OF
A REDEMPTION ORDER
FUND BY TRANSFER AGENT
---- -----------------------
<S> <C>
Prime.................................................. 2:30 p.m. Eastern time
Tax-Exempt Money....................................... 12:00 noon Eastern time
California Tax-Exempt Money Market..................... 10:30 a.m. Eastern time
</TABLE>
NOTES SPECIFIC TO THE REDEMPTION OF ALL SHARE CLASSES:
- - The Funds impose no charge when shares are redeemed.
- - Each Fund reserves the right to redeem shares in any account at their NAV if
the value of the account is less than $500 as a result of the redemption. A
shareholder having such an account will first be notified in writing that
their account has a value of less than $500 and will be allowed 60 days to
make additional investments to bring the value of the account to $500.
- - A Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of the
transfer of its share) for such periods as are permitted under the Investment
Company Act of 1940.
- - In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller. Neither Pacific
Horizon Funds, Inc. nor any of its service providers will be liable for any
loss or expense for acting upon telephone instructions that are reasonably
believed to be genuine.
- - A Fund may redeem shares involuntarily under certain special circumstances as
described in the SAI.
DIVIDENDS AND DISTRIBUTIONS
As a shareholder of a Fund, you are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Fund. Generally, each Fund's net income is declared
daily as a dividend. Dividends are paid within five business days after the end
of each month. Although the Funds do not expect to realize net long-term capital
gains, any capital gains realized will be distributed not more than twice a year
after reduction for any available capital loss carry-forward.
21
<PAGE> 139
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the NAV of such
shares on the payment date.
TAXES
As long as a Fund meets the requirements for being a tax-qualified regulated
investment company, which each Fund has done in the past and intends to do in
the future, it pays no Federal income tax on the earnings it distributes to
shareholders.
TAXABLE FUNDS: Dividends you receive from a Fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a Fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. It is anticipated that substantially all
of the dividends from the Funds will be taxable as ordinary income and not
capital gains.
Any time you sell or exchange shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you sell or
exchange, you may have a gain or a loss on the transaction. You are responsible
for any tax liabilities generated by your transactions.
TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: Both Funds
intend to meet certain Federal tax requirements so that distribution of the
tax-exempt interest it earns may be treated as "exempt-interest dividends."
However, any portion of exempt-interest dividends attributable to interest on
private activity bonds may increase certain shareholders' alternative minimum
tax. Dividends from a Fund's short- and long-term capital gains are taxable.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: This Fund intends to comply with
certain state tax requirements so that its income and dividends will be exempt
from state and local personal income taxes. Dividends derived from interest on
securities other than California Municipal Securities will be subject to
California personal income tax.
NOTES SPECIFIC TO ALL FUNDS REGARDING FEDERAL TAXES:
- - Taxable dividends paid in January may be taxable as if they had been paid the
previous December.
- - The Form 1099 that is mailed to you in January details your dividends and
their Federal tax category, although you should verify your tax liability with
your tax professional.
STATE AND LOCAL TAXES: Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the Federal income tax law, and with respect to the
California Tax-Exempt Money Market Fund, the California state personal income
tax. Exempt-interest dividends generally will be exempt from state and local
taxes as well. However, except as noted with respect to California state
personal income tax, dividends paid by the Funds may be taxable to investors
under state or local law as dividend income even through all or a portion of
such dividends may be derived from interest on obligations that, if realized
directly, would be exempt from such taxes.
22
<PAGE> 140
DISTRIBUTION ARRANGEMENTS
12B-1 AND SERVICE FEE PLANS
Pacific Horizon Funds offer share classes other than those described in this
prospectus. The major distinctions among the share classes are the fee plans
related to each share class. Pacific Horizon Funds, Inc. has adopted three fee
plans. Participants in any of these plans must enter into a specific agreement
with Pacific Horizon Funds, Inc. pursuant to the related adopted plan. Because
fees associated with the distribution and service plans are paid out of the
Fund's assets on an on-going basis, over time holders of the shares discussed
below may pay more than the economic equivalent of the maximum front-end sales
charge permitted by NASD Regulation, Inc.
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Shareholder Services Horizon Service Paid to Shareholder Service Each Shareholder Service
Plan Organizations who provide Organization receives a fee
support services to their of up to 0.25% (annualized)
customers (the beneficial of the average daily net
owners of the Horizon asset value of Horizon
Service Shares). Service Shares owned by
their customers. Holders of
a Fund's Horizon Service
Shares bear this expense.
Distribution and S, Y and X Paid to the Distributor for Payments by an X Share Class
Services Plan distribution expenses for distribution expenses
intended to result in the and shareholder servicing
sale of S, Y and X Shares of expense may not exceed 0.30%
the Prime and California and 0.25%, respectively, of
Tax-Exempt Money Market the average daily net assets
Funds, X and Y Shares of the of a Fund's X Shares.
Treasury Fund and S Shares Holders of the X Shares bear
of the Tax-Exempt Money Fund these expenses.
and for shareholder Payments by the S and Y
servicing expenses. Share Classes for
distribution expenses and
shareholder servicing
expenses may not exceed
0.75% and 0.25%,
respectively, of the average
daily net assets of a Fund's
S and Y Shares. Holders of
the S and Y Shares bear
these expenses.
</TABLE>
23
<PAGE> 141
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Special Management Pacific Horizon Paid to Shareholder Service Each Shareholder Service
Services Plan Organizations who provide Organization receives a fee
support services to their equal to .32% (annualized)
customers (the beneficial of the average daily net
owners of Pacific Horizon asset value of the Prime,
Shares of the Prime, Treasury, Government,
Treasury, Government, Treasury Only and Tax-Exempt
Treasury Only, Tax-Exempt Money Fund's Pacific Horizon
Money and California Tax- Shares and 0.35%
Exempt Money Market Funds). (annualized) of the average
daily net asset value of the
California Tax-Exempt Money
Market Fund's Pacific
Horizon Shares (.03% of
which is being voluntarily
waived by the Distributor)
owned by their customers.
Holders of these Fund's
Pacific Horizon Service
Shares bear this expense.
</TABLE>
24
<PAGE> 142
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for a Fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a fuller technical and legal
description of a Fund's policies, investment restrictions, risks, and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:
PACIFIC HORIZON FUNDS, INC.
P.O. Box 8968
Wilmington, Delaware 19899-8968
1-800-346-2087
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov. The Funds' investment company registration number is
811-04293.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-346-2087
Monday thru Friday
8:00 am to 8:00 pm (EST)
<PAGE> 143
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus gives vital information about these PRIME FUND
money market mutual funds, including information on -- X Shares
investment policies, risks and fees. For your own -- Pacific Horizon Shares
benefit and protection, please read it before you TREASURY FUND
invest, and keep it on hand for future reference. -- X Shares
Please note that these Funds: -- Pacific Horizon Shares
x are not bank deposits GOVERNMENT FUND
x are not obligations of, or guaranteed or endorsed -- Pacific Horizon Shares
by Bank of America NT&SA or any of its affiliates TREASURY ONLY FUND
x are not federally insured -- Pacific Horizon Shares
x are not obligations of, or guaranteed or endorsed
or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other governmental agency
x are not guaranteed to achieve their goal(s)
x may not be able to maintain a stable $1 share
price
Like all mutual fund shares, 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.
</TABLE>
Investment Portfolios Offered by
PHF-0001 Pacific Horizon Funds, Inc.
<PAGE> 144
OVERVIEW
GOAL OF THE MONEY MARKET FUNDS
The money market funds invest primarily in money market instruments and strive
to maintain a stable $1 share price. Each Fund employs its own strategy and has
its own risk/reward profile. Be sure to read all risk disclosure carefully
before investing.
THE INVESTMENT ADVISER
Pacific Horizon money market funds are managed by Bank of America NT&SA ("Bank
of America"), a subsidiary of BankAmerica Corporation, a registered bank holding
company. For more information on the Investment Adviser see the section entitled
"Management of the Funds."
<PAGE> 145
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A FUND-BY-FUND LOOK AT GOALS,
STRATEGIES, RISKS, EXPENSES FUND DESCRIPTION
AND FINANCIAL HISTORY.
OVERVIEW
2 PRIME FUND
8 TREASURY FUND
14 GOVERNMENT FUND
19 TREASURY ONLY FUND
23 ADDITIONAL INVESTMENT RISKS
DETAILS THAT APPLY TO ALL MONEY
MARKET FUNDS IN THIS MANAGEMENT OF THE FUNDS
PROSPECTUS. 23 INVESTMENT ADVISER
25 SERVICE PROVIDER CHART
POLICIES AND INSTRUCTIONS FOR
OPENING, MAINTAINING AND SHAREHOLDER INFORMATION
CLOSING AN ACCOUNT IN ANY OF 26 PRICING OF FUND SHARES
THE MONEY MARKET FUNDS. 26 PURCHASE OF FUND SHARES
28 REDEMPTION OF FUND SHARES
30 ADDITIONAL SHAREHOLDER SERVICES
32 DIVIDENDS AND DISTRIBUTIONS
32 TAXES
DETAILS ON DISTRIBUTION AND
OTHER SHAREHOLDER SERVICE DISTRIBUTION ARRANGEMENTS
PLANS. 33 12b-1 AND SERVICE FEE PLANS
SEE BACK COVER FOR MORE INFORMATION
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Trust and Savings Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 146
PRIME FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Pacific Horizon Shares: PCMXX
X Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund may invest in U.S. dollar-denominated money market securities (such as
bank certificates of deposit, bankers' acceptances and commercial paper),
including those issued by:
- - U.S. and foreign banks
- - U.S. and foreign corporate issuers
- - the U.S. government, its agencies and instrumentalities
- - municipalities
At least 95% of the Fund's investments will be in the highest short-term rating
category or will be issued by issuers with such ratings (or, if unrated, will be
of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund will concentrate its investments in the banking and finance industry
which means that it will invest at least 25% of its total assets in the
securities of that industry.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have
2
<PAGE> 147
provided similar information to the Fund. Nevertheless, the inability of Bank of
America and the other service providers to successfully address year 2000 issues
could result in interruptions in the Fund's business and have a material adverse
impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - Because the Fund concentrates in the banking and finance industry, it is more
susceptible to economic and regulatory developments in that industry than a
money market fund which does not concentrate. In addition, the Fund's
investment in foreign banks and corporate issuers makes it susceptible to
future political and economic developments in countries in which it invests.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 10 calendar years. Past performance is not
necessarily an indicator of how the Fund will perform in the future.
<TABLE>
<S> <C>
1988 7.29%
1989 9.02%
1990 8.04%
1991 6.16%
1992 3.68%
1993 2.93%
1994 3.87%
1995 5.58%
1996 5.04%
1997 5.22%
</TABLE>
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.31%. Over the past 10 calendar years, the highest
quarter total return for Pacific Horizon Shares of the Fund was 2.32% (quarter
ended June 30, 1989). Over the past 10 calendar years, the lowest quarter total
return for Pacific Horizon Shares of the Fund was 0.72% (quarter ended June 30,
1993).
3
<PAGE> 148
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years compare with the average annual returns for the same
periods of a broad-based market index (the Lipper Money Market Instrument
Funds). Past performance is not necessarily an indicator of how the Fund or the
broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR 5 YEARS 10 YEARS
PRIME FUND ------ ------- --------
<S> <C> <C> <C>
Lipper Money Market Instrument Funds........................ 4.90% 4.32% 5.40%
X Shares*................................................... 4.98% 4.46% 5.64%
Pacific Horizon Shares**.................................... 5.22% 4.52% 5.67%
</TABLE>
- ---------------
* Prime Fund -- X Shares commenced operations on July 22, 1996. The performance
results shown prior to that date reflect the past performance of Prime
Fund -- Pacific Horizon Shares. Prime Fund -- X Shareholders are subject to a
Shareholder Service Fee of 0.25% and a Rule 12b-1 Fee of 0.30%. Prime
Fund -- Pacific Horizon Shareholders are subject to a 0.32% Special
Management Services Fee. Performance data for Prime Fund -- X Shares prior to
July 22, 1996 has not been adjusted to reflect the higher expenses of the X
Shares. If performance data prior to July 22, 1996 had been adjusted to
reflect X Share expenses, performance would have been lower.
** This example does not include the deduction at redemption of any contingent
deferred sales charges for Pacific Horizon Shares of the Prime Fund acquired
through exchange of B Shares of the Time Horizon Funds.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
X PACIFIC HORIZON
SHARES(1) SHARES
--------- ---------------
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
</TABLE>
4
<PAGE> 149
<TABLE>
<CAPTION>
X PACIFIC HORIZON
SHARES(1) SHARES
--------- ---------------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Rule 12b-1 fees(4).......................................... .30% 0%
Shareholder services fees................................... .25% 0%
Special management services fees............................ 0% .32%
All other expenses.......................................... .03% .04%
---- ----
Total annual Fund operating expenses(5)..................... .78% .56%
==== ====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets. Due to established breakpoints, management fees decrease as the
Fund's assets increase. AS OF FEBRUARY 28, 1998, THE EFFECTIVE ADVISORY FEE
WAS .09%, THE EFFECTIVE ADMINISTRATION FEE WAS .10% AND THE EFFECTIVE
MANAGEMENT FEE WAS .19% OF THE FUND'S AVERAGE NET ASSETS.
(4) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(5) AS OF FEBRUARY 28, 1998, THE EFFECTIVE TOTAL OPERATING EXPENSES, AS A
PERCENTAGE OF AVERAGE NET ASSETS, WERE .77% FOR X SHARES AND .55% FOR
PACIFIC HORIZON SHARES. The amount of current total operating expenses may
increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
x you reinvested all dividends
x the average annual return was 5%
x the Fund's maximum total operating expenses are charged and remain the same
over the time periods
x you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
PRIME FUND
X Shares................................................... $80 $249 $433 $966
Pacific Horizon Shares*.................................... $57 $179 $313 $701
</TABLE>
- ---------------
* This example does not include the deduction at redemption of any contingent
deferred sales charges for Pacific Horizon Shares of the Prime Fund acquired
through exchange of B Shares of the Time Horizon Funds.
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
5
<PAGE> 150
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(a)
------------ ------------
<S> <C> <C>
X SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00 $ 1.00
-------- --------
Income from Investment Operations:
Net investment income..................................... 0.0491 0.0282
Net realized gains/(losses) on investment transactions.... -- --
-------- --------
Total income from investment operations..................... 0.0491 0.0282
Less dividends to shareholders from net investment income... (0.0491) (0.0281)
-------- --------
Net change in net asset value per share..................... -- 0.0001
-------- --------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00 $ 1.00
======== ========
Total return................................................ 5.03% 2.84%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 869 $ 204
Ratio of expenses to average net assets................... 0.77% 0.78%(c)
Ratio of net investment income to average net assets...... 4.92% 4.73%(c)
Ratio of expenses to average net assets*.................. (b) (b)
Ratio of net investment income to average net assets*..... (b) (b)
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 22, 1996 (inception date) to February 28,
1997.
(b) Fee waivers and fees paid by third parties had no effect on
the ratios.
(c) Annualized.
(d) Not annualized.
</TABLE>
6
<PAGE> 151
PACIFIC HORIZON PRIME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................. 0.0515 0.0492 0.0539 0.0424 0.0287
Net realized gains/(losses) on
investment transactions............ -- -- 0.0004 (0.0227) (0.0016)
-------- -------- -------- -------- --------
Total income from investment
operations............................ 0.0515 0.0492 0.0543 0.0197 0.0271
Less dividends to shareholders from net
investment income..................... (0.0515) (0.0490) (0.0539) (0.0422) (0.0287)
Increase due to voluntary capital
contribution from Investment
Advisor............................... -- -- -- 0.0233 --
-------- -------- -------- -------- --------
Net change in net asset value per
share................................. -- 0.0002 0.0004 0.0008 (0.0016)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF YEAR.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............................ 5.27% 5.01% 5.53% 4.30%+ 2.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year(millions)... $ 2,452 $ 2,292 $ 2,200 $ 1,129 $ 1,216
Ratio of expenses to average net
assets............................. 0.55% 0.55% 0.55% 0.51% 0.52%
Ratio of net investment income to
average net assets................. 5.15% 4.92% 5.37% 4.19% 2.86%
Ratio of expenses to average net
assets*............................ (b) (b) 0.56% 0.56% 0.53%
Ratio of net investment income to
average net assets*................ (b) (b) 5.36% 4.14% 2.85%
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fee waivers and fees paid by third parties had no effect on
the ratios.
</TABLE>
7
<PAGE> 152
TREASURY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Pacific Horizon Shares: PHGXX
X Shares: not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests solely in direct obligations of the U.S. Treasury, including:
- - U.S. Treasury bills, notes and bonds
- - repurchase agreements backed by U.S. Treasury bills, notes and bonds
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and generally does
not invest in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other
banks, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance
8
<PAGE> 153
Corporation or any other government agency. Although the Fund seeks to preserve
the value of your investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 10 calendar years. Past performance is not
necessarily an indicator of how the Fund will perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1988 7.01%
1989 8.71%
1990 7.77%
1991 5.67%
1992 3.38%
1993 2.65%
1994 3.70%
1995 5.44%
1996 4.91%
1997 5.03%
</TABLE>
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.27%. Over the past 10 calendar years, the highest
quarter total return for Pacific Horizon Shares of the Fund was 2.23% (quarter
ended June 30, 1989). Over the past 10 calendar years, the lowest quarter total
return for Pacific Horizon Shares of the Fund was 0.64% (quarter ended June 30,
1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1, 5
and 10 calendar years compare with the average annual returns for the same
periods of a broad-based market index (the Lipper U.S. Treasury Money Market
Funds). Past performance is not necessarily an indicator of how the Fund or the
broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR 5 YEARS 10 YEARS
TREASURY FUND ------ ------- --------
<S> <C> <C> <C>
Lipper U.S. Treasury Money Market Funds..................... 4.80% 4.19% 5.23%
X Shares*................................................... 4.79% 4.28% 5.38%
Pacific Horizon Shares...................................... 5.03% 4.34% 5.41%
</TABLE>
- ---------------
* Treasury Fund -- X Shares commenced operations on July 22, 1996. The
performance results shown prior to that date reflect the past performance of
Treasury Fund -- Pacific Horizon Shares.
9
<PAGE> 154
Treasury Fund -- X Shareholders are subject to a Shareholder Service Fee of
0.25% and a 12b-1 Fee of 0.30%. Treasury Fund -- Pacific Horizon Shareholders
are subject to a Special Management Services Fee of 0.32%. Performance data
for the Treasury Fund -- X Shares prior to July 22, 1996 has not been adjusted
to reflect the higher expenses of the X Shares. If performance data prior to
July 22, 1996 had been adjusted to reflect X Share expenses, performance would
have been lower.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
X PACIFIC HORIZON
SHARES(1) SHARES(1)
--------- ---------------
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Rule 12b-1 fees(4).......................................... .30% 0%
Shareholder services fees................................... .25% 0%
Special management services fees............................ 0% .32%
All other expenses.......................................... .03% .05%
------ ---------
Total annual Fund operating expenses........................ .78% .57%
====== =========
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(4) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
10
<PAGE> 155
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
x you reinvested all dividends
x the average annual return was 5%
x the Fund's maximum total operating expenses are charged and remain the same
over the time periods
x you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
X Shares................................................... $80 $249 $433 $966
Pacific Horizon Shares..................................... $58 $183 $318 $714
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
11
<PAGE> 156
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(a)
------------ ------------
<S> <C> <C>
X SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD.............. $ 1.00 $ 1.00
-------- --------
Income from Investment Operations:
Net investment income..................................... 0.0472 0.0271
-------- --------
Total income from investment operations..................... 0.0472 0.0271
Less dividends to shareholders from net investment income... (0.0472) (0.0271)
-------- --------
Net change in net asset value per share..................... -- --
-------- --------
NET ASSET VALUE PER SHARE, END OF PERIOD.................... $ 1.00 $ 1.00
======== ========
Total return................................................ 4.83% 2.74%(e)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions).................... $ 183 $ 6
Ratio of expenses to average net assets................... 0.78% 0.81%(d)
Ratio of net investment income to average net assets...... 4.73% 4.58%(d)
Ratio of expenses to average net assets*.................. (b)(c) (b)(c)
Ratio of net investment income to average net assets*..... (b)(c) (b)(c)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 22, 1996 (inception date) to February 28,
1997.
(b) There were no fee waivers or expense reimbursements during
the period.
(c) Fees paid by third parties had no effect on the ratios.
(d) Annualized.
(e) Not annualized.
</TABLE>
12
<PAGE> 157
PACIFIC HORIZON TREASURY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................. 0.0497 0.0477 0.0527 0.0405 0.0262
Net realized gains/(losses) on
investment transactions............ (0.0002) -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations............................ 0.0495 0.0477 0.0538 0.0406 0.0260
Less dividends to shareholders from net
investment income..................... (0.0495) (0.0477) (0.0527) (0.0405) (0.0262)
-------- -------- -------- -------- --------
Net change in net asset value per
share................................. -- -- 0.0011 0.0001 (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............................ 5.07% 4.87% 5.40% 4.13% 2.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)......................... $ 336 $ 411 $ 1,091 $ 1,132 $ 1,577
Ratio of expenses to average net
assets............................. 0.57% 0.57% 0.57% 0.55% 0.55%
Ratio of net investment income to
average net assets................. 4.96% 4.76% 5.24% 3.99% 2.62%
Ratio of expenses to average net
assets*............................ (a)(b) (b) 0.58% (a) (a)
Ratio of net investment income to
average net assets*................ (a)(b) (b) 5.23% (a) (a)
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
13
<PAGE> 158
GOVERNMENT FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbol:
Pacific Horizon Shares: PGHXX
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in short-term debt obligations issued or guaranteed (as to
principal and interest) by the U.S. Government, its agencies, instrumentalities,
or sponsored entities (and in repurchase agreements relating to such
obligations) including those obligations backed by the:
x full faith and credit of the United States
x right of the issuer to borrow from the U.S. Treasury
x discretionary authority of the U.S. Government to purchase the agency's
obligations
x credit of the agency or instrumentality issuing the obligation
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
x The yield paid by the Fund will vary with changes in interest rates.
x There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
x All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
x An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other
14
<PAGE> 159
service providers to successfully address year 2000 issues could result in
interruptions in the Fund's business and have a material adverse impact on the
Fund's operations.
x An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C> <C> <C> <C>
1993* 2.45
1994 3.84
1995 5.47
1996 4.93
1997 5.08
</TABLE>
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.28%. Since inception (March 1, 1993), the highest
calendar quarter total return for Pacific Horizon Shares of the Fund was 1.40%
(quarter ended June 30, 1995). Since inception (March 1, 1993), the lowest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.71%
(quarter ended December 31, 1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper U.S. Government Money
Market Funds). Past performance is not necessarily an indicator of how the Fund
or the broad-based market index will perform in the future.
15
<PAGE> 160
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
1 YEAR SINCE INCEPTION
GOVERNMENT FUND -------- ----------------
<S> <C> <C>
Lipper U.S. Government Money Market Funds................... 4.90% Not applicable
Pacific Horizon Shares*..................................... 5.08% 4.49%
</TABLE>
- ---------------
* Government Fund -- Pacific Horizon Shares commenced operations on March 1,
1993.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
PACIFIC HORIZON
SHARES(1)
---------------
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None
Maximum sales charge imposed on reinvested dividends........ None
Maximum deferred sales charge............................... None
Redemption fees(2).......................................... None
Exchange fees............................................... None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3)(4)....................................... .20%
Special management services fees............................ .32%
All other expenses.......................................... .12%
----
Total annual Fund operating expenses(3)..................... .64%
====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(4) The adviser has agreed to waive a portion of the management fee. AS OF
FEBRUARY 28, 1998, THE EFFECTIVE MANAGEMENT FEE AND TOTAL OPERATING
EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS, WERE .15% AND .60%,
RESPECTIVELY, FOR THE PACIFIC HORIZON SHARES, AFTER TAKING INTO
CONSIDERATION ANY FEE WAIVERS AND EXPENSE REIMBURSEMENTS. The management fee
limitation may be terminated at any time at the option of the investment
adviser. If this were to occur, the amount of the current management fee and
total operating expenses may increase without shareholder approval up to the
maximum total operating expenses.
16
<PAGE> 161
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
x you reinvested all dividends
x the average annual return was 5%
x the Fund's maximum total operating expenses are charged and remain the same
over the time periods
x you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Pacific Horizon Shares..................................... $65 $205 $357 $798
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. This information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that a shareholder would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Price Waterhouse LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request.
17
<PAGE> 162
PACIFIC HORIZON GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.0503 0.0481 0.0530 0.0421 0.0288
Net realized gains/(losses) on
investment transactions........... (0.0002) -- (0.0004)** (0.0091) (0.0006)
-------- -------- -------- -------- --------
Total income from investment
operations........................... 0.0501 0.0481 0.0526 0.0330 0.0282
Less dividends to shareholders from net
investment income.................... (0.0501) (0.0480) (0.0524) (0.0420) (0.0288)
Increase due to voluntary capital
contribution from Investment
Advisor.............................. -- -- -- 0.0085 --
-------- -------- -------- -------- --------
Net change in net asset value per
share................................ -- 0.0001 0.0002 (0.0005) (0.0006)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................... 5.13% 4.91% 5.37% 4.28%+ 2.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)........................ $ 162 $ 192 $ 261 $ 355 $ 154
Ratio of expenses to average net
assets............................ 0.60% 0.55% 0.56% 0.50% 0.60%
Ratio of net investment income to
average net assets................ 4.99% 4.82% 5.34% 4.27% 2.88%
Ratio of expenses to average net
assets*........................... 0.64% 0.61%(a) 0.63% 0.58% 0.60%
Ratio of net investment income to
average net assets*............... 4.95% 4.76%(a) 5.27% 4.19% 2.88%
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** Net realized loss for the period is a direct result of a
decrease in outstanding shares between February 28, 1995 and
the date of the gain realization.
(a) Fees paid by third parties had no effect on the ratios.
+ Total return includes the effect of the voluntary capital
contribution from the Investment Advisor. Without this
capital contribution, the total return would have been
lower.
</TABLE>
18
<PAGE> 163
TREASURY ONLY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbol:
Pacific Horizon Shares: PTPXX
INVESTMENT OBJECTIVE
The Fund seeks current income, a stable share price, and daily liquidity. The
Fund is a Money Market Fund and intends to maintain a stable $1 share price. The
Fund's investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests solely in obligations of the U.S. Treasury. U.S. Treasury
securities are backed by the full faith and credit of the U.S. Government, and
include:
x U.S. Treasury bills, notes and bonds
All of the Fund's investments will be in the highest short-term rating category
or will be issued by issuers with such ratings (or, if unrated, will be of
comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
x The yield paid by the Fund will vary with changes in interest rates.
x There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
x All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
x An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
x An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
19
<PAGE> 164
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 5 calendar years since inception (March 1,
1993). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C>
1993* 2.14%
1994 3.53%
1995 5.10%
1996 4.71%
1997 4.79%
</TABLE>
* Represents period from March 1, 1993 to December 31, 1993.
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 1.20%. Since inception (March 1, 1993), the highest
calendar quarter total return for Pacific Horizon Shares of the Fund was 1.29%
(quarter ended March 31, 1995). Since inception (March 1, 1993), the lowest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.64%
(quarter ended September 30, 1993).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper U.S. Treasury Money
Market Funds). Past performance is not necessarily an indicator of how the Fund
or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
1 YEAR SINCE INCEPTION
TREASURY ONLY FUND -------- ----------------
<S> <C> <C>
Lipper U.S. Treasury Money Market Funds..................... % Not applicable
Pacific Horizon Shares*..................................... 4.79% 4.18%
</TABLE>
- ---------------
* Treasury Only Fund -- Pacific Horizon Shares commenced operations on March 1,
1993.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
20
<PAGE> 165
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
PACIFIC HORIZON
SHARES(1)
---------------
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None
Maximum sales charge imposed on reinvested dividends........ None
Maximum deferred sales charge............................... None
Redemption fees(2).......................................... None
Exchange fees............................................... None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20%
Special management fees..................................... .32%
All other expenses.......................................... .09%
----
Total annual Fund operating expenses........................ .61%
====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These changes are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
x you reinvested all dividends
x the average annual return was 5%
x the Fund's maximum total operating expenses are charged and remain the same
over the time periods
x you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your cost would be.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
TREASURY ONLY FUND ------ ------- ------- --------
<S> <C> <C> <C> <C>
Pacific Horizon Shares..................................... $62 $195 $340 $762
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
21
<PAGE> 166
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. This information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that a shareholder would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Price Waterhouse LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request.
PACIFIC HORIZON TREASURY ONLY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.0472 0.0458 0.0495 0.0384 0.0254
Net realized gains/(losses) on
investment transactions........... -- 0.0001 0.0003 (0.0002) (0.0002)
-------- -------- -------- -------- --------
Total income from investment
operations........................... 0.0472 0.0459 0.0498 0.0382 0.0252
Less dividends to shareholders from net
investment income.................... (0.0472) (0.0458) (0.0495) (0.0384) (0.0254)
-------- -------- -------- -------- --------
Net change in net asset value per
share................................ -- 0.0001 0.0003 (0.0002) (0.0002)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return........................... 4.83% 4.68% 5.06% 3.90% 2.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(millions)........................ $ 229 $ 225 $ 274 $ 90 $ 72
Ratio of expenses to average net
assets............................ 0.61% 0.60% 0.63% 0.62% 0.56%
Ratio of net investment income to
average net assets................ 4.73% 4.59% 4.94% 3.90% 2.54%
Ratio of expenses to average net
assets*........................... (a)(b) (b) (a) 0.63% 0.72%
Ratio of net investment income to
average net assets*............... (a)(b) (b) (a) 3.89% 2.38%
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
22
<PAGE> 167
ADDITIONAL INVESTMENT RISKS
The following is a general list of the types of risks that may apply to a given
Fund. Additional information about a Fund's investments is available in the
Statement of Additional Information.
CREDIT RISK: The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
FOREIGN SECURITY RISK: The risk of losses due to political, regulatory,
economic, social or other uncontrollable forces in a foreign country.
INTEREST RATE RISK: The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK: Associated with securities or practices (such as when-issued and
forward commitment transactions) that multiply small market movements into
larger changes in value.
LIQUIDITY RISK: The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
MARKET RISK: The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably.
OPPORTUNITY RISK: The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
PREPAYMENT RISK: The risk that a debt security may be paid off and proceeds
invested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
VALUATION RISK: The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America, which has principal offices located at 555 California Street,
San Francisco, California 94104, serves as the Funds' investment adviser and is
responsible for all purchases and sales of the Funds' portfolio securities. Bank
of America is a national banking association formed in 1904 which 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 37 foreign countries. Bank of
America is the successor by merger to Security Pacific National Bank, which
previously served as investment adviser to Pacific Horizon Funds, Inc. since it
commenced operations in 1984. Bank of America and its affiliates have over $77
billion in assets under management, including $22 billion in mutual fund assets.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation announced
a definitive agreement to merge and form a new holding company to be named
BankAmerica Corporation (the "Merger"). The Merger is anticipated to close by
the end of 1998, however, it is subject to a number of approvals including
shareholder and regulatory approvals.
23
<PAGE> 168
For the fiscal year ended February 28, 1998, Bank of America received the
following fees, as a percentage of each Fund's average net assets:
Prime Fund .09%, Government Fund .05%, Treasury Fund .10% and Treasury Only Fund
.10%.
The chart on the next page shows the Funds' other service providers and includes
their addresses and principal activities.
24
<PAGE> 169
<TABLE>
<S> <C>
--------------------------------
SHAREHOLDERS -----------
--------------------------------
Distribution and Shareholder
Services
--------------------------------
SERVICE ORGANIZATIONS
----------- Provide shareholder services. ----------
--------------------------------
------------------------------------- --------------------------------
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, Inc. PFPC Inc.
Four Falls Corporate Center, 6th Floor 400 Bellevue Parkway
West Conshohocken, PA 19428 Wilmington, DE 19809
-----------------
Distributes shares through selling Handles shareholders services,
brokers, Financial planners and other including recordkeeping and
financial representatives. statements, distribution of
------------------------------------- dividends and processing of buy
and sell requests.
--------------------------------
------------------------------------- --------------------------------
INVESTMENT ADVISER CUSTODIAN
Bank of America The Bank of New York
555 California Street 90 Washington Street
San Francisco, CA 94104 New York, NY 10286
--------
Manages the Funds' business and Holds the Funds' assets,
investment activites. settles all portfolio trades and
------------------------------------- collects most of the valuation
data required for calculating
each Fund's NAV.
--------------------------------
Asset
Management
-------------------------------------
ADMINISTRATOR
Bank of America
Fund 555 California Street
Operations San Francisco, CA 94104
and --------
SUB-ADMINISTRATOR
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provide Facilities, equipment
and personnel to carry out
administrative services related
to the Funds.
-------------------------------------
-------------------------------------
ACCOUNTING AGENT
The Bank of New York
90 Washington Street ------------------------------------
New York, NY 10286
Calculates each Fund's NAV,
dividends and distributions.
-------------------------------------
--------------------------------
BOARD OF DIRECTORS
Supervise the Funds' activities.
--------------------------------
</TABLE>
25
<PAGE> 170
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
To help each Fund maintain its $1 constant share price, portfolio securities are
valued at cost, and any discount or premium created by market movements is
amortized to maturity. The net asset value (NAV) per share class for each Fund
for purposes of pricing purchase and redemption orders is determined
independently of that for other Pacific Horizon Funds.
The Transfer Agent makes purchases or redemptions at the NAV per share next
determined after receipt of the purchase or sell order. NAVs for each share
class are calculated each Business Day (each day that both the New York Stock
Exchange (the "Exchange") and the Federal Reserve Bank are open for business)
using the following schedule:
<TABLE>
<CAPTION>
FUND CALCULATION TIME
---- -----------------------------
<S> <C>
Prime and Treasury As of 5:00 p.m. Eastern time
Government As of 2:30 p.m. Eastern time
Treasury Only As of 11:30 a.m. Eastern time
</TABLE>
Fund shares will not be priced on those days the Funds are closed as follows:
Independence Day (observed) -- Friday, July 3, 1998
Labor Day -- Monday, September 7, 1998
Columbus Day -- Monday, October 12, 1998
Veterans Day -- Wednesday, November 11, 1998
Thanksgiving Day -- Thursday, November 26, 1998
Christmas Day -- Friday, December 25, 1998
New Year's Day -- Friday, January 1, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999
President's Day -- Monday, February 15, 1999
Good Friday -- Friday, April 2, 1999
Memorial Day (observed) -- Monday, May 31, 1999
PURCHASE OF FUND SHARES
Fund shares can only be purchased on a Business Day through the means described
below. Customers of Service Organizations (brokers, financial institutions or
other industry professionals who maintain accounts on behalf of shareholders and
provide additional services to their clients) should refer to their Service
Organization for the terms and conditions under which Fund shares can be
purchased, including minimum initial and subsequent purchase limits, minimum
average balance requirements and deadlines for purchases. Service Organizations
may be authorized to accept on Pacific Horizon Funds, Inc.'s behalf orders
placed by or on behalf of their customers. Under those circumstances, a Fund
will be deemed to have received an order when it is accepted by a Service
Organization on a Business Day. The order will be priced at a Fund's net asset
value per share next determined after such acceptance. Service Organizations
will be responsible for transmitting accepted orders to the Fund within the
period agreed upon by them. Customers should contact their Service Organizations
to learn whether they are authorized to accept orders for Pacific Horizon Funds,
Inc.
Each share class described below represents a different level of service
available to a select group of clients. Fees paid by the Fund for each share
class vary according to the level of service provided.
X SHARES: X Shares of the Prime and Treasury Funds are offered to customers of
selected Service Organizations who purchase such shares through cash management
services and have executed the
26
<PAGE> 171
appropriate account documentation. On any Business Day that deposits and credits
exceed withdrawals and charges in your transaction account, it is the
responsibility of the Service Organization to transmit a purchase order on your
behalf to the transfer agent and deliver required funds on a timely basis.
PACIFIC HORIZON SHARES: Pacific Horizon Shares of the Prime, Treasury,
Government and Treasury Only Funds are offered to customers of Bank of America
through their qualified trust and agency accounts, to customers of Service
Organizations and directly to individual investors.
The table below addresses the Funds' requirements for individual investors
investing directly in PACIFIC HORIZON SHARES:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN EXISTING ACCOUNT
------------------ -----------------------------
<S> <C> <C>
Minimum Investment: $500 $50 ($500 for TeleTrade
purchases.)
By Mail: Complete and sign an Account Make your check payable to the
Application and mail along with appropriate Pacific Horizon
your check payable to the Fund and mail to:
appropriate Pacific Horizon PACIFIC HORIZON FUNDS, INC.,
Fund to the address on the P.O. BOX 8984, WILMINGTON, DE
Account Application. 19899-8984
By Other than Mail: Deliver in person to: Deliver in person to:
PACIFIC HORIZON FUNDS, INC., PACIFIC HORIZON FUNDS, INC.,
C/O PFPC INC., 400 BELLEVUE C/O PFPC INC., 400 BELLEVUE
PARKWAY, SUITE 108, PARKWAY, SUITE 108,
WILMINGTON, DE 19809 WILMINGTON, DE 19809
By Wire: Not permitted. Call the Transfer Agent at
1-800-346-2087 for
instructions. Request your bank
to transmit Federal funds for
the purchase of the appropriate
Pacific Horizon Fund shares in
your name. Ensure your account
number is included.
With TeleTrade: Not permitted. Allows you to purchase shares
(minimum of $500 and maximum of
$50,000 per transaction)
without charge by telephone.
Appropriate information
concerning your bank must be on
file with the Transfer Agent
before the TeleTrade privilege
may be used. Your bank must be
a domestic financial
institution, which is an
Automated Clearing House
member. Call the Transfer Agent
at 1-800-346-2087 to effect a
TeleTrade.
</TABLE>
27
<PAGE> 172
NOTES SPECIFIC TO THE PURCHASE OF PACIFIC HORIZON SHARES:
x A Fund may, in its discretion, reject any order for shares.
x The Funds will not accept third party checks.
x Purchases will not be effected until payments made in other than Federal
funds are converted to Federal funds.
REDEMPTION OF FUND SHARES
Fund shares can only be redeemed on a Business Day through the means described
below. Customers of Service Organizations should refer to their Service
Organization for the terms and conditions under which Fund shares can be
redeemed, including the deadlines for redemptions.
X SHARES: On any Business Day that withdrawals and charges in your transaction
account exceed deposits and credits, it is the responsibility of the Service
Organization to transmit a redemption order on your behalf to the Transfer Agent
and to credit your account with the proceeds on a timely basis.
PACIFIC HORIZON SHARES: Investors whose Pacific Horizon Shares are purchased
through accounts at Bank of America or a Service Organization may redeem all or
part of such shares in accordance with the instructions pertaining to such
accounts. If such investors are also the shareholders of record of those
accounts on the books of the Transfer Agent, they may redeem shares in
accordance with the procedure described in the table below under "By Mail." It
is the responsibility of Bank of America or the Service Organization to transmit
a redemption order on your behalf to the Transfer Agent and to credit your
account with the proceeds on a timely basis.
The table below addresses the redemption procedures for individual investors
effecting redemptions of PACIFIC HORIZON SHARES directly with the Transfer
Agent:
<TABLE>
<S> <C>
By Mail: Mail a written request to the appropriate
Pacific Horizon Fund and mail to: PACIFIC
HORIZON FUNDS, INC., P.O. BOX 8968,
WILMINGTON, DE 19899-8968
By Other than Mail: Deliver in person to: PACIFIC HORIZON FUNDS,
INC. C/O PFPC INC., 400 BELLEVUE PARKWAY,
SUITE 108, WILMINGTON, DE 19809
By Wire: Ensure the Transfer Agent has appropriate
information on file concerning your bank
account. Write or send a telegraph to the
address specified in the box above or call
1-800-346-2087 to effect a redemption.
Proceeds will be wired in Federal funds to
your commercial bank. Redemption amounts must
be at least $1,000 and may be subject to
limits as to frequency and overall amount.
</TABLE>
28
<PAGE> 173
<TABLE>
<S> <C>
With TeleTrade: Entitles you to redeem shares (minimum of $500 and maximum
of $50,000 per transaction) without charge by telephone.
You may receive the proceeds by wire or check. Appropriate
information concerning your bank must be on file with the
Transfer Agent before proceeds can be wired. Your bank
must be a domestic financial institution, which is an
Automated Clearing House member. Call the Transfer Agent
at 1-800-346-2087 to effect a TeleTrade.
By Check Redemption ("Check"): To use this means of redemption, you must request
Redemption Checks drawn on the fund. Checks will only be
sent to the registered owner(s) and only to the address of
record. Checks may be made payable to the order of any
person in the amount of $500 or more. Dividends are earned
until the Check clears the Transfer Agent, at which time a
sufficient number of shares will be redeemed to cover the
Check. There is no charge for using the Checks.
</TABLE>
NOTES SPECIFIC TO THE REDEMPTION OF PACIFIC HORIZON SHARES:
x Pacific Horizon Shares of the Prime Fund acquired through exchange of B Shares
of the Time Horizon Funds are subject to a contingent deferred sales charge
("CDSC") upon redemption. For purposes of computing the CDSC, the length of
time of ownership will be measured from the date of the original purchase of B
Shares and will not include any period of ownership of the Pacific Horizon
Shares of the Prime Fund.
x Certificates, which previously had been issued, may not be redeemed unless the
certificates have been submitted to the Transfer Agent and endorsed for
Transfer. Certificates are not eligible for wire, TeleTrade or Check
redemption.
x Regular redemption requests must be signed by each shareholder, including each
joint owner on joint accounts.
x Signature Guarantees: A redemption request for 1) in excess of $50,000 per
Day, 2) any amount if the proceeds are to be sent elsewhere than to the
address of record, and 3) an amount of $50,000 or less if the address of
record has not been on file with the Transfer Agent for a period of 60 days,
must be accompanied by a signature guarantee. A signature guarantee may be
obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association who are participants in a Medallion Program
recognized by the Securities Transfer Association. The three recognized
Medallion Programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc.
Medallion Program (MSP). Signature Guarantees which are not a part of these
programs will not be accepted. Please note that a notary public stamp or seal
is not acceptable.
x Wire redemption procedures may be terminated or modified at any time.
29
<PAGE> 174
x If the shares to be redeemed have been purchased by check or TeleTrade, the
Fund will, upon clearance of the purchase check or TeleTrade payment, mail the
redemption proceeds.
The schedule below addresses the Funds' deadlines for all share classes (unless
otherwise indicated) for receipt of redemption orders by the Transfer Agent:
<TABLE>
<CAPTION>
DEADLINE FOR RECEIPT OF A
FUND REDEMPTION ORDER BY
(INCLUDES ALL SHARE CLASSES UNLESS OTHERWISE NOTED.) TRANSFER AGENT
---------------------------------------------------- -------------------------
<S> <C>
Prime or Treasury (Horizon Shares) 5:00 p.m. Eastern time
Prime or Treasury (All Other Share Classes) 2:30 p.m. Eastern time
Government 2:30 p.m. Eastern time
Treasury Only 11:30 a.m. Eastern time
</TABLE>
NOTES SPECIFIC TO THE REDEMPTION OF ALL SHARE CLASSES:
x The Funds impose no charge when shares are redeemed.
x Each Fund reserves the right to redeem shares in any account at their NAV if
the value of the account is less than $500 as a result of the redemption. A
shareholder having such an account will first be notified in writing that
their account has a value of less than $500 and will be allowed 60 days to
make additional investments to bring the value of the account to $500.
x A Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of the
transfer of its share) for such periods as are permitted under the Investment
Company Act of 1940.
x In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller. Neither Pacific
Horizon Funds, Inc. nor any of its service providers will be liable for any
loss or expense for acting upon telephone instructions that are reasonably
believed to be genuine.
x A Fund may redeem shares involuntarily under certain special circumstances as
described in the SAI.
ADDITIONAL SHAREHOLDER SERVICES
The services and privileges described under this heading are available only to
holders of the Funds' Pacific Horizon Shares and are not available to persons
who invest directly in X Shares of any of the Funds. Customers of Service
Organizations investing in Pacific Horizon Shares should refer to their Service
Organization to determine availability of these services to them and/or other
conditions relative to these services, which may be imposed on them by their
Service Organization.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAs"): Regular IRAs, Roth IRAs, IRAs under a
Simplified Employee Pension Plan ("SEP-IRAs") and IRA Rollover Accounts
("Rollover Accounts") are available to holders of Pacific Horizon Shares. The
minimum for SEP-IRAs with more than one participant is $2,500, with no minimum
on subsequent purchases. The minimum initial investment for regular IRAs, Roth
IRAs and SEP-IRAs with only one participant is normally $500, with no minimum on
subsequent purchases. Individuals who open either kind of IRA may also open a
similar non-working spousal IRA with a minimum investment of $250. For details
call 1-800-346-2087.
EXCHANGE PRIVILEGES: The Exchange Privilege enables an investor to exchange
Pacific Horizon Shares of a Fund for like shares in another Pacific Horizon Fund
or like shares of the Time Horizon Funds, provided that (i) Pacific Horizon
Shares of the Prime Fund acquired through an exchange of B Shares of a Time
Horizon Fund may only be exchanged back to B Shares of a Time Horizon Fund, and
30
<PAGE> 175
(ii) such other shares may legally be sold in the state of the investor's
residence. The shares that are exchanged must have a current value of at least
$500 and in establishing a new account through use of this feature, the shares
being exchanged must have a value at least equal to the minimum initial
investment required by the particular Fund into which the exchange is being
made. Should you desire to use the Exchange Privilege you should read the SAI
and consult your Service Organization or the Distributor for further information
including Pacific Horizon Funds and Time Horizon Funds Prospectuses. Read the
prospectuses carefully before making any exchanges. You may telephone exchange
instructions by calling the Transfer Agent at 1-800-346-2087. Pacific Horizon
Fund, Inc. reserves the right to reject any exchange request and the exchange
privilege may be modified or terminated at any time.
NOTES SPECIFIC TO THE EXCHANGE PRIVILEGE:
x B Shares of Time Horizon Funds offered with a CDSC may be exchanged for
Pacific Horizon Shares of the Prime Fund. Such exchange-acquired shares
however, will be subject to a CDSC upon redemption in accordance with the
prospectus for the particular B Shares exchanged. For purposes of computing
the CDSC, the length of time of ownership will be measured from the date of
the original purchase of B shares and will not include any period of ownership
of the Prime Fund.
x In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller.
AUTOMATIC INVESTMENT PROGRAM ("AIP"): The AIP permits you to purchase Pacific
Horizon Shares (minimum $50 per transaction) at regular intervals you select.
Shares are purchased by debiting an account for a specific amount, provided your
financial institution (an Automated Clearing House member) allows automatic
withdrawals subject to authorization. The shares will be purchased either once a
month (on either the first or fifteenth day) or twice a month (on both days). An
AIP can be established with proper completion of an Account Application or
subsequently by mail with the Transfer Agent. You may cancel the AIP or change
the amount of purchase by mailing written notification to the Transfer Agent at
PACIFIC HORIZON FUNDS, INC., P.O. BOX 8968, WILMINGTON, DE 19899-8968.
DIRECT DEPOSIT PROGRAM ("DIP"): If you receive a Federal salary, social
security, or certain veteran's military or other payments from the Federal
government, you are eligible for the DIP. With this program, you may purchase
Pacific Horizon Shares (minimum $50 and maximum $50,000 per transaction) by
having all or a portion of these payment automatically deposited into your fund
account. For instructions on how to enroll in a DIP, call the Transfer Agent at
1-800-346-2087.
AUTOMATIC WITHDRAWAL PLAN ("AWP"): Investors having a $5,000 minimum account
balance may request withdrawals in multiples of $50 on a monthly, quarterly,
semi-annual or annual basis. All AWP withdrawals will be made on either the
first or fifteenth day (at your option) of the appropriate month(s). An AWP can
be established with proper completion of an Account Application or subsequently
by mail with the Transfer Agent at Pacific Horizon Funds, Inc., P.O. Box 8968,
Wilmington, DE 19899-8968.
NOTES SPECIFIC TO THE AWP:
x Use of an AWP may be disadvantageous for holders of Pacific Horizon Shares of
the Prime Fund acquired through exchange of Time Horizon Fund B Shares due to
the potential need to pay a CDSC.
REINSTATEMENT PRIVILEGES: You may invest all or any portion of your redemption
proceeds received from the redemption of Pacific Horizon Shares of the Prime
Fund, which were acquired through exchange of B Shares of the Time Horizon
Funds, within 90 days of the redemption trade date. Such reinvestment
31
<PAGE> 176
must be made in B Shares of an investment portfolio of the Time Horizon Funds.
Upon such a reinvestment, the Distributor will credit to your account any
contingent deferred sales charge imposed on any redeemed shares. Shares
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
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 an investor may use this privilege.
DIVIDENDS AND DISTRIBUTIONS
As a shareholder of a Fund, you are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Fund. Generally, each Fund's net income is declared
daily as a dividend. Dividends are paid within five business days after the end
of each month. Although the Funds do not expect to realize net long-term capital
gains, any capital gains realized will be distributed not more than twice a year
after reduction for any available capital loss carry-forward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the NAV of such
shares on the payment date. However, holders of the Funds' Pacific Horizon
Shares may elect to receive dividends in cash. This election or revocation must
be made in writing to the Transfer Agent and becomes effective upon receipt of
your instructions by the Transfer Agent.
NOTES SPECIFIC TO DIVIDENDS AND DISTRIBUTIONS FOR THE PACIFIC HORIZON SHARES:
x If you elect to receive distributions in cash, and if your checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share
NAV determined as of the date of payment of the distribution. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share NAV determined as
of the date of cancellation.
x Reinvestment dividends receive the same tax treatment as dividends paid in
cash.
TAXES
As long as a Fund meets the requirements for being a tax-qualified regulated
investment company, which each Fund has done in the past and intends to do in
the future, it pays no Federal income tax on the earnings it distributes to
shareholders.
TAXABLE FUNDS: Dividends you receive from a Fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a Fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. It is anticipated that substantially all
of the dividends from the Funds will be taxable as ordinary income and not
capital gains.
Any time you sell or exchange shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you sell or
exchange, you may have a gain or a loss on the transaction. You are responsible
for any tax liabilities generated by your transactions.
32
<PAGE> 177
NOTES SPECIFIC TO ALL FUNDS REGARDING FEDERAL TAXES:
- - Taxable dividends paid in January may be taxable as if they had been paid the
previous December.
- - The Form 1099 that is mailed to you in January details your dividends and
their Federal tax category, although you should verify your tax liability with
your tax professional.
STATE AND LOCAL TAXES: Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the Federal income tax law. Exempt-interest dividends
generally will be exempt from state and local taxes as well. However, dividends
paid by the Funds may be taxable to investors under state or local law as
dividend income even through all or a portion of such dividends may be derived
from interest on obligations that, if realized directly, would be exempt from
such taxes.
DISTRIBUTION ARRANGEMENTS
12b-1 AND SERVICE FEE PLANS
Pacific Horizon Funds offer share classes other than those described in this
prospectus. The major distinctions among the share classes are the fee plans
related to each share class. Pacific Horizon Funds, Inc. has adopted three fee
plans. Participants in any of these plans must enter into a specific agreement
with Pacific Horizon Funds, Inc. pursuant to the related adopted plan. Because
fees associated with the distribution and service plans are paid out of the
Fund's assets on an on-going basis, over time holders of the shares discussed
below may pay more than the economic equivalent of the maximum front-end sales
charge permitted by NASD Regulation, Inc.
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Shareholder Services Horizon Service Paid to Shareholder Service Each Shareholder Service
Plan Organizations who provide Organization receives a fee
support services to their of up to 0.25% (annualized)
customers (the beneficial of the average daily net
owners of the Horizon asset value of Horizon
Service Shares). Service Shares owned by
their customers. Holders of
a Fund's Horizon Service
Shares bear this expense.
</TABLE>
33
<PAGE> 178
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Distribution and S, Y and X Paid to the Distributor for Payments by an X Share Class
Services Plan distribution expenses for distribution expenses
intended to result in the and shareholder servicing
sale of S, Y and X Shares of expenses may not exceed
the Prime and California 0.30% and 0.25%,
Tax-Exempt Money Market respectively, of the average
Funds, X and Y Shares of the daily net assets of a Fund's
Treasury Fund and S Shares X Shares. Holders of the X
of the Tax-Exempt Money Fund Shares bear these expenses.
and for shareholder
servicing expenses. Payments by the S and Y
Share Classes for
distribution expenses and
shareholder servicing
expenses may not exceed
0.75% and 0.25%,
respectively, of the average
daily net assets of a Fund's
S and Y Shares. Holders of
the S and Y Shares bear
these expenses.
Special Management Pacific Horizon Paid to Shareholder Service Each Shareholder Service
Services Plan Organizations who provide Organization receives a fee
support services to their equal to 0.32% (annualized)
customers (the beneficial of the average daily net
owners of Pacific Horizon asset value of the Prime,
Shares of the Prime, Treasury, Government,
Treasury, Government, Treasury Only and Tax-Exempt
Treasury Only, Tax-Exempt Money Fund's Pacific Horizon
Money and California Tax- Shares and 0.35%
Exempt Money Market Funds). (annualized) of the average
daily net asset value of the
California Tax-Exempt Money
Market Fund's Pacific
Horizon Shares (.03% of
which is being voluntarily
waived by the Distributor)
owned by their customers.
Holders of these Funds'
Pacific Horizon Service
Shares bear this expense.
</TABLE>
34
<PAGE> 179
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for a Fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a fuller technical and legal
description of a Fund's policies, investment restrictions, risks, and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:
PACIFIC HORIZON FUNDS, INC.
P.O. Box 8968
Wilmington, Delaware 19899-8968
1-800-346-2087
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov. The Funds' investment company registration number is
811-04293.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-346-2087
Monday thru Friday
8:00 am to 8:00 pm (EST)
<PAGE> 180
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus gives vital information about these PACIFIC HORIZON FUNDS, INC.
money market mutual funds, including information on TAX-EXEMPT MONEY FUND
investment policies, risks and fees. For your own -- Pacific Horizon Shares
benefit and protection, please read it before you CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
invest, and keep it on hand for future reference. -- X Shares
Please note that these Funds: -- Pacific Horizon Shares
- - are not bank deposits
- - are not obligations of, or guaranteed or endorsed
by Bank of America NT&SA or any of its affiliates
- - are not federally insured
- - are not obligations of, or guaranteed or endorsed
or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other governmental
agency
- - are not guaranteed to achieve their goal(s)
- - may not be able to maintain a stable $1 share
price
Like all mutual fund shares, 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.
</TABLE>
Investment Portfolios Offered by
PHF-0002 Pacific Horizon Funds, Inc.
<PAGE> 181
OVERVIEW
GOAL OF THE MONEY MARKET FUNDS
The money market funds invest primarily in money market instruments and strive
to maintain a stable $1 share price. Each Fund employs its own strategy and has
its own risk/reward profile. Be sure to read all risk disclosure carefully
before investing.
THE INVESTMENT ADVISER
Pacific Horizon money market funds are managed by Bank of America NT&SA ("Bank
of America"), a subsidiary of BankAmerica Corporation, a registered bank holding
company. For more information on the Investment Adviser see the section entitled
"Management of the Funds."
<PAGE> 182
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A FUND-BY-FUND LOOK AT GOALS, FUND DESCRIPTION
STRATEGIES, RISKS, EXPENSES OVERVIEW
AND FINANCIAL HISTORY. 2-6 TAX-EXEMPT MONEY FUND
7-13 CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
14 ADDITIONAL INVESTMENT RISKS
DETAILS THAT APPLY TO ALL MANAGEMENT OF THE FUNDS
MONEY MARKET FUNDS IN THIS 14 INVESTMENT ADVISER
PROSPECTUS. 16 SERVICE PROVIDER CHART
POLICIES AND INSTRUCTIONS FOR SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND 17 PRICING OF FUND SHARES
CLOSING AN ACCOUNT IN ANY OF 17 PURCHASE OF FUND SHARES
THE MONEY MARKET FUNDS. 20 REDEMPTION OF FUND SHARES
22 ADDITIONAL SHAREHOLDER SERVICES
23 DIVIDENDS AND DISTRIBUTIONS
23 TAXES
DETAILS ON DISTRIBUTION AND DISTRIBUTION ARRANGEMENTS
OTHER SHAREHOLDER SERVICE 24 12b-1 AND SERVICE FEE PLANS
PLANS.
SEE BACK COVER FOR MORE INFORMATION
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Trust and Savings Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 183
TAX-EXEMPT MONEY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbol:
Pacific Horizon Shares: PHPXX
INVESTMENT OBJECTIVE
The Fund seeks current income exempt from federal income taxes, a stable share
price, and daily liquidity. The Fund is a Money Market Fund and intends to
maintain a stable $1 share price. The Fund's investment objective may be changed
without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests in a diversified portfolio of federally tax-exempt short-term
debt obligations issued by, or on behalf of, states, territories and possessions
of the United States, including those issued by:
- - the U.S. government, its agencies and instrumentalities
- - municipalities, local governments, other political subdivisions and their
agencies.
Under normal market conditions, all of the Fund's investments will be in the
highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality). The Fund may also
invest in investments in the second-highest short-term rating category (or
securities issued by issuers with such ratings or unrated equivalents) for
temporary defensive purposes or if the investment adviser does not feel that
suitable securities in the highest short-term rating category are available. The
Fund may invest in taxable obligations or hold uninvested cash reserves for
temporary defensive purposes.
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities, and no more than 20% of the Fund's total assets
will be invested in taxable obligations.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
2
<PAGE> 184
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to successfully
address year 2000 issues could result in interruptions in the Fund's business
and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America, any other bank,
or any of their affiliates and is not insured or guaranteed by any financial
institution, the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 5 calendar years since inception (July 9, 1993).
Past performance is not necessarily an indicator of how the Fund will perform in
the future.
<TABLE>
<S> <C>
1993* 0.95%
1994 2.36%
1995 3.35%
1996 2.95%
1997 3.14%
</TABLE>
*Represents period from July 9, 1993 to December 31, 1993.
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 0.78%. Since inception (July 9, 1993), the highest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.87%
(quarter ended September 30, 1995). Since inception (July 9, 1993), the lowest
calendar quarter total return for Pacific Horizon Shares of the Fund was 0.45%
(quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past
calendar year, and since inception, compare with the average annual returns for
the same periods of a broad-based market index
3
<PAGE> 185
(the Lipper Tax-Exempt Money Market Funds). Past performance is not necessarily
an indicator of how the Fund or the broad-based market index will perform in the
future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
TAX-EXEMPT MONEY FUND -------- -----------------
<S> <C> <C>
Lipper Tax-Exempt Money Market Funds........................ % Not applicable
Pacific Horizon Shares*..................................... 3.14% 2.84%
</TABLE>
- ---------------
* Tax-Exempt Money Fund-Pacific Horizon Shares commenced operations on July 9,
1993.
CURRENT YIELD
You may obtain the Fund's current 7-day yield by calling 1-800-346-2087.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
PACIFIC HORIZON
SHARES(1)
----------------------
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None
Maximum sales charge imposed on reinvested dividends........ None
Maximum deferred sales charge............................... None
Redemption fees(2).......................................... None
Exchange fees............................................... None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20%
Special management services fees............................ .32%
All other expenses.......................................... .08%
----
Total annual Fund operating expenses........................ .60%
====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
4
<PAGE> 186
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your cost would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TAX-EXEMPT MONEY FUND
Pacific Horizon Shares..................................... $61 $192 $335 $750
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
5
<PAGE> 187
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
--------------------------------------------------------------- ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES
Net asset value per share, beginning of
year..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income.................... 0.0310 0.0290 0.0327 0.0253 0.0124
Less dividends to shareholders from net
investment income........................ (0.0310) (0.0290) (0.0327) (0.0253) (0.0124)
-------- -------- -------- -------- --------
Net change in net asset value per share.... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value per share, end of year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return..................... 3.14% 2.94% 3.32% 2.56% 1.25%(d)
Ratios/Supplemental Data:
Net assets at end of year (millions)..... $ 151 $ 86 $ 50 $ 37 $ 50
Ratio of expenses to average net
assets................................ 0.60% 0.60% 0.63% 0.60% 0.60%(c)
Ratio of net investment income to average
net assets............................ 3.09% 2.91% 3.26% 2.47% 1.95%(c)
Ratio of expenses to average net
assets*............................... (b)(e) (b) (b) (b) 0.61%(c)
Ratio of net investment income to average
net assets*........................... (b)(e) (b) (b) (b) 1.94%(c)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from July 9, 1993 (inception date) to February 28,
1994.
(b) There were no fee waivers or expense reimbursements during
the period.
(c) Annualized.
(d) Not annualized.
(e) Fees paid by third parties had no effect on the ratios.
</TABLE>
6
<PAGE> 188
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Registrant Name: Pacific Horizon Funds, Inc.
Ticker Symbols:
Pacific Horizon Shares: CFTXX
X Shares: Not applicable
INVESTMENT OBJECTIVE
The Fund seeks current income free from federal income tax and California state
personal income tax, a stable share price, and daily liquidity. The Fund is a
Money Market Fund and intends to maintain a stable $1 share price. The Fund's
investment objective may be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
The Fund invests primarily in municipal securities issued by or on behalf of the
State of California and other governmental issuers.
All of the Fund's investments will be in either the highest or the
second-highest short-term rating category or will be issued by issuers with such
ratings (or, if unrated, will be of comparable quality).
The Fund maintains an average maturity of 90 days or less, and does not invest
in securities with maturities of more than 13 months.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in municipal securities which are exempt from California state personal
income tax, and no more than 5% of the Fund's net assets will be invested in any
one category of taxable securities. The Fund may invest in taxable obligations
or hold uninvested cash reserves for temporary defensive purposes.
The Fund's investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's staff of fixed-income research and
credit analysts and portfolio managers.
RISK FACTORS
- - Because the Fund is a non-diversified investment portfolio, the change in
value of any one security may affect the overall value of the Fund more than
it would if the Fund was a diversified portfolio.
- - The Fund's concentration in California issuers brings greater risk than that
of a less geographically concentrated investment portfolio. Since the Fund
invests heavily in California, events in California are likely to affect the
Fund's investments.
- - The Fund intends to minimize income earned that is subject to the federal
alternative minimum tax. If a portion of income earned by the Fund is subject
to this tax, you will be notified of the percentage.
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a risk that the Fund's share price could fall below $1, which would
reduce the value of your account.
- - All mutual funds are subject to management risk (the risk that a strategy used
by a fund's investment adviser may fail to produce the intended result) and
all securities are subject to market risk (the risk that the market value of a
security may move up and down, sometimes rapidly and unpredictably).
7
<PAGE> 189
- - An issue has emerged in the investment services industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these systems will be able
to accurately process. The Fund has been informed by Bank of America that it
has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Fund. Nevertheless,
the inability of Bank of America and the other service providers to
successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse impact on the Fund's operations.
- - An investment in the Fund is not a deposit of Bank of America or any other
bank, or any of their affiliates and is not insured or guaranteed by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the Fund.
PRIOR PERFORMANCE
ANNUAL TOTAL RETURNS
The chart below shows the changes in annual total returns for Pacific Horizon
Shares of the Fund for the last 9 calendar years since inception (December 6,
1989). Past performance is not necessarily an indicator of how the Fund will
perform in the future.
<TABLE>
<S> <C>
1989* 0.38%
1990 5.20%
1991 3.97%
1992 2.39%
1993 1.87%
1994 2.30%
1995 3.32%
1996 2.88%
1997 3.07%
</TABLE>
*Represents the period from December 9, 1989 to December 31, 1989.
The total return for Pacific Horizon Shares of the Fund for the fiscal quarter
ended May 31, 1998 was 0.76%. Since inception (December 6, 1989), the highest
calendar quarter total return for Pacific Horizon Shares of the Fund was 1.34%
(quarter ended June 30, 1990). Since inception (December 6,
8
<PAGE> 190
1989), the lowest calendar quarter total return for Pacific Horizon Shares of
the Fund was 0.42% (quarter ended March 31, 1993).
AVERAGE ANNUAL TOTAL RETURN -- COMPARISON
The table below shows how the Fund's average annual returns for the past 1 and 5
calendar years, and since inception, compare with the average annual returns for
the same periods of a broad-based market index (the Lipper California Tax-Exempt
Money Market Funds). Past performance is not necessarily an indicator of how the
Fund or the broad-based market index will perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------
CALIFORNIA TAX-EXEMPT 1 YEAR 5 YEARS SINCE INCEPTION
MONEY MARKET FUND ------ ------- ---------------
<S> <C> <C> <C>
Lipper California Tax-Exempt Money Market Funds............. 3.00% 2.73% Not applicable
X Shares*................................................... 2.84% 2.63% 3.11%
Pacific Horizon Shares**.................................... 3.07% 2.69% 3.14%
</TABLE>
- ---------------
* California Tax-Exempt Money Market Fund-X Shares commenced operations on
October 2, 1996. The performance results shown prior to that date reflect the
past performance of the California Tax-Exempt Money Market Fund -- Pacific
Horizon Shares. California Tax-Exempt Money Market Fund -- X Shareholders are
subject to a Shareholder Service Fee of 0.25% and a 12b-1 Fee of 0.30%.
California Tax-Exempt Money Market Fund-Pacific Horizon Shares are subject to
a Special Management Services Fee (after waivers) of 0.32%. Performance data
prior to October 2, 1996 for the California Tax-Exempt Money Market Fund -- X
Shares has not been adjusted to reflect the higher expenses of the X Shares.
If the performance data prior to October 2, 1996 had been adjusted to reflect
X Shares expenses, performance would have been lower.
** California Tax-Exempt Money Market Fund-Pacific Horizon Shares commenced
operations on December 6, 1989.
CURRENT YIELD
You may obtain the fund's current 7-day yield by calling 1-800-346-2087.
9
<PAGE> 191
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
PACIFIC
X HORIZON
SHARES(1) SHARES(1)
--------- ---------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum sales charge imposed on reinvested dividends........ None None
Maximum deferred sales charge............................... None None
Redemption fees(2).......................................... None None
Exchange fees............................................... None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees(3).......................................... .20% .20%
Rule 12b-1 fees(4).......................................... .30% 0%
Shareholder services fees................................... .25% 0%
Special management service fees............................. 0% .35%(5)
All other expenses.......................................... .05% .05%
---- ----
Total annual Fund operating expenses........................ .80% .60%
==== ====
</TABLE>
- ---------------
(1) A shareholder will pay separate charges for shares purchased through a
Service Organization. These charges are not included in this table.
(2) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(3) The management fee contains an investment advisory fee and an administration
fee, each payable at a maximum annual rate of .10% of the Fund's average net
assets.
(4) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(5) Special management service fees are being waived. This waiver may be
terminated at any time. AS OF FEBRUARY 28, 1998, THE EFFECTIVE SPECIAL
MANAGEMENT SERVICE FEE AND TOTAL OPERATING EXPENSES WERE .32% AND .57%,
RESPECTIVELY, OF THE FUND'S AVERAGE NET ASSETS, AFTER FEE WAIVERS AND
EXPENSE REIMBURSEMENTS.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 over the various time frames indicated. The
example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
10
<PAGE> 192
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
X Shares................................................... $82 $255 $444 $990
Pacific Horizon Shares..................................... $61 $192 $335 $750
</TABLE>
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
11
<PAGE> 193
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Price Waterhouse LLP, whose
report, along with the Fund's financial statements, is included in the annual
report, which is available without charge upon request.
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(a)
------------ ------------
<S> <C> <C>
X SHARES
Net asset value per share, beginning of period.............. $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income..................................... 0.0279 0.0107
Less dividends to shareholders from net investment income... (0.0279) (0.0107)
-------- --------
Net change in net asset value per share..................... -- --
-------- --------
Net asset value per share, end of period.................... $ 1.00 $ 1.00
======== ========
Total return...................................... 2.83% 1.09%(d)
Ratios/Supplemental Data:
Net assets at end of period (millions).................... $ 31 $ 29
Ratio of expenses to average net assets................... 0.80% 0.80%(c)
Ratio of net investment income to average net assets...... 2.80% 2.66%(c)
Ratio of expenses to average net assets*.................. (b) (b)
Ratio of net investment income to average net assets*..... (b) (b)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
(a) Period from October 2, 1996 (inception date) to February 28,
1997.
(b) Fees paid by third parties had no effect on the ratios.
(c) Annualized.
(d) Not annualized.
</TABLE>
12
<PAGE> 194
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES
Net asset value per share, beginning of
year...................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income..................... 0.0302 0.0284 0.0324 0.0249 0.0186
Net realized gains/(losses) on investment
transactions........................... -- -- (0.0001) (0.0001) 0.0002
-------- -------- -------- -------- --------
Total income from investment operations..... 0.0302 0.0284 0.0323 0.0248 0.0188
Less dividends to shareholders from net
investment income......................... (0.0302) (0.0284) (0.0324) (0.0249) (0.0186)
-------- -------- -------- -------- --------
Net change in net asset value per share..... -- -- (0.0001) (0.0001) 0.0002
-------- -------- -------- -------- --------
Net asset value per share, end of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return...................... 3.06% 2.88% 3.29% 2.52% 1.88%
Ratios/Supplemental Data:
Net assets at end of year (millions)...... $ 598 $ 493 $ 528 $ 187 $ 204
Ratio of expenses to average net assets... 0.57% 0.57% 0.62% 0.62% 0.66%
Ratio of net investment income to average
net assets............................. 3.01% 2.83% 3.35% 2.48% 1.86%
Ratio of expenses to average net
assets*................................ 0.60%(b) 0.60%** 0.63%** (a) 0.68%
Ratio of net investment income to average
net assets*............................ 2.98%(b) 2.80% (b) (a) 1.84%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been
as indicated.
** During the years ended February 28, 1997 and February 29,
1996, the Portfolio received credits from its custodian for
interest earned on uninvested cash balances which were used
to offset custodian fees and expenses. If such credits had
not occurred, the expense ratio would have been as
indicated. The ratio of net investment income was not
affected.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) Fees paid by third parties had no effect on the ratios.
</TABLE>
13
<PAGE> 195
ADDITIONAL INVESTMENT RISKS
The following is a general list of the types of risks that may apply to a given
Fund. Additional information about a Fund's investments is available in the
Statement of Additional Information.
CREDIT RISK: The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
FOREIGN SECURITY RISK: The risk of losses due to political, regulatory,
economic, social or other uncontrollable forces in a foreign country.
INTEREST RATE RISK: The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK: Associated with securities or practices (such as when-issued and
forward commitment transactions) that multiply small market movements into
larger changes in value.
LIQUIDITY RISK: The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
MARKET RISK: The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably.
OPPORTUNITY RISK: The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
PREPAYMENT RISK: The risk that a debt security may be paid off and proceeds
invested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
VALUATION RISK: The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America, which has principal offices located at 555 California Street,
San Francisco, California 94104, serves as the Funds' investment adviser and is
responsible for all purchases and sales of the Funds' portfolio securities. Bank
of America is a national banking association formed in 1904 which 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 37 foreign countries. Bank of
America is the successor by merger to Security Pacific National Bank, which
previously served as investment adviser to Pacific Horizon Funds, Inc. since it
commenced operations in 1984. Bank of America and its affiliates have over $77
billion in assets under management, including $22 billion in mutual fund assets.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation announced
a definitive agreement to merge and form a new holding company to be named
BankAmercia Corporation (the
14
<PAGE> 196
"Merger"). The Merger is anticipated to close by the end of 1998, however, it is
subject to a number of approvals including shareholder and regulatory approvals.
For the fiscal year ended February 28, 1998, Bank of America received the
following fees, as a percentage of each Fund's average net assets:
California Tax-Exempt Money Market Fund .10%, Tax-Exempt Money Fund .10%.
The chart on the next page shows the Funds' other service providers and includes
their addresses and principal activities.
15
<PAGE> 197
<TABLE>
<S> <C>
--------------------------------
SHAREHOLDERS -----------
--------------------------------
Distribution and Shareholder
Services
--------------------------------
SERVICE ORGANIZATIONS
----------- Provide shareholder services. ----------
--------------------------------
------------------------------------- --------------------------------
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, Inc. PFPC Inc.
Four Falls Corporate Center, 6th Floor 400 Bellevue Parkway
West Conshohocken, PA 19428 Wilmington, DE 19809
-----------------
Distributes shares through selling Handles shareholders services,
brokers, Financial planners and other including recordkeeping and
financial representatives. statements, distribution of
------------------------------------- dividends and processing of buy
and sell requests.
--------------------------------
------------------------------------- --------------------------------
INVESTMENT ADVISER CUSTODIAN
Bank of America The Bank of New York
555 California Street 90 Washington Street
San Francisco, CA 94104 New York, NY 10286
--------
Manages the Funds' business and Holds the Funds' assets,
investment activites. settles all portfolio trades and
------------------------------------- collects most of the valuation
data required for calculating
each Fund's NAV.
--------------------------------
Asset
Management
-------------------------------------
ADMINISTRATOR
Bank of America
Fund 555 California Street
Operations San Francisco, CA 94104
and --------
SUB-ADMINISTRATOR
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provide Facilities, equipment
and personnel to carry out
administrative services related
to the Funds.
-------------------------------------
-------------------------------------
ACCOUNTING AGENT
The Bank of New York
90 Washington Street ------------------------------------
New York, NY 10286
Calculates each Fund's NAV,
dividends and distributions.
-------------------------------------
--------------------------------
BOARD OF DIRECTORS
Supervise the Funds' activities.
--------------------------------
</TABLE>
16
<PAGE> 198
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
To help each Fund maintain its $1 constant share price, portfolio securities are
valued at cost, and any discount or premium created by market movements is
amortized to maturity. The net asset value (NAV) per share class for each Fund
for purposes of pricing purchase and redemption orders is determined
independently of that for other Pacific Horizon Funds.
The Transfer Agent makes purchases or redemptions at the NAV per share next
determined after receipt of the purchase or sell order. NAVs for each share
class are calculated each Business Day (each day that both the New York Stock
Exchange (the "Exchange") and the Federal Reserve Bank are open for business)
using the following schedule:
<TABLE>
<CAPTION>
FUND CALCULATION TIME
---- -----------------------------
<S> <C>
California Tax-Exempt Money Market As of 10:30 a.m. Eastern time
Tax-Exempt Money As of 12:00 noon Eastern time
</TABLE>
Fund shares will not be priced on those days the Funds are closed as follows:
Independence Day (observed) -- Friday, July 3, 1998
Labor Day -- Monday, September 7, 1998
Columbus Day -- Monday, October 12, 1998
Veterans Day -- Wednesday, November 11, 1998
Thanksgiving Day -- Thursday, November 26, 1998
Christmas Day -- Friday, December 25, 1998
New Year's Day -- Friday, January 1, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999
President's Day -- Monday, February 15, 1999
Good Friday -- Friday, April 2, 1999
Memorial Day (observed) -- Monday, May 31, 1999
PURCHASE OF FUND SHARES
Fund shares can only be purchased on a Business Day through the means described
below. Customers of Service Organizations (brokers, financial institutions or
other industry professionals who maintain accounts on behalf of shareholders and
provide additional services to their clients) should refer to their Service
Organization for the terms and conditions under which Fund shares can be
purchased, including minimum initial and subsequent purchase limits, minimum
average balance requirements and deadlines for purchases. Service Organizations
may be authorized to accept on Pacific Horizon Funds, Inc.'s behalf orders
placed by or on behalf of their customers. Under those circumstances, a Fund
will be deemed to have received an order when it is accepted by a Service
Organization on a Business Day. The order will be priced at a Fund's net asset
value per share next determined after such acceptance. Service Organizations
will be responsible for transmitting accepted orders to the Fund within the
period agreed upon by them. Customers should contact their Service Organizations
to learn whether they are authorized to accept orders for Pacific Horizon Funds,
Inc.
Each share class described below represents a different level of service
available to a select group of clients. Fees paid by the Fund for each share
class vary according to the level of service provided.
17
<PAGE> 199
X SHARES: X Shares of the California Tax-Exempt Money Market Fund are offered to
customers of selected Service Organizations who purchase such shares through
cash management services and have executed the appropriate account
documentation. On any Business Day that deposits and credits exceed withdrawals
and charges in your transaction account, it is the responsibility of the Service
Organization to transmit a purchase order on your behalf to the transfer agent
and deliver required funds on a timely basis.
PACIFIC HORIZON SHARES: Pacific Horizon Shares of the Tax-Exempt Money and
California Tax-Exempt Money Market Funds are offered to customers of Bank of
America through their qualified trust and agency accounts, to customers of
Service Organizations and directly to individual investors.
18
<PAGE> 200
The table below addresses the Funds' requirements for individual investors
investing directly in PACIFIC HORIZON SHARES:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN EXISTING ACCOUNT
------------------ -----------------------------
<S> <C> <C>
Minimum Investment: $500 $50 ($500 for TeleTrade
purchases.)
By Mail: Complete and sign an Account Make your check payable to the
Application and mail along with appropriate Pacific Horizon
your check payable to the Fund and mail to:
appropriate Pacific Horizon PACIFIC HORIZON FUNDS, INC.
Fund to the address on the P.O. BOX 8984
Account Application. WILMINGTON, DE 19899-8984
By Other than Mail: Deliver in person to: Deliver in person to:
PACIFIC HORIZON FUNDS, INC. PACIFIC HORIZON FUNDS, INC.
C/O PFPC INC. C/O PFPC INC.
400 BELLEVUE PARKWAY, SUITE 108 400 BELLEVUE PARKWAY, SUITE 108
WILMINGTON, DE 19809 WILMINGTON, DE 19809
By Wire: Not permitted Call the Transfer Agent at
1-800-346-2087 for
instructions. Request your bank
to transmit Federal funds for
the purchase of the appropriate
Pacific Horizon Fund shares in
your name. Ensure your account
number is included.
With TeleTrade: Not permitted. Allows you to purchase shares
(minimum of $500 and maximum of
$50,000 per transaction)
without charge by telephone.
Appropriate information
concerning your bank must be on
file with the Transfer Agent
before the TeleTrade privilege
may be used. Your bank must be
a domestic financial
institution, which is an
Automated Clearing House
member. Call the Transfer Agent
at 1-800-346-2087 to effect a
TeleTrade.
</TABLE>
NOTES SPECIFIC TO THE PURCHASE OF PACIFIC HORIZON SHARES:
- - A Fund may, in its discretion, reject any order for shares.
- - The Funds will not accept third party checks.
- - Purchases will not be effected until payments made in other than Federal funds
are converted to Federal funds.
19
<PAGE> 201
REDEMPTION OF FUND SHARES
Fund shares can only be redeemed on a Business Day through the means described
below. Customers of Service Organizations should refer to their Service
Organization for the terms and conditions under which Fund shares can be
redeemed, including the deadlines for redemptions.
X SHARES: On any Business Day that withdrawals and charges in your transaction
account exceed deposits and credits, it is the responsibility of the Service
Organization to transmit a redemption order on your behalf to the Transfer Agent
and to credit your account with the proceeds on a timely basis.
PACIFIC HORIZON SHARES: Investors whose Pacific Horizon Shares are purchased
through accounts at Bank of America or a Service Organization may redeem all or
part of such shares in accordance with the instructions pertaining to such
accounts. If such investors are also the shareholders of record of those
accounts on the books of the Transfer Agent, they may redeem shares in
accordance with the procedure described in the table below under "By Mail." It
is the responsibility of Bank of America or the Service Organization to transmit
a redemption order on your behalf to the Transfer Agent and to credit your
account with the proceeds on a timely basis.
The table below addresses the redemption procedures for individual investors
effecting redemptions of PACIFIC HORIZON SHARES directly with the Transfer
Agent:
<TABLE>
<S> <C>
By Mail: Mail a written request to the appropriate Pacific Horizon
Fund and mail to: PACIFIC HORIZON FUNDS, INC.
P.O. BOX 8968
WILMINGTON, DE 19899-8968
By Other than Mail: Deliver in person to:
PACIFIC HORIZON FUNDS, INC.
C/O PFPC INC.
400 BELLEVUE PARKWAY, SUITE 108
WILMINGTON, DE 19809
By Wire: Ensure the Transfer Agent has appropriate information on
file concerning your bank account. Write or send a telegraph
to the address specified in the box above or call
1-800-346-2087 to effect a redemption. Proceeds will be
wired in Federal funds to your commercial bank. Redemption
amounts must be at least $1,000 and may be subject to limits
as to frequency and overall amount.
With TeleTrade: Entitles you to redeem shares (minimum of $500 and maximum
of $50,000 per transaction) without charge by telephone. You
may receive the proceeds by wire or check. Appropriate
information concerning your bank must be on file with the
Transfer Agent before proceeds can be wired. Your bank must
be a domestic financial institution, which is an Automated
Clearing House member. Call the Transfer Agent at
1-800-346-2087 to effect a TeleTrade.
By Check Redemption To use this means of redemption, you must request Redemption
("Check"): Checks drawn on the fund. Checks will only be sent to the
registered owner(s) and only to the address of record.
Checks may be made payable to the order of any person in the
amount of $500 or more. Dividends are earned until the Check
clears the Transfer Agent, at which time a sufficient number
of shares will be redeemed to cover the Check. There is no
charge for using the Checks.
</TABLE>
20
<PAGE> 202
NOTES SPECIFIC TO THE REDEMPTION OF PACIFIC HORIZON SHARES:
- - Certificates, which previously had been issued, may not be redeemed unless the
certificates have been submitted to the Transfer Agent and endorsed for
transfer. Certificates are not eligible for wire, TeleTrade or Check
redemption.
- - Regular redemption requests must be signed by each shareholder, including each
joint owner on joint accounts.
- - Signature Guarantees: A redemption request for 1) in excess of $50,000 per
day, 2) any amount if the proceeds are to be sent elsewhere than to the
address of record, and 3) an amount of $50,000 or less if the address of
record has not been on file with the Transfer Agent for a period of 60 days,
must be accompanied by a signature guarantee. A signature guarantee may be
obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association who are participants in a Medallion Program
recognized by the Securities Transfer Association. The three recognized
Medallion Programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc.
Medallion Program (MSP). Signature Guarantees which are not a part of these
programs will not be accepted. Please note that a notary public stamp or seal
is not acceptable.
- - Wire redemption procedures may be terminated or modified at any time.
- - If the shares to be redeemed have been purchased by check or TeleTrade, the
Fund will, upon clearance of the purchase check or TeleTrade payment, mail the
redemption proceeds.
The schedule below addresses the Funds' deadlines for ALL SHARE CLASSES (unless
otherwise indicated) for receipt of redemption orders by the Transfer Agent:
<TABLE>
<CAPTION>
DEADLINE FOR RECEIPT OF A
FUND REDEMPTION ORDER BY
(INCLUDES ALL SHARE CLASSES UNLESS OTHERWISE NOTED.) TRANSFER AGENT
- ---------------------------------------------------- -------------------------
<S> <C>
Tax-Exempt Money 12:00 noon Eastern time
California Tax-Exempt Money Market 10:30 a.m. Eastern time
</TABLE>
NOTES SPECIFIC TO THE REDEMPTION OF ALL SHARE CLASSES:
- - The Funds impose no charge when shares are redeemed.
- - Each Fund reserves the right to redeem shares in any account at their NAV if
the value of the account is less than $500 as a result of the redemption. A
shareholder having such an account will first be notified in writing that
their account has a value of less than $500 and will be allowed 60 days to
make additional investments to bring the value of the account to $500.
- - A Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of the
transfer of its share) for such periods as are permitted under the Investment
Company Act of 1940.
- - In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller. Neither Pacific
Horizon Funds, Inc. nor any of its service providers will be liable for any
loss or expense for acting upon telephone instructions that are reasonably
believed to be genuine.
- - A Fund may redeem shares involuntarily under certain special circumstances as
described in the SAI.
21
<PAGE> 203
ADDITIONAL SHAREHOLDER SERVICES
The services and privileges described under this heading are available only to
holders of the Funds' Pacific Horizon Shares and are not available to persons
who invest directly in X Shares of any of the Funds. Customers of Service
Organizations investing in Pacific Horizon Shares should refer to their Service
Organization to determine availability of these services to them and/or other
conditions relative to these services, which may be imposed on them by their
Service Organization.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"): Regular IRAs, Roth IRAs, IRAs under a
Simplified Employee Pension Plan ("SEP-IRAs") and IRA Rollover Accounts
("Rollover Accounts") are available to holders of Pacific Horizon Shares. The
minimum for SEP-IRAs with more than one participant is $2,500, with no minimum
on subsequent purchases. The minimum initial investment for regular IRAs, Roth
IRAs and SEP-IRAs with only one participant is normally $500, with no minimum on
subsequent purchases. Individuals who open either kind of IRA may also open a
similar non-working spousal IRA with a minimum investment of $250. For details
call 1-800-346-2087.
EXCHANGE PRIVILEGES: The Exchange Privilege enables an investor to exchange
Pacific Horizon Shares of a Fund for like shares in another Pacific Horizon Fund
or like shares of the Time Horizon Funds, provided that such other shares may
legally be sold in the state of the investor's residence. The shares that are
exchanged must have a current value of at least $500 and in establishing a new
account through use of this feature, the shares being exchanged must have a
value at least equal to the minimum initial investment required by the
particular Fund into which the exchange is being made. Should you desire to use
the Exchange Privilege you should read the SAI and consult your Service
Organization or the Distributor for further information including Pacific
Horizon Funds and Time Horizon Funds Prospectuses. Read the prospectuses
carefully before making any exchanges. You may telephone exchange instructions
by calling the Transfer Agent at 1-800-346-2087. Pacific Horizon Fund, Inc.
reserves the right to reject any exchange request and the exchange privilege may
be modified or terminated at any time.
NOTES SPECIFIC TO THE EXCHANGE PRIVILEGE:
- - In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller.
AUTOMATIC INVESTMENT PROGRAM ("AIP"): The AIP permits you to purchase Pacific
Horizon Shares (minimum $50 per transaction) at regular intervals you select.
Shares are purchased by debiting an account for a specific amount, provided your
financial institution (an Automated Clearing House member) allows automatic
withdrawals subject to authorization. The shares will be purchased either once a
month (on either the first or fifteenth day) or twice a month (on both days). An
AIP can be established with proper completion of an Account Application or
subsequently by mail with the Transfer Agent. You may cancel the AIP or change
the amount of purchase by mailing written notification to the Transfer Agent at
PACIFIC HORIZON FUNDS, INC., P.O. BOX 8968, WILMINGTON, DE 19899-8968.
DIRECT DEPOSIT PROGRAM ("DIP"): If you receive a Federal salary, social
security, or certain veteran's military or other payments from the Federal
government, you are eligible for the DIP. With this program, you may purchase
Pacific Horizon Shares (minimum $50 and maximum $50,000 per transaction) by
having all or a portion of these payment automatically deposited into your fund
account. For instructions on how to enroll in a DIP, call the Transfer Agent at
1-800-346-2087.
22
<PAGE> 204
AUTOMATIC WITHDRAWAL PLAN ("AWP"): Investors having a $5,000 minimum account
balance may request withdrawals in multiples of $50 on a monthly, quarterly,
semi-annual or annual basis. All AWP withdrawals will be made on either the
first or fifteenth day (at your option) of the appropriate month(s). An AWP can
be established with proper completion of an Account Application or subsequently
by mail with the Transfer Agent at PACIFIC HORIZON FUNDS, INC., P.O. BOX 8968,
WILMINGTON, DE 19899-8968.
DIVIDENDS AND DISTRIBUTIONS
As a shareholder of a Fund, you are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Fund. Generally, each Fund's net income is declared
daily as a dividend. Dividends are paid within five business days after the end
of each month. Although the Funds do not expect to realize net long-term capital
gains, any capital gains realized will be distributed not more than twice a year
after reduction for any available capital loss carry-forward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the NAV of such
shares on the payment date. However, holders of the Funds' Pacific Horizon
Shares may elect to receive dividends in cash. This election or revocation must
be made in writing to the Transfer Agent and becomes effective upon receipt of
your instructions by the Transfer Agent.
NOTES SPECIFIC TO DIVIDENDS AND DISTRIBUTIONS FOR THE PACIFIC HORIZON SHARES:
- - If you elect to receive distributions in cash, and if your checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share
NAV determined as of the date of payment of the distribution. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share NAV determined as
of the date of cancellation.
- - Reinvestment dividends receive the same tax treatment as dividends paid in
cash.
TAXES
As long as a Fund meets the requirements for being a tax-qualified regulated
investment company, which each Fund has done in the past and intends to do in
the future, it pays no Federal income tax on the earnings it distributes to
shareholders.
TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: Both Funds
intend to meet certain Federal tax requirements so that distribution of the
tax-exempt interest it earns may be treated as "exempt-interest dividends."
However, any portion of exempt-interest dividends attributable to interest on
private activity bonds may increase certain shareholders' alternative minimum
tax. Dividends from a Fund's short- and long-term capital gains are taxable.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND: This Fund intends to comply with
certain state tax requirements so that its income and dividends will be exempt
from state and local personal income taxes. Dividends derived from interest on
securities other than California Municipal Securities will be subject to
California personal income tax.
23
<PAGE> 205
NOTES SPECIFIC TO ALL FUNDS REGARDING FEDERAL TAXES:
- - Taxable dividends paid in January may be taxable as if they had been paid the
previous December.
- - The Form 1099 that is mailed to you in January details your dividends and
their Federal tax category, although you should verify your tax liability with
your tax professional.
STATE AND LOCAL TAXES: Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the Federal income tax law, and with respect to the
California Tax-Exempt Money Market Fund, the California state personal income
tax. Exempt-interest dividends generally will be exempt from state and local
taxes as well. However, except as noted with respect to California state
personal income tax, dividends paid by the Funds may be taxable to investors
under state or local law as dividend income even through all or a portion of
such dividends may be derived from interest on obligations that, if realized
directly, would be exempt from such taxes.
DISTRIBUTION ARRANGEMENTS
12b-1 AND SERVICE FEE PLANS
Pacific Horizon Funds offer share classes other than those described in this
prospectus. The major distinctions among the share classes are the fee plans
related to each share class. Pacific Horizon Funds, Inc. has adopted three fee
plans. Participants in any of these plans must enter into a specific agreement
with Pacific Horizon Funds, Inc. pursuant to the related adopted plan. Because
fees associated with the distribution and service plans are paid out of the
Fund's assets on an on-going basis, over time holders of the shares discussed
below may pay more than the economic equivalent of the maximum front-end sales
charge permitted by NASD Regulation, Inc.
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Shareholder Services Horizon Service Paid to Shareholder Service Each Shareholder Service
Plan Organizations who provide Organization receives a fee
support services to their of up to 0.25% (annualized)
customers (the beneficial of the average daily net
owners of the Horizon asset value of Horizon
Service Shares). Service Shares owned by
their customers. Holders of
a Fund's Horizon Service
Shares bear this expense.
</TABLE>
24
<PAGE> 206
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
--------- ------------ ------------- -----
<S> <C> <C> <C>
Distribution and S, Y and X Paid to the Distributor for Payments by an X Share Class
Services Plan distribution expenses for distribution expenses
intended to result in the and shareholder servicing
sale of S, Y and X Shares of expenses may not exceed
the Prime and California 0.30% and 0.25%,
Tax-Exempt Money Market respectively, of the average
Funds, X and Y Shares of the daily net assets of a Fund's
Treasury Fund and S Shares X Shares. Holders of the X
of the Tax-Exempt Money Fund Shares bear these expenses.
and for shareholder Payments by the S and Y
servicing expenses. Share Classes for
distribution expenses and
shareholder servicing
expenses may not exceed
0.75% and 0.25%,
respectively, of the average
daily net assets of a Fund's
S and Y Shares. Holders of
the S and Y Shares bear
these expenses.
Special Management Pacific Horizon Paid to Shareholder Service Each Shareholder Service
Services Plan Organizations who provide Organization receives a fee
support services to their equal to 0.32% (annualized)
customers (the beneficial of the average daily net
owners of Pacific Horizon asset value of the Prime,
Shares of the Prime, Treasury, Government,
Treasury, Government, Treasury Only and Tax-Exempt
Treasury Only, Tax-Exempt Money Fund's Pacific Horizon
Money and California Tax- Shares and 0.35%
Exempt Money Market Funds). (annualized) of the average
daily net asset value of the
California Tax-Exempt Money
Market Fund's Pacific
Horizon Shares (.03% of
which is being voluntarily
waived by the Distributor)
owned by their customers.
Holders of these Funds'
Pacific Horizon Service
Shares bear this expense.
</TABLE>
25
<PAGE> 207
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for a Fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a fuller technical and
legal description of a Fund's policies, investment restrictions, risks, and
business structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:
PACIFIC HORIZON FUNDS, INC.
P.O. Box 8968
Wilmington, Delaware 19899-8968
1-800-346-2087
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov. The Funds' investment company registration number is
811-04293.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-346-2087
Monday thru Friday
8:00 am to 8:00 pm (EST)
<PAGE> 208
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus provides vital information about PACIFIC HORIZON ASSET ALLOCATION FUND
this fund. For your own benefit and protection, -- a diversified portfolio seeking long-term
please read it before you invest, and keep it on growth from capital appreciation and dividend
hand for future reference. and interest income
Please note that this fund: -- actively allocates investments among the three
- - is not a bank deposit major asset categories: bonds, equity securities
- - is not federally insured and cash equivalents
- - is not endorsed by any bank or government agency
- - is not guaranteed to achieve its goal(s)
- - involves investment risk, including possible loss
of principal
More detailed information is available in a
Statement of Additional Information dated July 1,
1998. You may obtain a free copy by calling
800-346-2087.
The Statement of Additional Information has been
incorporated by reference into this prospectus (is
legally a part of this prospectus) and has been
filed with the Securities and Exchange Commission.
You may visit the Securities and Exchange
Commission's Internet web site (http://www.sec.gov)
to view the Statement of Additional Information,
material incorporated by reference and other
information.
Like all mutual fund shares, 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.
</TABLE>
Investment Portfolio Offered by
Pacific Horizon Funds, Inc.
<PAGE> 209
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
FUND INVESTMENTS 7 INVESTMENT OBJECTIVE
7 TYPES OF INVESTMENTS
8 FUNDAMENTAL LIMITATIONS
12 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 17 HOW TO BUY SHARES
17 What Is My Minimum Investment In The Fund?
17 What Alternative Sales Arrangements Are Available?
18 How Are Shares Priced?
23 How Do I Decide Whether To Buy A, B or K Shares?
24 How Can I Buy Shares?
25 What Price Will I Receive When I Buy Shares?
26 What Else Should I Know To Make A Purchase?
26 HOW TO SELL SHARES
26 How Do I Redeem My Shares?
29 What NAV Will I Receive For Shares I Want To Sell?
29 What Kind Of Paperwork Is Involved In Selling Shares?
29 How Quickly Can I Receive My Redemption Proceeds?
30 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES 30
SHAREHOLDER SERVICES 31
31 CAN I USE THE FUND IN MY RETIREMENT PLAN?
31 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
32 WHAT IS TELETRADE?
33 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
33 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
33 CAN I ARRANGE PERIODIC WITHDRAWALS?
34 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
34 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 34 FUND MANAGEMENT
34 Service Providers
TAX INFORMATION 37
MEASURING PERFORMANCE 38
DESCRIPTION OF SHARES 39
PLAN PAYMENTS 41
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings and Trust Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 210
ASSET ALLOCATION FUND
GOAL, STRATEGY AND PORTFOLIO SECURITIES. The Asset Allocation Fund seeks to
provide investors with long-term growth from capital appreciation and dividend
and interest income. To pursue this goal, the fund actively allocates its
investments among the three major asset categories: bonds, equity securities and
cash equivalents.
PORTFOLIO SECURITIES. Under normal circumstances, the equity portion of the
Asset Allocation Fund will invest primarily in blue chip stocks and the fixed
income portion will invest in investment grade bonds.
RISK FACTORS. As with most funds that invest in stocks the value of your
investment in the Asset Allocation Fund will fluctuate in response to stock
market movements. As with most funds that invest in fixed income securities or
convertible securities the value of your investment in the Asset Allocation Fund
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of debt securities.
PORTFOLIO MANAGEMENT. Bank of America National Savings and Trust Association
("Bank of America") serves as the Fund's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $77 billion
under management, including over $22 billion in mutual funds. Portfolio
management services for the equity portion of the Asset Allocation Fund are
conducted by an investment management team headed by James Miller, and for the
fixed income portion are conducted by Steven L. Vielhaber.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers three classes of shares through this
Prospectus. A Shares are offered at net asset value plus a front-end sales
charge (see page 17 of the Prospectus for an explanation of net asset value per
share) and are subject to a shareholder servicing fee. B Shares are offered at
net asset value without a front-end sales charge but are subject to a contingent
deferred sales charge plus distribution and shareholder servicing fees. K Shares
are offered at net asset value with neither a front-end sales charge nor a
contingent deferred sales charge, but are subject to distribution,
administrative servicing and shareholder servicing fees. B Shares of the Fund
held for 9 years will convert to A Shares of the Fund. A fourth class of shares,
SRF Shares, are offered for investment by eligible retirement accounts. SRF
Shares are described in another Prospectus of the Company.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of B and K Shares only), shareholder servicing,
accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A, B and K Shares and the estimated operating expenses expected to be
incurred during the current fiscal year with
2
<PAGE> 211
respect to the Fund's A, B and K Shares. Actual expenses may vary. A
hypothetical example based on the summary is also shown.
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 5.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. .55% .55% .55%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee*................................... 0.25% 0.25% 0.25%
Other Expenses.............................................. 0.10% 0.10% 0.10%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+............... 0.90% 1.65% 1.40%
==== ==== ====
</TABLE>
- ---------------
+Absent fee waivers, Total Operating Expenses for the Fund's K Shares would be
1.65%, of average net assets (annualized).
*Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
and 0.75% of the average net assets (annualized) of the Fund's B and K Shares,
respectively. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed the annual rate of 1.00% of the
average net assets of the Fund's B and K Shares. However, it is expected that
during the current fiscal year, such fees will not exceed 1.00% and 0.75% of
the average net assets of the Fund's B and K Shares, respectively. Because of
the Rule 12b-1, administrative and/or shareholder services fees paid by the
Fund as shown in the above table, long-term B and K shareholders may pay more
than the economic equivalent of the maximum front-end sales charge permitted by
NASD Regulation, Inc. For a further description of shareholder transaction
expenses and the Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Fund" and "Plan Payments" below.
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $64 $82 $102 $160
B Shares Assuming complete redemption at end of
period(2)................................................ $67 $95 $118 $195(3)
Assuming no redemption..................................... $17 $52 $ 90 $195(3)
K Shares................................................... $14 $44 $ 77 $168
</TABLE>
3
<PAGE> 212
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
MANAGEMENT FEES CONSIST OF:
X an investment advisory fee payable at the annual rate of 0.40% of the Fund's
average daily net assets; and
X an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets.
SELECTION OF APPROPRIATE SHARE CLASS
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to annual fees under a Distribution and Services Plan and a contingent deferred
sales charge upon redemption within the first six years of investment, with
respect to B 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 to certain types of investors. See the
section entitled "What Alternative Sales Arrangements are Available?" and "How
Do I Decide Whether To Buy A, B or K Shares?" on pages 16 and 21.
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. On July 22, 1996, the Fund initially funded
K Shares. Prior to June 23, 1997, the Fund operated as part of a master-feeder
structure and invested all of its assets in a diversified investment portfolio
of an open-end, management investment company called the Asset Allocation
Portfolio of Master Investment Trust, Series I (the "Master Portfolio") which
had an identical investment objective. On June 23, 1997, the Fund withdrew its
assets from the Master Portfolio and invested them directly in portfolio
securities. During the periods shown, the Fund did not offer B Shares. Actual
investment results of the B Shares may be different. This information has been
audited by Price Waterhouse LLP, independent accountants, whose unqualified
report on the financial statements containing such information is incorporated
by reference in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund is
available in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-346-2087.
4
<PAGE> 213
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 18,
1994
(INCEPTION
FOR THE FOR THE FOR THE FOR THE DATE)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997(a) 1996 1995 1994
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period............. $ 19.40 $ 17.52 $ 15.15 $14.84 $15.00
------- ------- ------- ------ ------
Income from Investment Operations:
Net investment income........... 0.52 0.48 0.52 0.48 0.03
Net realized and unrealized
gains (losses) on investment
transactions................. 3.72 2.50 2.86 0.24 (0.19)
------- ------- ------- ------ ------
Total income (loss) from
investment operations. 4.24 2.98 3.38 0.72 (0.16)
------- ------- ------- ------ ------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income........ (0.47) (0.46) (0.53) (0.41) --
Dividends to shareholders from
net realized gains on
investment transactions...... (1.76) (0.64) (0.48) -- --
------- ------- ------- ------ ------
Total dividends and
distributions......... (2.23) (1.10) (1.01) (0.41) --
------- ------- ------- ------ ------
Net change in net asset value per
share........................... 2.01 1.88 2.37 0.31 (0.16)
------- ------- ------- ------ ------
Net asset value per share, end of
period.......................... $ 21.41 $ 19.40 $ 17.52 $15.15 $14.84
======= ======= ======= ====== ======
Total Return+........... 23.07% 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period
(000)........................ $49,240 $34,838 $22,355 $5,694 $ 666
Ratio of expenses to average net
assets*...................... 1.03% 1.25% 0.62% 0.00% 0.00%++
Ratio of net investment income
(loss) to average net
assets*...................... 2.67% 2.59% 3.49% 4.25% 4.20%++
</TABLE>
- ---------------
* Reflects the Fund's proportionate share of the Master Portfolio's expenses,
the Master Portfolio's fee waivers and expense reimbursements and the Fund's
fee waivers and expense reimbursements. Such fee waivers and expense
reimbursements had the effect of reducing the ratio of expenses to average
net assets and increasing the ratio of net investment income to average net
assets by 0.06%, 0.69%, 2.30%, 7.89% and 83.95% (annualized) for the periods
ended February 28, 1998, February 28, 1997, February 29, 1996, February 28,
1995 and February 28, 1994, respectively.
+ The total returns listed are not annualized for the period ended February 28,
1994, and do not include the effect of the maximum 4.50% sales charge on A
Shares.
++ Annualized.
(a) As of July 22, 1996 the Fund designated the existing series of shares as "A"
shares.
5
<PAGE> 214
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
FOR THE YEAR (INCEPTION DATE)
ENDED THROUGH
FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $19.40 $17.23
------ ------
Income from Investment Operations:
Net investment income..................................... 0.41 0.19
Net realized and unrealized gain on investments........... 3.66 2.80
------ ------
Total income from investment operations.............. 4.07 2.99
------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.36) (0.18)
Distributions to shareholders from net realized gains on
investment transactions................................ (1.75) (0.64)
------ ------
Total Dividends and Distributions.................... (2.11) (0.82)
------ ------
Net change in net asset value per share..................... 1.96 2.17
------ ------
Net asset value per share, end of period.................... $21.36 $19.40
====== ======
Total Return......................................... 22.10% 17.69%++
Ratios/Supplemental Data:
Net assets at end of period (000)......................... $1,667 $ 748
Ratio of expenses to average net assets................... 1.52% 1.94%+
Ratio of net investment income to average net assets...... 2.17% 2.31%+
</TABLE>
- ---------------
+ Annualized. Reflects the Fund's proportionate share of the Master Portfolio's
expenses, the Master Portfolio's fee waivers and expense reimbursements and
the Fund's fee waivers and expense reimbursements. Such fee reductions and
expense reimbursements had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.06% and 1.32% for the periods ended February 28, 1998
and February 28, 1997, respectively.
++ Not annualized
6
<PAGE> 215
FUND INVESTMENTS
INVESTMENT OBJECTIVE
The Pacific Horizon Asset Allocation Fund seeks to obtain long-term growth from
capital appreciation and dividend and interest income. The Fund seeks to achieve
its objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents. The Fund may be
appropriate for investors who want long-term capital appreciation and current
dividend and interest income.
WHILE THE FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
IN GENERAL. The Fund is a diversified portfolio which will invest substantially
all of its assets through a balanced approach using bonds, equity securities and
cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index,
however, up to 15% of the portion of the Fund's assets that may be invested in
equity securities may be invested in stocks that are not included in these
indices. Bonds acquired by the Fund will be investment grade at the time of
purchase, and may include corporate and government obligations, mortgage-backed
securities and municipal securities. Investment grade bonds are bonds that are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization, i.e., BBB or better by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit Co. ("D&P")
or Fitch IBCA, Inc. ("Fitch IBCA") or Baa or better by Moody's Investors
Service, Inc. ("Moody's"). While bonds with such ratings are regarded as having
adequate capacity to pay interest and repay principal, adverse economic
conditions or changing circumstances could lead to a weakened capacity to pay
interest and repay principal. Bonds with the lowest investment grade rating
(i.e., BBB or Baa) do not have outstanding investment characteristics and may
have speculative characteristics as well. Unrated securities will be purchased
only if Bank of America determines that they are of comparable quality to the
rated securities in which the Fund may invest. Under normal market conditions at
least 25% of the Fund's total assets will be invested in fixed income senior
securities.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government or one of its
agencies or instrumentalities. The Fund will not invest more than 35% of its net
assets in mortgage-backed securities. There is the risk that corporate bonds
might be called by the issuer if the bond interest rate is higher than currently
prevailing interest rates. Similarly, a risk associated with mortgage-backed
securities is early paydown resulting from refinancing of the underlying
mortgages. The rate of such prepayments, and hence the life of the security,
will primarily be a function of current market rates. In periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds will generally be at lower rates than
the rates on the prepaid obligations.
The Fund may also invest, from time to time, in obligations issued by state and
local governmental issuers ("Municipal Securities"). The purchase of Municipal
Securities may be advantageous when, as a
7
<PAGE> 216
result of prevailing economic, regulatory or other circumstances, the
performance of such securities, on a pre-tax basis, is comparable to that of
corporate or U.S. Government obligations. Dividends received by shareholders
which are attributable to interest income received from Municipal Securities
generally will not be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Private activity bonds held by the Fund are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
The Fund may also include "moral obligation" securities, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund, the restoration of which is a moral commitment
but not a legal obligation of the state or municipality which created the
issuer.
The value of securities held by the Fund will vary with changes in interest
rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P or similarly rated by another NRSRO, or if unrated, will
be determined by Bank of America to be of comparable quality under procedures
established by the Board.
The Fund may also make other investments as described more fully below under
"Other Investment Practices and Considerations."
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund is not fundamental and may be changed by
the Board of Directors without a vote by the holders of a majority of the
outstanding shares of the Fund. The Fund is subject to investment limitations
which are fundamental and which may not be changed without a vote by the holders
of a majority of the outstanding shares of the Fund. A complete list of
fundamental, and certain non-fundamental, investment limitations is set out in
the Statement of Additional Information.
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices.
The fund is permitted to use -- within limits established by the directors
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or
8
<PAGE> 217
negatively. On the following pages are brief descriptions of types of investment
risks and certain investment securities and investment practices of each Fund.
As with any mutual fund, there is no guarantee that a Pacific Horizon fund will
achieve its goals or show a positive total return over any period of
time -- days, months or years.
TYPES OF INVESTMENT RISK
The following are some of the principal types of investment risks involved with
the securities and investment practices the fund is permitted to use.
CORRELATION RISK. The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment). Incomplete correlation
can result in unanticipated risks.
CREDIT RISK. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK. The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK. The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INFORMATION RISK. The risk that key information about a security or market is
inaccurate or unavailable.
INTEREST RATE RISK. The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK. Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
X HEDGED. When a derivative (a security whose value is based on another security
or index) is used as a hedge against an opposite position that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
X SPECULATIVE. To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
LIQUIDITY RISK. The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result.
9
<PAGE> 218
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole.
NATURAL EVENT RISK. The risk of losses attributable to natural disasters, crop
failures and similar events.
OPPORTUNITY RISK. The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
POLITICAL RISK. The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK. The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK. The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
10
<PAGE> 219
HIGHER-RISK SECURITIES AND PRACTICES
This table shows each fund's investment limitations as a percentage of portfolio
assets. Numbers in this table show allowable usage only; for actual usage,
consult the fund's annual/semiannual reports.
<TABLE>
<CAPTION>
ASSET ALLOCATION
FUND
----------------
<S> <C>
10 Percent of total assets
10 Percent of net assets
- - No policy limitation on usage; fund may be using
currently
o Permitted, but has not typically been used
- -- Not permitted
- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing of
money from banks or through reverse repurchase
agreements................................................ 33.3
REPURCHASE AGREEMENTS. The purchase of a security that must
later be sold back to the issuer at the same price plus
interest.................................................. -
SECURITIES LENDING. The lending of securities to financial
institutions, which provide cash or government securities
as collateral............................................. 33.3
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The purchase or sale of securities for
delivery at a future date; market value may change before
delivery.................................................. 25
- --------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities issued by foreign governments
or companies.............................................. 25
RESTRICTED AND ILLIQUID SECURITIES. Securities not traded on
the open market........................................... 15
MORTGAGE-BACKED SECURITIES. Securities backed by pools of
mortgages................................................. 35
INVESTMENT COMPANY SECURITIES. Securities issued by other
investment companies...................................... o
MUNICIPAL SECURITIES. Obligations issued by state or local
governments............................................... -
- --------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES. Securities backed by unsecured
debt, such as credit card debt; these securities are often
guaranteed or over-collateralized to enhance their credit
quality................................................... -
- --------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX
OPTIONS. Contracts involving the right or obligation to
deliver or receive assets or money depending on the
performance of one or more assets or an economic index.... *
X FUTURES AND RELATED OPTIONS.
X OPTIONS ON SECURITIES AND INDICES.
* SEE "OPTIONS" AND "FUTURES" FOR A DESCRIPTION OF
APPLICABLE INVESTMENT LIMITATIONS.........................
</TABLE>
11
<PAGE> 220
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Fund may invest in securities of foreign issuers that may or may not
be publicly traded in the United States, such as Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Fund to invest no
more than 25% of its net assets (at the time of purchase) in foreign securities.
The Fund may be subjected to additional risks associated with the holding of
property abroad such as future political and economic developments, currency
fluctuations, possible withholding of tax payments, possible seizure or
nationalization of foreign assets, possible establishment of currency exchange
control regulations or the adoption of other foreign government restrictions
that might adversely affect the payment of principal or interest on foreign
securities in the Fund. In addition, securities of some foreign companies are
less liquid, and their prices more volatile than domestic companies, have less
publicly available information about foreign companies, and such foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies.
OPTIONS. The Fund may purchase put and call options on listed securities and
stock indexes so long as the aggregate of the premiums paid for options does not
exceed 2% of the net assets of the Fund (this restriction does not apply to
options on futures contracts). Put options may be purchased in order to protect
the Fund's securities in expectation of a declining market and call options may
be purchased to benefit from anticipated price increases in the underlying
securities or index. The Fund may not write put options but may write fully
covered call options as long as the Fund remains fully covered throughout the
life of the option, either by owning the optioned securities or possessing a
call issued by another writer that is identical in all respects to the call
written by the Fund.
Closing purchase transactions on previously written options may be entered into
by the Fund to realize a profit and/or to permit the Fund to write another
option on the underlying security. The Fund might write another option on the
underlying security in order to provide for a different exercise price or
expiration date. A profit or loss will be realized when an option is closed to
the extent the cost of the closing transaction is less or more, respectively,
than the premium received for writing the option.
When an option written by the Fund is exercised, the Fund will receive the
exercise price for the security as provided for in the option, but it loses the
opportunity to receive the price which it could have obtained for the security
in the open market, which will likely be higher than the exercise price of the
option.
Put options purchased by the Fund give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. The Fund may sell a put option prior to the time
the securities underlying the option are actually sold, which will result in a
gain or loss to the Fund depending on whether the amount received from the sale
is more or less than the premium and other transaction costs associated with the
option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. The Fund will only write options where
Bank of America believes a liquid secondary market will exist on a national
securities exchange for options of the same series, which would permit the Fund
to close out its option positions. There are no assurances that a liquid
secondary market will exist on an exchange for a particular option or at any
particular time. In fact, for some options no secondary market on an exchange
may exist at all. If the Fund cannot close
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<PAGE> 221
out an option, it will not be able to sell the securities underlying the option
until the option expires or is exercised.
The Fund's ability to engage in transactions in options may be limited by IRS
requirements that the Fund receive less than 30% of its gross income from
certain securities, including options and futures contracts, held by the Fund
for less than three months. Bank of America does not believe that transactions
in options will significantly affect the Fund's ability to meet IRS
requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Fund may purchase and sell both interest rate and stock index
futures contracts (as well as purchase related options) as a hedge against
anticipated fluctuations or changes resulting from relevant market conditions in
the values of the securities held by the Fund or which it intends to purchase or
sell, and where the transactions are economically appropriate for the reduction
of risks inherent in the ongoing management of the Fund. The Fund may not
purchase or sell an interest rate or stock index futures contract or purchase a
related option unless immediately after any such transaction the sum of the
aggregate amount of margin deposits on its existing futures positions and the
amount of premiums paid for related options does not exceed 5% of the Fund's
total assets (after taking into account certain technical adjustments). For a
more detailed description of futures contracts and options and the costs and
risks related to such instruments, see the Statement of Additional Information.
VARIABLE RATE INSTRUMENTS. The Fund may invest in variable and floating rate
instruments, which may include master demand notes. Although payable on demand
by the Fund, master demand notes may not be marketable. Consequently, the
ability to redeem such notes may depend on the borrower's ability to pay which
will be continuously monitored by Bank of America. Such notes will be purchased
only from domestic corporations that either (a) are rated Aa or better by
Moody's or AA or better by S&P, (b) have commercial paper rated at least Prime-2
by Moody's or A-2 by S&P or the equivalent by another nationally recognized
statistical rating organization ("NRSRO"), (c) are backed by a bank letter of
credit or (d) are determined by Bank of America to be of a quality comparable to
securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. The Fund may invest in securities issued by other
investment companies (including money market funds advised by Bank of America)
to the extent permitted in the 1940 Act, except that with respect to the
investment in a money market mutual fund advised by Bank of America, the Fund is
permitted to invest in the greater of 5% of its net assets or $2.5 million.
REPURCHASE AGREEMENTS. The Fund may also enter into repurchase agreements. Under
these agreements, the Fund will enter into repurchase agreements only with
financial institutions (such as banks and broker-dealers) deemed creditworthy by
Bank of America, under guidelines approved by the Company's Board of Directors.
Repurchase agreements are considered to be loans under the 1940 Act. Repurchase
agreements will be entered into only for debt obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, certificates of
deposit, bankers' acceptances or commercial paper, and either the Fund's
custodian or its agent will have physical possession of the securities or the
securities will be transferred to the Fund's custodian, by appropriate entry in
the Federal Reserve Bank's records and, in either case, will be maintained in a
segregated account.
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<PAGE> 222
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Fund might incur a loss if the value of
the securities securing the repurchase agreement declines, and might incur
disposition costs in connection with liquidating the securities. In addition, if
bankruptcy proceedings are commenced with respect to the seller, realization
upon the securities by the Fund may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary purposes
by entering into transactions called reverse repurchase agreements. Under these
arrangements, the Fund will sell portfolio securities to either a bank (which
has a commercial paper rating of A-2 or better by S&P or Prime-2 or better by
Moody's) or a registered broker-dealer, with an agreement to repurchase the
security on an agreed date, price and interest payment. Reverse repurchase
agreements involve the possible risk that the value of portfolio securities the
Fund relinquishes may decline below the price the Fund must pay when the
transaction closes. Borrowings may magnify the potential for gain or loss on
amounts invested resulting in an increase in the speculative character of the
Fund's outstanding shares.
When the Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by Bank of America to make sure that an
appropriate value is maintained. Reverse repurchase agreements are considered to
be borrowings under the 1940 Act.
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to broker-dealers that Bank of America considers to be of
good standing. Borrowers of portfolio securities may not be affiliated directly
or indirectly with the Company or the Fund. If the broker-dealer should become
bankrupt, however, the Fund could experience delays in recovering its
securities. A securities loan will only be made when, in Bank of America's
judgment, the possible reward from the loan justifies the possible risks. In
addition, such loans will not be made if, as a result, the value of securities
loaned by the Fund exceeds 33 1/3% of its total assets. Securities loans will be
fully collateralized.
ASSET-BACKED SECURITIES. The Fund may purchase asset-backed securities.
Asset-backed securities consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) or receivables held in a trust.
Examples include certificates for automobile receivables (CARS) and credit card
receivables (CARDS). Payments of principal and interest on the loans or
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but usually
amounts to only a fraction of the asset-backed security's par value until
exhausted. Ultimately, asset-backed securities are dependent upon payment of the
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables. All asset- backed securities purchased by the Fund will either be
issued or guaranteed by a U.S. Government entity or rated AAA by S&P, Aaa by
Moody's or have an equivalent rating from any other rating agency.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Fund must be reinvested in securities
whose yields reflect interest rates prevailing at the time. Thus, the Fund's
ability to maintain a portfolio which includes high-yielding asset-
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<PAGE> 223
backed securities will be adversely affected to the extent reinvestments are in
lower yielding securities. The actual maturity and realized yield will therefore
vary based upon the prepayment experience of the underlying asset pool and
prevailing interest rates at the time of prepayment. Asset-backed securities may
be subject to greater risk of default during periods of economic downturn than
other instruments. Also, while the secondary market for asset-backed securities
is ordinarily quite liquid, in times of financial stress, the secondary market
may not be as liquid as the market for other types of securities, which could
result in the Fund's experiencing difficulty in valuing or liquidating such
securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. These transactions, which involve a commitment by the Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Fund to lock-in a
price or yield on a security, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk that the price
or yield obtained may be less favorable than the price or yield available when
the delivery takes place. The Fund will set aside in a segregated account cash
or liquid securities equal to the amount of any when-issued or forward
commitment transactions. The Fund's when-issued purchases and forward
commitments are not to exceed 25% of the value of the Fund's total assets absent
unusual market conditions. The Fund does not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of its investment objective.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
total assets (determined at the time of acquisition) in securities that are
illiquid. If, after the time of acquisition, events cause this limit to be
exceeded, the Fund will take steps to reduce the aggregate amount of illiquid
securities as soon as is reasonably practicable.
SECURITIES ISSUED BY AFFILIATES. The Fund will not invest in instruments or
securities issued by Bank of America or any of its affiliates.
YEAR 2000 RISKS. An issue has emerged in the investment services industry and
for the economy overall regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. The Fund has been informed by Bank of America that it has a
team in place working on year 2000 systems compliance and that Bank of America
expects to have its systems ready by the year 2000. Certain other service
providers have provided similar information to the Fund. Nevertheless, the
inability of Bank of America and the other service providers to successfully
address year 2000 issues could result in interruptions in the Fund's business
and have a material adverse impact on the Fund's operations.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made independently
from those for other investment companies and accounts managed by Bank of
America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or sold by the Fund.
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<PAGE> 224
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the Fund are not less favorable than what they
would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Fund's investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs than would otherwise be the case. Higher rates of turnover may
require payment of brokerage commissions, impose other transaction costs and
could increase substantially the amount of income received by the Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). Fund turnover will not be a limiting factor in making
investment decisions for the Fund. For further information concerning portfolio
turnover, see the Statement of Additional Information.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- -----------
<S> <C> <C>
Regular Account...................................... $ 500* $50
Automatic Investment Plan............................ $ 50 $50
IRAs, SEP-IRAs (one participant)..................... $ 500 No minimum
Spousal IRAs**....................................... $ 250 No minimum
SEP-IRAs (more than one participant)................. $2,500 No minimum
</TABLE>
- ---------------
* The minimum investment is $100 for purchases made through Bank of America
Savings and Trust Association ("Bank of America") or its affiliates' trust
and agency accounts or a Service Organization (defined below) whose clients
have made aggregate minimum purchases of $1,000,000. The minimum investment
is $200 for BankAmericard holders with an appropriate award certificate.
** A regular IRA must be opened in conjunction with this account.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues three 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. B Shares are sold to investors choosing the contingent
deferred sales charge alternative. 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 Provident
Distributors, Inc. and Bank of America, respectively, or their affiliates; (c)
accounts opened for IRA rollovers from a 401(k) plan in which the assets were
held in any Pacific Horizon or Time Horizon Fund and subsequent purchases into
an IRA rollover account opened as described above, so long as the original IRA
rollover account remains open on the Company's books; (d) accounts under Section
403(b)(7) of the Code; (e) deferred compensation plans under Section 457 of the
Code; and (f) certain other retirement plans. The three classes of shares
represent interests in the same portfolio of investments of the Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares have a front-end sales load, bear the
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<PAGE> 226
expenses of a Shareholder Services Plan, and have exclusive voting rights with
respect to such Plan. B Shares bear the expenses of a Distribution and Services
Plan and have exclusive voting rights with respect to the Distribution and
Services Plan. B Shares also bear the expenses of the deferred sales charge
arrangements and any expenses resulting from such arrangements. 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
three classes also have different exchange privileges, as described below. The
net income attributable to A, B and K Shares and the dividends payable on A, B
and K Shares will be reduced by the amount of the: (a) Shareholder Services Plan
fees attributable to A Shares, (b) Distribution and Services Plan fees
attributable to B Shares, (c) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (d)
the incremental expenses associated with such Plans. Lastly, B Shares of the
Fund held for 8 years will automatically convert into A Shares of the Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
<TABLE>
<S> <C> <C>
(Value of Assets Attributable to the Class)
- (Liabilities Attributable to the Class)
NAV =
---------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the Fund
pursuant to procedures adopted by the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market value. For
further information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
The per share net asset values of A, B 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 5.50% and may decrease as the amount you invest increases, as shown in
the following chart:
<TABLE>
<CAPTION>
SALES CHARGE DEALER'S
SALES CHARGE (AS APPROXIMATE REALLOWANCE*
(AS A % OF PERCENTAGE OF (AS A % OF
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE) INVESTED) PRICE)
----------- ------------ --------------- ------------
<S> <C> <C> <C>
Less than $50,000..................................... 5.50% 5.82% 5.00%
$50,000 but less than $100,000........................ 4.50% 4.71% 4.00%
$100,000 but less than $250,000....................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000....................... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000..................... 2.00% 2.04% 1.75%
</TABLE>
- ---------------
* Dealer's reallowance may be changed periodically.
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<PAGE> 227
There is no initial sales charge on purchases of Class A shares of $1 million or
more. However, unless you participated in the Bank of America Daily
Advantage(TM) or Advantage Plus(TM) programs, a contingent deferred sales charge
of 1% will be imposed on redemptions made within 18 months after purchase. The
Distributor will pay dealers of record commissions on purchases above $1 million
in an amount equal to (i) 1.00% on sales up to $5 million; (ii) 0.50% on the
next $45 million; and (iii) .25% on sales over $50 million.
From time to time, the Fund's distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Fund.
To the extent that no other A share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon Fund or Time Horizon
Fund equals or exceeds $1,000,000.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B Shares may be purchased at net
asset value per share without the imposition of a sales charge at the time of
purchase. The Fund's distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time the
shares are purchased. The proceeds of the contingent deferred sales charges and
the ongoing distribution and services plan fees described below are used to
reimburse the Fund's distributor for its expenses, including the compensation of
broker-dealers.
B Shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. B Shares will convert to A Shares at the end of the month in
which the ninth anniversary of the date of purchase occurs unless the B Shares
have been exchanged for Y Shares of the Pacific Horizon Prime Fund.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
NUMBER OF YEARS (AS A PERCENTAGE OF DOLLAR
ELAPSED SINCE PURCHASE* AMOUNT SUBJECT TO THE CHARGE)
----------------------- -----------------------------
<S> <C>
Less than one......................................... 5.0%
More than one, but less than or equal to two.......... 4.0%
More than two, but less than or equal to three........ 3.0%
More than three, but less than or equal to four....... 3.0%
More than four, but less than or equal to five........ 2.0%
More than five, but less than or equal to six......... 1.0%
After six years....................................... 0.0%
</TABLE>
- ---------------
* The time period during which Y Shares of the Pacific Horizon Prime Fund
acquired through an exchange are held is not included when the amount of the
contingent deferred sales charge is calculated.
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<PAGE> 228
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B Shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B Shares above the total amount of payments for
the purchase of B Shares during the preceding 6 years; then of amounts
representing the cost of B Shares held beyond the applicable contingent deferred
sales charge period; and finally, of amounts representing the cost of the B
Shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Y Shares of the Pacific Horizon
Prime Fund, that in the third year after purchase the net asset value per share
is $12, and that during the three-year period you had acquired 10 additional
shares through dividend reinvestment. If at such time you make your first
redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the
charge because of dividend reinvestment. With respect to the remaining 40
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 3.00% (the applicable rate in
the third year after purchase).
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
X reinvestment of dividends or distributions;
X any purchase by an investor who is a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
X 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;
X any purchase through FundAdvisor(TM) or FundManager(TM) from BA Investment
Services, Inc. (However, existing clients who purchased the Funds load-waived
through FUND Selections(TM), will be able to make additional purchases without
paying the front-end sales charge until June 30, 1998. Clients who have
Automatic Investment Programs may continue to invest no-load after June 30,
1998.)
X 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;
X any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of the Bank of America's Northwest
Division or by or on behalf of agency accounts administered by any bank or
trust company affiliate of Bank of America;
X 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;
X 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;
X any purchase of shares pursuant to the Reinstatement Privilege described
below; and
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<PAGE> 229
X any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
X members of the Company's Board of Directors and their spouses;
X 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;
X 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;
X holders of the BankAmericard with an appropriate award certificate;
X former members of the Company's Board of Directors with the designation of
director emeritus and their spouses;
X Lucky Store Cardholders during periodic promotions under the Periodic No Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only, a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Funds may be purchased without a
front end sales load pursuant to the Program.)
X Investors who during periodic retail merchandising campaigns of Bank of
America request information and subsequently purchase shares. (Promotional
material will delineate the beginning and ending date during which information
must be requested and Fund shares purchased.)
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The CDSC will
be waived on redemptions of B shares (i) following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder (including a registered joint owner), (ii) in connection with the
following retirement plan distributions: (a) lump-sum or other distributions
from a qualified corporate or self-employed retirement plan following retirement
(or in the case of a "key employee" of a "top heavy" plan, following attainment
of age 59 1/2); (b) distributions from an IRA or Custodial Account under Section
403(b)(7) of the Code following attainment of age 59 1/2; (c) a tax-free return
of an excess contribution to an IRA; and (d) distributions from a qualified
retirement plan that are not subject to 10% additional Federal withdrawal tax
pursuant to Section 72(t)(2) of the Code, (iii) payments made to pay medical
expenses which exceed 7.5% of income and distributions to pay for insurance by
an individual who has separated from employment and who has received
unemployment compensation under a federal or state program for at least 12
weeks, (iv) effected pursuant to the Funds' right to liquidate a shareholder's
account, including instances where the aggregate net asset value of the B shares
held in the account is less than the minimum account size, (v) effected pursuant
to the Automatic Withdrawal Plan discussed below, provided that such redemptions
do not exceed, on an annual basis, 12% of the net asset value of the B Shares in
the account, and (vi) in connection with the combination of the Funds with any
other registered investment company by a merger, acquisition of assets or by any
other transaction. Shareholders are responsible for providing evidence
sufficient to establish that they are eligible for any waiver of the CDSC.
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<PAGE> 230
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an exchange
and can be traced back to shares that were acquired with a sales load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
EXAMPLE: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.50% 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 $50,000 or more in shares of any Pacific Horizon or
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. A Shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-346-2087. Please read it carefully, as you will be bound by its terms.
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<PAGE> 231
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A, B or K shares, you should consider all
relevant factors, including the dollar amount of your purchase, the length of
time you expect to hold the shares, the amount of any applicable front-end sales
charge or contingent deferred sales charge, the amount of any applicable
distribution, administrative or service fee that may be incurred while you own
the shares, whether or not you will be reinvesting income or capital gain
distributions in additional shares, whether or not you meet applicable
eligibility requirements or qualify for a sales charge waiver or reduction in
the case of A shares, whether to have the entire initial purchase price invested
in the Fund with the investment thereafter being subject to a contingent
deferred sales charge in the case of B shares, whether you are eligible to
purchase K shares, and the relative level of services that are provided to
different classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
Shares than you would in the absence of a front-end sales charge. A Shares are
also subject to fees under a shareholder services plan. As an illustration,
investors who qualify for a significantly reduced sales load, as described
above, might elect the front-end sales charge alternative (A Shares) because
similar sales charge reductions are not available for purchases under the
contingent deferred sales charge alternative (B Shares). Moreover, A Shares
would not be subject to ongoing distribution and services plan fees, as
described below. However, because front-end sales charges are deducted at the
time of purchase, such investors who pay a front-end sales charge would not have
all their funds invested initially. The Company will not accept any order for B
Shares from an investor who is eligible to purchase A Shares without a sales
load or from an investor eligible to purchase K Shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in the Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing Distribution and Services Plan fees related to B Shares may exceed
the front-end sales charge and ongoing Shareholder Services Plan fees related to
A Shares. However, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
distribution and services plan fees may be offset to the extent any return is
realized on the additional funds initially invested under the contingent
deferred sales charge alternative.
Certain investors might determine it to be more advantageous to have all their
funds invested initially in B Shares, although subject to continuing
distribution and services plan fees and to a contingent deferred sales charge
for a 6-year period of time. Alternatively, when you purchase K shares, you will
not pay a front-end sales charge and all of your monies will be fully invested
at the time of purchase. However, K shares are subject to annual distribution
and/or administrative and shareholder service fees. K Shares are only available
to certain types of investors. See "What Alternative Sales Arrangements are
Available?"
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<PAGE> 232
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 FUNDS' TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete an Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. The Company P.O. Box 8984
will not accept third party Wilmington, DE
checks for investment. 19899-8984
IN PERSON Deliver an Account Application Deliver your payment directly to
Pacific Horizon Funds, Inc. and your payment directly to the the address on the left.
c/o PFPC INC. address on the left.
400 Bellevue Parkway
Suite 108
Wilmington, DE 19809
BY WIRE Initial purchases of shares into Contact the Fund's transfer
a new account may not be made by agent at 800-346-2087 for
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>
24
<PAGE> 233
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------ --------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not be Purchases may be made in the
(a service permitting transfers used to make an initial minimum amount of $500 and the
of money from your checking, purchase. maximum amount of $50,000 per
savings or bank money market transaction as soon as
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
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS AND
EXCHANGES,
TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
Transfer Agent.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
25
<PAGE> 234
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
26
<PAGE> 235
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<TABLE>
<S> <C>
BY MAIL Send a signed, written request (each owner, including
Pacific Horizon Funds, Inc. each joint owner, must sign) to the Transfer Agent.
P.O. Box 8968
Wilmington, DE 19899-8968
If you hold stock certificates for the shares being
redeemed, make sure to endorse them for transfer, have
your signature on them guaranteed by your bank or
another guarantor institution (as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") and include them with your request.
IN PERSON Deliver your signed, written request (each owner,
Pacific Horizon Funds, Inc. including each joint owner, must sign) and any
c/o PFPC Inc. certificates (endorsed for transfer and signature
400 Bellevue Parkway guaranteed as described in the section entitled "What
Suite 108 Kind Of Paperwork Is Involved In Selling Shares?") to
Wilmington, DE 19809 the address on the left.
</TABLE>
27
<PAGE> 236
<TABLE>
<S> <C>
BY WIRE As soon as appropriate information regarding your bank account has
been established on your Fund account, you may write, telephone or
telegraph redemption requests to the Transfer Agent, and redemption
proceeds will be wired in federal funds to the commercial bank you
have specified. Information regarding your bank account may be
provided on the Account Application or in a signature guaranteed
letter of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What Kind Of
Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day after your
request and any other necessary documents have been received by the
Transfer Agent.
Wire Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent
that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to limits on
frequency and amount.
Wire Privileges may be modified or suspended at any time, and are not
available for shares issued in certificate form.
Contact your bank for information on any charges imposed by the bank
in connection with receipt of redemptions by wire.
BY TELETRADE You may redeem Fund shares (minimum of $500 of and maximum of $50,000
(a service permitting transfers per transaction) by savings or bank telephone after appropriate
money to your checking, savings information regarding your bank account has been established on your
or bank money market account) Fund account. This information may be provided on the Account
Application or in a signature guaranteed letter of instruction to the
Transfer Agent. Signature guarantee requirements are discussed in the
section entitled "What Kind of Paperwork Is Involved in Selling
Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate on the
Account Application or in a subsequent written notice to the Transfer
Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for additional
important information about the TeleTrade Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE
ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
28
<PAGE> 237
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. Although the
Fund itself imposes no charge when A Shares are redeemed, if you purchase shares
through Bank of America or a Service Organization they may charge a fee for
providing certain services in connection with investments in Fund shares.
When you redeem your B Shares within 5 years of purchase (or longer if your
shares have been exchanged for Y Shares of the Pacific Horizon Prime Fund), you
may be subject to a contingent deferred sales charge as described above.
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, B
or K Shares. If you own both A or K and B Shares of the Fund, A or K Shares will
be redeemed first unless you request otherwise. Certain types of redemption
requests as well as all endorsed share certificates will need to include a
signature guarantee. Signature guarantees must accompany redemption requests for
(i) an amount in excess of $50,000 per day, (ii) any amount if the redemption
proceeds are to be sent somewhere other than the address of record on the
Company's books, or (iii) an amount of $50,000 or less if the address of record
has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
29
<PAGE> 238
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 120 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 B Shares or any Y 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
Dividends from the Fund's net income is declared and paid as a dividend on a
quarterly basis and net realized capital gains (if any) are distributed at least
annually. Dividends are paid within five business days after the quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of distribution.
In addition, any undeliverable checks or checks that remain uncashed for six
months will be cancelled and will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, PFPC, Inc., at P.O. Box 8968, Wilmington,
Delaware 19899-8968. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
30
<PAGE> 239
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 B Shares will not be
charged on redemptions in connection with minimum required distributions from an
IRA due to a shareholder having reached 70 1/2. For details, contact the Fund's
distributor at 800-346-2087. Investors should also read the IRA Disclosure
Statement and the Bank Custodial Agreement for further details on eligibility,
service fees and tax implications, and should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares, B Shares may be
exchanged for other B 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. B Shares may be exchanged for other B Shares or for Y Shares of
the Pacific Horizon Prime Fund without the payment of any contingent deferred
sales charge at the time the exchange is made. In addition, Y Shares of the
Pacific Horizon Prime Fund that were acquired through an exchange of B Shares
may be exchanged for B Shares without the payment of any contingent deferred
sales charge at the time the exchange is made. In determining the holding period
for calculating the contingent deferred sales charge payable upon redemption of
B Shares, the holding period of the shares originally held will be added to the
holding period of the shares acquired through the exchange unless the shares
acquired through the exchange are Y Shares of the Pacific Horizon Prime Fund.
The time period during which Y Shares of the Pacific Horizon Prime Fund acquired
through an exchange are held is not included when the amount of the contingent
deferred sales charge is calculated.
31
<PAGE> 240
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, savings 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),
32
<PAGE> 241
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,
savings 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.
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Use of this Plan may also be disadvantageous for B Shares due to a 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.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as the Fund's Investment Adviser. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
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On April 13, 1998, BankAmerica Corporation ("BankAmerica") and NationsBank
Corporation ("NationsBank") announced a definitive agreement to merge and form a
new holding company to be named BankAmerica Corporation (the "Merger"). The
Merger is anticipated to close by the end of 1998, however, it is subject to a
number of approvals including shareholder and regulatory approvals.
In its advisory agreement (the "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.
An investment management team headed by James Miller, Chief Investment Officer
of Quantitative Based Equity Management for Bank of America is responsible for
day-to-day investment activities of the equity portion of the Asset Allocation
Fund. Mr. Miller has been associated with Bank of America since 1988. Steven L.
Vielhaber is primarily responsible for the selection of particular securities
for the fixed-income portion of the Asset Allocation Fund. Mr. Vielhaber has
been the Asset Allocation Fund's manager since April 1994 and has been employed
by Bank of America since 1993. Prior thereto, Mr. Vielhaber had been Director of
Fixed Income Marketing at Dimensional Fund Advisers since 1990, and Vice
President and Manager of Investments at Gibraltar Savings from 1986 to 1990.
For the services provided and expenses assumed under the Advisory Agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.40% of the
Fund's average daily net assets. This amount may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers"). Prior to June 23, 1997, Bank of America was entitled to receive an
investment advisory fee at the annual rate of 0.55% of the average daily net
assets of the Master Portfolio. On that date, the Asset Allocation Fund withdrew
its investment in the Master Portfolio and began investing directly in portfolio
securities pursuant to a new investment advisory agreement between the Company
and Bank of America which superseded the then existing advisory agreement
between Master Investment Trust, Series I and Bank of America with respect to
the Master Portfolio. During the period from March 1, 1997 through June 23,
1997, the Master Portfolio paid Bank of America advisory fees at an effective
annual rate of 0.02% of the Master Portfolio's average daily net assets, and
Bank of America waived a portion of its fee at an effective annual rate of 0.13%
of the Master Portfolio's average daily net assets. During the period from June
24, 1997 through February 28, 1998, the Fund paid Bank of America 0.28% and Bank
of America waived a portion of its fee at the effective annual rate of 0.12% of
the Fund's average daily assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution and Services Plan, Distribution Plan
and Administrative and Shareholder Services Plan as described under "Plan
Payments" below, and may receive fees charged directly to their accounts in
connection with investments in Fund shares.
ADMINISTRATOR
Bank of America serves as Administrator of the Fund. Bank of America's principal
office is located at 555 California Street, San Francisco, CA 94104. For the
period from March 1, 1997 through September 15,
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1997, The BISYS Group Inc., through its wholly-owned subsidiary BISYS Funds
Services L.P. (collectively, "BISYS"), served as administrator of the Fund. For
the period September 15, 1997 through February 28, 1998, Bank of America served
as the Fund's administrator.
Under its administration agreement with the Company, Bank of America 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, Bank of America 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
Bank of America. (See the information below under "Fee Waivers"). Prior to June
23, 1997, BISYS was entitled to receive an administration fee payable at the
annual rate of 0.15% of the Fund's average daily net assets and 0.05% of the
Asset Allocation Master Portfolio's average daily net assets. From June 24, 1997
through September 15, 1997, BISYS was entitled to receive an administration fee
payable by the Fund at the annual rate of 0.15% of the Fund's average daily net
assets. During the period from March 1, 1997 through June 23, 1997, the Asset
Allocation Master Portfolio paid BISYS administration fees at an effective
annual rate of 0.01% of the Asset Allocation Master Portfolio's average daily
net assets, and BISYS waived a portion of its fee with respect to the Asset
Allocation Master Portfolio at an effective annual rate of 0.01% of the Asset
Allocation Master Portfolio's average daily net assets. For the same period,
BISYS waived its entire administration fee payable by the Asset Allocation Fund.
During the period June 24, 1997 through September 15, 1997, BISYS received
administration fees from the Fund at an effective annual rate of 0.03% of the
Fund's average daily net assets. During the period September 15, 1997 through
February 28, 1998 the Fund paid Bank of America administration fees at an
effective annual rate of 0.07% of the Fund's average daily net assets. During
the period June 24, 1997 through February 28, 1998, neither BISYS nor Bank of
America waived administration fees with respect to the Fund.
Bank of America has entered into an agreement with PFPC Inc., an indirect
wholly-owned subsidiary of PNC Bank Corp. ("PFPC"), pursuant to which PFPC has
agreed to provide certain sub-administration services to the Funds, including,
among other things, assisting in the developing and monitoring of compliance
procedures, participating in periodic updating of Funds' prospectuses and
statements of additional information, providing periodic reports to the
Company's Board and providing certain record-keeping services. Bank of America
will bear all fees and expenses charged by PFPC for these services.
Pursuant to the authority granted in its administration agreements, Bank of
America or a subcontractor has entered into an agreement with PFPC under which
PFPC provides certain accounting, bookkeeping, pricing, and dividend and
distribution calculation services to the Fund. The Fund bears all fees and
expenses charged by PFPC for these services.
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DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Provident Distributors, Inc.
("PDI" or the "Distributor"). The Distributor is located at Four Falls Corporate
Center, 6th Floor, West Conshohocken, PA 19428.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Fund. PFPC is the transfer
and dividend disbursing agent of the Fund and its address as transfer agent is
P.O. Box 8968, Wilmington, Delaware 19809-8968.
FEE WAIVERS
Except as noted in this Prospectus and the Statement of Additional Information,
the service contractors bear all expenses in connection with the performance of
their services, and the Fund bears the expenses incurred in its operations.
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Bank of America and other service providers. Periodically, during the course of
the Fund's fiscal year, Bank of America and other service providers may
prospectively choose not to receive fee payments and/or may assume certain Fund
expenses as a result of competitive pressures and in order to preserve and
protect the business and reputation of these entities. However, the service
providers retain the ability to discontinue such fee waivers and/or expense
reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
The Fund's distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time the Fund held the relevant assets). You will be subject to
income tax on these distributions regardless whether they are paid in cash or
reinvested in additional shares.
You should note that if you purchase shares just prior to a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for
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six months or less will be treated as a long-term capital loss to the extent any
capital gain dividends that were received with respect to the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges, and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
It is expected that the Fund itself will be subject to foreign withholding taxes
with respect to dividends or interest received from sources in foreign
countries. The Fund may make an election to treat a proportionate amount of such
taxes as constituting a distribution to each shareholder, which would allow each
shareholder either (1) to credit such proportionate amount of taxes against U.S.
federal income tax liability, or (2) to take such amount as an itemized
deduction.
For more information regarding the taxation of the Fund, consult the Statement
of Additional Information under the heading "Additional Information Concerning
Taxes." You should also consult your tax adviser for information regarding the
federal, state and local tax consequences and the applicability of any foreign
taxes or U.S. withholding taxes with respect to your specific situation.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30-day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by the Fund during the period are reinvested in Fund shares, and include
the maximum front-end sales charge for A Shares and the applicable contingent
deferred sales charge for B Shares. The Fund may also advertise total return
data without reflecting the sales load imposed on the purchase of Fund shares in
accordance with the rules of the Securities and Exchange Commission. Quotations
that do not reflect the sales load will, of course, be higher than quotations
that do reflect sales loads.
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a
30-day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30-day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, the Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
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Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class O Common Stock, 100 million shares of Class O -- Special Series 3 Common
Stock; 100 million shares of Class O -- Special Series 5 Common Stock and 100
million shares of Class O -- Special Series 7 Common Stock representing
interests in the Fund, and additional classes of shares representing interests
in other investment portfolios of the Company. Class O Common Stock are the "A"
Shares; Class O -- Special Series 3 Common Stock are the "B" Shares; Class
O -- Special Series 5 Common Stock are the "K" Shares; and Class O -- Special
Series 7 Common Stock are "SRF" Shares. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class O Common
Stock, Class O -- Special Series 3 Common Stock, Class O -- Special Series 5
Common Stock or Class O -- Special Series 7 Common Stock) into one or more
series. This Prospectus relates primarily to the Fund's A, B and K Shares. For
more information about the Fund's SRF Shares or about the Company's other
portfolios, contact the Company at the telephone number listed on the cover page
of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into the
Company. A Shares are sold to investors choosing the front-end sales charge
alternative unless an exemption to the sales charge is otherwise available,
which is the case for eligible retirement accounts. A Shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. B Shares are sold
without a front-end sales charge, but are subject to a contingent deferred sales
charge. K Shares are neither
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subject to a front-end sales charge nor a contingent deferred sales charge. See
"Shareholder Guide -- What Alternative Sales Arrangements are Available?" for a
description of eligible purchasers of K Shares.
A Shares, B Shares, K Shares and SRF Shares each have certain purchase,
redemption and exchange privileges. Additionally, A Shares, B Shares and K
Shares have certain shareholder services such as TeleTrade, an automatic
investment program, an automatic withdrawal plan, a directed distribution plan
and a direct deposit program.
The three classes of shares in the Fund which are publicly offered represent
interests in the same portfolio of investments of the Fund, have the same rights
and are identical in all respects except (a) SRF Shares and A Shares bear the
expenses of their respective Shareholder Services Plans; (b) B Shares bear the
expenses of a Distribution and Services Plan; and (c) K Shares bear the expenses
of a Distribution Plan and/or Administrative and Shareholder Services Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A, B and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution and Services Plan fees attributable to B Shares,
(c) Distribution Plan fees and/or Administrative and Shareholder Services Plan
fees attributable to K Shares, respectively, and (d) the incremental expenses
associated with such Plans. SRF, A, B and K Shares may have different
performance results due to sales charges and other expenses attributable to
distribution, administrative service and/or shareholder servicing plans
applicable with respect to a particular share class.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board may grant in its discretion. When issued for payment as
described in this Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). Only holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares; only holders of B Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution and Services Plan attributable to B Shares; only holders of
K Shares will be entitled to vote on matters submitted to a vote of shareholders
relating to the Distribution Plan and Administrative and Shareholder Services
Plan attributable to K Shares; and only holders of SRF Shares will be entitled
to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to SRF Shares. The Fund does not
presently intend to hold annual meetings of shareholders to elect directors or
for other business unless and until such time as less than a majority of the
directors holding office have been elected by the shareholders. At that time,
the directors then in office will call a shareholders' meeting for the election
of directors. Under certain circumstances, however, shareholders have the right
to call a shareholder meeting to consider the removal of one or more directors.
Such meetings will be held when requested by the shareholders of 10% or more of
the Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in
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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, A
DISTRIBUTION AND SERVICES PLAN FOR B 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 and Services Plan pursuant to Rule 12b-1 under the 1940 Act, under
which the B Shares of the Fund reimburse the Distributor for services rendered
and costs incurred in connection with distribution of the B Shares and for
shareholder servicing fees the Distributor pays to Service Organizations. The
Company has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act under which the K Shares of the Fund reimburse the Distributor for services
rendered and costs incurred in connection with distribution of the K Shares. The
Company has also adopted an Administrative and Shareholder Services Plan for K
Shares, under which K Shares of the Fund reimburse the Distributor for
administrative and shareholder servicing fees the Distributor pays to Service
Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of the Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1998, the Asset Allocation Fund made payments
under the Plan at an effective annual rate of 0.25% of the A Shares' average
daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected
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that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
DISTRIBUTION AND SERVICES PLAN, 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. Under
the Distribution and Services Plan, each Fund pays Bank of America for
distribution expenses primarily intended to result in the sale of such Fund's B
Shares and for shareholder servicing expenses. Such distribution expenses
include expenses incurred in connection with advertising and marketing the
Fund's B and K Shares; payments to Service Organizations for assistance in
connection with the distribution of B and 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 B and K
shareholders of the Fund) and in implementing and operating the Distribution and
Services Plan and the Distribution Plan.
Shareholder servicing expenses under the Distribution and Services Plan and
Administrative and Shareholder Services Plan include, but are not limited to,
expenses incurred in connection with shareholder services provided by Bank of
America and the Distributor and payments to Service Organizations for the
provision of support services with respect to the beneficial owners of B and K
Shares, such as assisting clients in processing exchange and redemption requests
and in changing dividend options and account descriptions and responding to
client inquiries concerning their investments. Administrative servicing expenses
under the Administrative and Shareholder Services Plan include, but are not
limited to, expenses incurred in connection with administrative services
provided by the Distributor and payments to Service Organizations for the
provision of administrative services to beneficial owners of K Shares such as
establishing and maintaining accounts and records relating to their clients who
invest in K Shares, providing information to the Fund necessary for accounting
or sub-accounting, and providing statements periodically to clients showing
their position in K Shares.
Under the Distribution and Services Plan and 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 B or K Shares. Under the Distribution and
Services Plan and 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 B and 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 B or K Shares. These amounts
may be reduced pursuant to undertakings by the Distributor or Bank of America.
Payments for distribution expenses under the Distribution and Services Plan and
the Distribution Plan are subject to Rule 12b-1 under the 1940 Act. For the
fiscal year ended February 28, 1998, the Asset Allocation Fund made payments
under the Distribution, Administrative and Shareholder Services Plans at the
effective annual rate of 0.75% of the average daily net assets of the Asset
Allocation Fund's K Shares, and the Distributor waived fees under the
Distribution, Administrative and Shareholder Services Plans at the effective
annual rate of 0.00% of average daily net assets with respect to K Shares of the
Asset Allocation Fund. During the fiscal year ended February 28, 1998, no B
Shares were offered by the Company.
42
<PAGE> 251
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus provides vital information about PACIFIC HORIZON BLUE CHIP FUND
these funds. For your own benefit and protection, -- a diversified portfolio seeking long-term
please read it before you invest, and keep it on capital appreciation
hand for future reference. -- primarily invests in blue chip stocks
Please note that these funds: PACIFIC HORIZON AGGRESSIVE GROWTH FUND
- - are not bank deposits -- a diversified portfolio seeking to maximize
- - are not federally insured capital appreciation
- - are not endorsed by any bank or government agency -- primarily invests in common stocks and
- - are not guaranteed to achieve their goals securities convertible into common stocks
- - involve investment risk, including possible loss PACIFIC HORIZON ASSET ALLOCATION FUND
of principal -- a diversified portfolio seeking long-term
More detailed information is available in a growth from capital appreciation and dividend and
Statement of Additional Information dated July 1, interest income
1998. You may obtain a free copy by calling -- actively allocates investments among the three
800-346-2087. major asset categories: bonds, equity
The Statement of Additional Information has been securities and cash equivalents
incorporated by reference into this prospectus (is PACIFIC HORIZON CAPITAL INCOME FUND
legally a part of this prospectus) and has been -- a diversified portfolio seeking a total
filed with the Securities and Exchange Commission. investment return, comprised of current income and
You may visit the Securities and Exchange capital appreciation consistent with prudent
Commission's Internet web site (http://www.sec.gov) investment risk
to view the Statement of Additional Information, -- primarily invests in convertible bonds and
material incorporated by reference and other convertible preferred stocks of domestic
information. issuers
Like all mutual fund shares, these securities have PACIFIC HORIZON INTERNATIONAL EQUITY FUND
not been approved or disapproved by the Securities -- a diversified portfolio seeking long-term
and Exchange Commission or any state securities capital growth
commission, nor has the Securities and Exchange -- primarily invests in foreign equity investments
Commission or any state securities commission
passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a
criminal offense.
</TABLE>
Investment Portfolios Offered by
Pacific Horizon Funds, Inc.
<PAGE> 252
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 3
FINANCIAL HIGHLIGHTS 10
FUND INVESTMENTS 25
25 INVESTMENT OBJECTIVES
00 DURATION AND MATURITY
25 TYPES OF INVESTMENTS
33 FUNDAMENTAL LIMITATIONS
33 MORE ABOUT RISK
40 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 49 HOW TO BUY SHARES
49 What Is My Minimum Investment In The Fund?
49 What Alternative Sales Arrangements Are Available?
50 How Are Shares Priced?
55 How Do I Decide Whether to Buy A or B Shares?
56 How Can I Buy Shares?
57 What Price Will I Receive When I Buy Shares?
58 What Else Should I Know To Make A Purchase?
58 HOW TO SELL SHARES
58 How Do I Redeem My Shares?
60 What NAV Will I Receive For Shares I Want To Sell?
60 What Kind of Paperwork Is Involved In Selling Shares?
61 How Quickly Can I Receive My Redemption Proceeds?
61 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES 61
SHAREHOLDER SERVICES 62 CAN I USE THE FUND IN MY RETIREMENT PLAN?
62 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
63 WHAT IS TELETRADE?
64 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
64 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
65 CAN I ARRANGE PERIODIC WITHDRAWALS?
65 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
65 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 65 FUND MANAGEMENT
00 Expenses
66 Service Providers
70 Fee Waivers
TAX INFORMATION 70
MEASURING PERFORMANCE 71
DESCRIPTION OF SHARES 72
PLAN PAYMENTS 74
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings and Trust Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
Sub-Adviser to the International Equity Fund:
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
<PAGE> 253
EQUITY FUNDS
GOAL, STRATEGY AND PORTFOLIO SECURITIES
The BLUE CHIP FUND seeks to provide investors with long-term capital
appreciation. To pursue this goal, the fund invests primarily in a diversified
portfolio of blue chip stocks. Such securities are generally included in either
the Dow Jones Industrial Average ("DJIA") or the Standard & Poor's 500 Composite
Stock Index ("S&P 500").
Unlike most other investment companies which invest directly in portfolio
securities, the Blue Chip Fund seeks to achieve its investment objective by
investing all of its investable assets in a fund of an open end, management
investment company (the "Blue Chip Master Portfolio") having the same investment
objective as that of the Blue Chip Fund. Under normal circumstances, the Blue
Chip Master Portfolio invests at least 65% of total assets in blue chip stocks.
The Blue Chip Master Portfolio may invest up to 15% of its total assets in
securities that are not included in the DJIA and S&P 500.
The AGGRESSIVE GROWTH FUND seeks to provide investors with maximum capital
appreciation. To pursue this goal, the fund invests primarily in a diversified
portfolio of common stocks and securities convertible into common stocks. Under
normal circumstances, the Aggressive Growth Fund invests at least 65% of total
assets in equity securities. The Aggressive Growth Fund may also invest up to
20% of its total assets in securities issued by foreign issuers. During
temporary defensive periods, the Aggressive Growth Fund may hold without
limitation cash equivalents such as money market instruments.
The ASSET ALLOCATION FUND seeks to provide investors with long-term growth from
capital appreciation and dividend and interest income. To pursue this goal, the
fund actively allocates its investments among the three major asset categories:
bonds, equity securities and cash equivalents. Under normal circumstances, the
equity portion of the Asset Allocation Fund will invest primarily in blue chip
stocks and the fixed income portion will invest in investment grade bonds.
The CAPITAL INCOME FUND seeks to provide investors with a total investment
return, comprised of current income and capital appreciation consistent with
prudent investment risk. To pursue this goal, the fund invests primarily in a
diversified portfolio of convertible bonds and convertible preferred stocks of
domestic issues. Under normal circumstances, the Capital Income Fund will invest
at least 65% of total assets in convertible securities.
The INTERNATIONAL EQUITY FUND seeks to provide investors with long-term capital
growth. To pursue this goal, the International Equity Fund invests primarily in
a diversified portfolio of foreign equity securities although it may invest a
portion of its assets in convertible bonds and debt securities. Under normal
circumstances, the International Equity Fund invests at least 80% of total
assets in equity securities of foreign companies. Equity securities in which the
International Equity Fund may invest include common stock, preferred stock,
securities convertible into common stocks or preferred stocks, and warrants to
purchase such securities. The International Equity Fund may also invest, without
limit, in securities of foreign issuers in the form of American Depositary
Receipts. The International Equity Fund may invest up to 20% of its total assets
in convertible bonds and debt securities. These debt obligations include U.S.
Government and foreign government securities and corporate debt securities.
RISK FACTORS
As with most funds that invest in stocks, the value of your investment in each
of the Funds will fluctuate in response to stock market movements. To the extent
that a Fund invests in higher-risk securities, it takes on additional risks that
could adversely affect its performance.
2
<PAGE> 254
Similarly, as with most funds that invest in fixed income securities or
convertible securities, the value of your investment in the Asset Allocation or
Capital Income Funds will fluctuate with changes in interest rates. Typically, a
rise in interest rates causes a decline in the market value of debt securities.
Convertible securities pay a fixed rate of interest and return principal at
maturity, similar to straight debt obligations. Unlike straight debt
obligations, they may be converted into a set amount of corporate common stock.
There are also risks related to investing in lower rated securities.
Because it invests internationally, the International Equity Fund carries
additional risks, including currency, information, natural event and political
risks, making the Fund more volatile than a comparable domestic fund. Please
read, "More about Risk" starting on page 34.
PORTFOLIO MANAGEMENT/SUB-ADVISOR
Bank of America National Savings and Trust Association ("Bank of America")
serves as each Fund's investment adviser. Based in San Francisco, California,
Bank of America and its affiliates have over $77 billion under management,
including over $22 billion in mutual funds.
The investment management team of the Blue Chip Fund and Aggressive Growth Fund
is headed by James Miller, Executive Vice President and Chief Investment Officer
of BofA Illinois, a Bank of America affiliate. Portfolio management services for
the equity portion of the Asset Allocation Fund are conducted by an investment
management team headed by James Miller and for the fixed income portion are
conducted by Steven L. Vielhaber. Portfolio management services to the Capital
Income Fund are conducted by Ed Cassens, Vice President and Senior Portfolio
Manager of Bank of America. Wellington Management Company, LLP, serves as the
International Equity Fund's Sub-Adviser. Day-to-day management of the Fund is
conducted by Trond Skramstad and Andrew S. Offit. Mr. Skramstad, Wellington's
Director of International Equity Investments, is chairman of Wellington
Management's Global Equity Strategy Group, a group of regional equity portfolio
managers and senior investment professionals responsible for providing
investment research and recommendations.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer three classes of shares. A Shares are
offered at net asset value plus a front-end sales charge (see page 50 of the
Prospectus for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. B Shares are offered at net asset value without a
front-end sales charge but are subject to a contingent deferred sales charge
plus distribution and shareholder servicing fees. K Shares are offered at net
asset value with neither a front-end sales charge nor a contingent deferred
sales charge, but are subject to distribution, administrative servicing and
shareholder servicing fees. B Shares of the Fund held for 9 years will convert
to A Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and the Blue Chip
Master Portfolio (which are allocable to the Blue Chip Fund). Operating expenses
include fees for portfolio management, maintenance of shareholder accounts,
general administration, distribution (in the case of B and K Shares only),
shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A, B and K Shares, the operating expenses of the A and K Shares of each Fund
except the Asset Allocation Fund incurred during the last fiscal year, and the
operating expenses of the B Shares of each Fund and the A and K Shares of the
Asset Allocation Fund expected to be incurred during the current fiscal year.
Actual expenses may vary. A hypothetical example based on the summary is also
shown.
3
<PAGE> 255
BLUE CHIP FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 5.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.70% 0.70% 0.70%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee*................................... 0.25% 0.25% 0.25%
Other Expenses (After Fee Waivers).......................... 0.23% 0.23% 0.22%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+............... 1.18% 1.93% 1.67%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Other Expenses for the Blue Chip Fund's A, B and K Shares
would be .27% of average net assets (annualized). Total Operating Expenses for
the Blue Chip Fund's A, B and K Shares would be 1.22%, 1.97% and 1.97% of
average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
and 0.75% of the average net assets (annualized) of the Fund's B and K Shares,
respectively. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed the annual rate of 1.00% of the
average net assets of the Fund's B and K Shares. However, it is expected that
during the current fiscal year, such fees will not exceed 1.00% and 0.75% of
the average net assets of the Fund's B and K Shares, respectively. Because of
the Rule 12b-1, administrative and/or shareholder services fees paid by the
Blue Chip Fund as shown in the above table, long-term B and K shareholders may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the NASD Regulations, Inc. For a further description of
shareholder transaction expenses and the Blue Chip Fund's operating expenses,
see the sections entitled "Shareholder Guide," "The Business of the Funds" and
"Plan Payments" below.
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 AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $66 $ 90 $116 $190
B Shares Assuming complete redemption at end of
period(2)................................................ $70 $103 $132 $225(3)
Assuming no redemption..................................... $20 $ 61 $104 $225(3)
K Shares................................................... $17 $ 53 $ 91 $198
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
4
<PAGE> 256
AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 5.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.90% 0.90% 0.90%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee*................................... 0.25% 0.25% 0.25%
Other Expenses (After Fee Waivers).......................... 0.31% 0.31% 0.28%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+............... 1.46% 2.21% 2.18%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Other Expenses for the Fund's A, B and K Shares would be
.37%, .37% and .34%, respectively, of average net assets (annualized). Total
Operating Expenses for the Fund's A, B and K Shares would be 1.52%, 2.27% and
2.24% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
and 0.75% of the average net assets (annualized) of the Fund's B and K Shares.
The total of all 12b-1 fees, administrative services fees and shareholder
services fees may not exceed the annual rate of 1.00% of the average net
assets of the Fund's K Shares respectively. However, it is expected that
during the current fiscal year, such fees will not exceed 1.00% and 0.75% of
the average net assets of the Fund's B and K Shares, respectively. Because of
the Rule 12b-1, administrative and/or shareholder services fees paid by the
Aggressive Growth Fund as shown in the above table, long-term B and K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulations, Inc. For a further
description of shareholder transaction expenses and the Aggressive Growth
Fund's operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
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 AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $69 $ 99 $130 $220
B Shares Assuming complete redemption at end of
period(2)................................................ $72 $111 $146 $254(3)
Assuming no redemption..................................... $22 $ 69 $118 $254(3)
K Shares................................................... $20 $ 60 $104 $225
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
5
<PAGE> 257
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 5.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.55% 0.55% 0.55%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee*................................... 0.25% 0.25% 0.25%
Other Expenses.............................................. 0.10% 0.10% 0.10%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+............... 0.90% 1.65% 1.40%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Total Operating Expenses for the Asset Allocation Fund's K
Shares would be 1.65% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
and 0.75% of the average net assets (annualized) of the Fund's B and K Shares,
respectively. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed the annual rate of 1.00% of the
average net assets of the Fund's B and K Shares. However, it is expected that
during the current fiscal year, such fees will not exceed 1.00% and 0.75% of
the average net assets of the Fund's B and K Shares, respectively. Because of
the Rule 12b-1, administrative and/or shareholder services fees paid by the
Asset Allocation Fund as shown in the above table, long-term B and K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulation, Inc. For a further
description of shareholder transaction expenses and the Asset Allocation
Fund's operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
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 AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $64 $82 $102 $160
B Shares Assuming complete redemption at end of
period(2)................................................ $67 $95 $118 $195(3)
Assuming no redemption..................................... $17 $52 $ 90 $195(3)
K Shares................................................... $14 $44 $ 77 $168
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
6
<PAGE> 258
CAPITAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 5.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.65% 0.65% 0.65%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee*................................... 0.25% 0.25% 0.25%
Other Expenses.............................................. 0.20% 0.20% 0.20%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+............... 1.10% 1.85% 1.60%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Other Expenses would be 0.22 of average net assets
(annualized for the Fund's A, B and K Shares). Total Operating Expenses for
the Fund's A, B and K Shares would be 1.10%, 1.85% and 1.85% of average net
assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
and 0.75% of the average net assets (annualized) of the Fund's B and K Shares.
The total of all 12b-1 fees, administrative services fees and shareholder
services fees may not exceed the annual rate of 1.00% of the average net
assets of the Fund's B and K Shares. However, it is expected that during the
current fiscal year, such fees will not exceed 1.00% and 0.75% of the average
net assets of the Fund's B and K Shares, respectively. Because of the Rule
12b-1, administrative and/or shareholder services fees paid by the Capital
Income Fund as shown in the above table, long-term B and K shareholders may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by NASD Regulation, Inc. For further description of shareholder
transaction expenses and the Capital Income Fund's operating expenses, see the
sections entitled "Shareholder Guide," "The Business of the Funds" and "Plan
Payments" below.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $66 $ 88 $112 $182
B Shares Assuming complete redemption at end of
period(2)................................................ $69 $101 $128 $217(3)
Assuming no redemption..................................... $19 $ 58 $100 $217(3)
K Shares................................................... $16 $ 51 $ 87 $190
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
7
<PAGE> 259
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 5.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+........................ 0% 0% 0%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee (After Fee Waivers)*............... 0.03% 0.03% 0.03%
Other Expenses (After Fee Waivers and Expense
Reimbursements)+.......................................... 1.19% 1.19% 1.19%
---- ---- ----
Total Operating Expenses (After Fee Waivers and Expense
Reimbursements) .......................................... 1.22% 1.97% 1.72%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers and/or expense reimbursements, Management Fees for each
class of shares of the Fund would be 0.95% of the average net assets
(annualized); Other Expenses for the Fund's A, B and K shares would be 1.41%,
1.41% and 1.41% of average net assets (annualized) and Total Operating
Expenses for the Fund's A, B and K Shares would be 2.61%, 3.36% and 3.36% of
average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees, administrative services and shareholder
services fees would be 0.75%, 0.75% and 0.25% of the average net assets
(annualized) of the Fund's B and K Shares. The total of all 12b-1 fees,
administrative services fees and shareholder services fees may not exceed the
annual rate of 1.00% of the average net assets of the Fund's B and K Shares.
However, it is expected that during the current fiscal year, such fees will
not exceed 1.00% and 0.75% of the average net assets of the Fund's B and K
Shares, respectively. Because of the Rule 12b-1, administrative and/or
shareholder services fees paid by the Fund as shown in the above table,
long-term B and K shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the NASD Regulation, Inc.
Absent fee waivers, shareholder services fees would be 0.25% of the average
net assets (annualized) of the Funds A Shares. For a further description of
shareholder transaction expenses and the Fund's operating expenses, see the
sections entitled "Shareholder Guide," "The Business of the Fund" and "Plan
Payments" below.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $67 $ 92 $118 $195
B Shares Assuming complete redemption at end of
period(2)................................................ $70 $104 $134 $230(3)
Assuming no redemption..................................... $20 $ 62 $106 $230(3)
K Shares................................................... $17 $ 54 $ 93 $203
</TABLE>
8
<PAGE> 260
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear directly (as with transaction expenses) or indirectly (as with annual
operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
X an investment advisory fee payable at the annual rate of 0.50%, 0.60%, 0.40%,
0.45% and 0.75% of the Blue Chip Master Portfolio's and Aggressive Growth
Fund's, Asset Allocation Fund's, Capital Income Fund's and International
Equity Fund's respective average daily net assets; and
X an administration fee payable at the annual rate of 0.15% and 0.05% of the
Blue Chip Fund's and Master Portfolio's respective average daily net assets
and 0.30%, 0.15%, 0.20% and 0.20% of the Aggressive Growth Fund's, Asset
Allocation Fund's, Capital Income Fund's and International Equity Fund's
respective average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Blue Chip Fund and the Blue Chip Master Portfolio in which the
Blue Chip Fund's assets are invested will be less than or approximately equal to
the expenses which the Blue Chip Fund would incur if the Company retained the
services of an investment adviser for the Blue Chip Fund and the assets of the
Blue Chip Fund were invested directly in the type of securities held by the Blue
Chip Master Portfolio. Further, the Directors believe that the shareholders of
the Blue Chip Fund may participate in the ownership of a larger portfolio of
securities than could be achieved directly by the Blue Chip Fund. There can be
no assurance, however, that such will be the case or that any economies of scale
that might occur if other investors acquire shares of the Blue Chip Master
Portfolio will be realized.
SELECTION OF APPROPRIATE SHARE CLASS
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 except to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to annual fees under a Distribution and Services Plan and contingent deferred
sales charge upon redemption within the first six years of investment, with
respect to B Shares, or incur neither a front-end sales charge or a contingent
deferred sales charge, but incur fees under a Distribution Plan and/or an
Administrative and Shareholder Services Plan with respect to K shares. K Shares,
however, are only available to certain types of investors. See the sections
entitled "What Alternative Sales Arrangements are Available?" and "How Do I
Decide Whether to Buy A, B or K Shares?" on page .
9
<PAGE> 261
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results for
the Funds for the years and periods indicated. During the periods shown, the
Funds did not offer B Shares. Actual investment results of the B Shares may be
different.
The Capital Income Fund commenced operations on September 25, 1987 as the Total
Return Fund (the "Predecessor Fund"), a separate portfolio of a Massachusetts
business trust called The Horizon Capital Funds. On January 1, 1989, the
Predecessor Fund changed its name to The Pacific Horizon Convertible Securities
Fund and on January 9, 1990 was reorganized as a portfolio of the Company. On
September 16, 1991, the Capital Income Fund changed its name to the Pacific
Horizon Capital Income Fund.
Prior to June 23, 1997, the Asset Allocation Fund operated as part of a
master-feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company called the
Asset Allocation Portfolio of Master Investment Trust, Series I (the "Asset
Allocation Master Portfolio") which had an identical investment objective as
that of the Asset Allocation Fund. On June 23, 1997, the Fund withdrew its
assets from the Asset Allocation Master Portfolio and invested them directly in
portfolio securities.
Prior to September 1, 1996, the International Equity Fund operated as part of a
master-feeder structure and invested all of its assets in a portfolio of Master
Investment Trust, Series I (the "International Equity Master Portfolio"), which
had an identical investment objective. On September 1, 1996, the International
Equity Fund withdrew its assets from the International Equity Master Portfolio
and invested them directly in portfolio securities.
The information for each of the: 1) four fiscal years in the four year period
ended February 28, 1998 and the period ended February 28, 1994 with respect to A
Shares of the Blue Chip Fund and the period July 22, 1996 through February 28,
1997 and the fiscal year ended February 28, 1998 with respect to K Shares of the
Blue Chip Fund; 2) five fiscal years in the five year period ended February 28,
1998 with respect to A Shares of the Aggressive Growth Fund and the period July
22, 1996 through February 28, 1997 and the fiscal year ended February 28, 1998
with respect to K Shares of the Aggressive Growth Fund; 3) four fiscal years in
the four year period ended February 28, 1998 and the period ended February 28,
1994 with respect to A Shares of the Asset Allocation Fund and the period July
22, 1996 through February 28, 1997 and the fiscal year ended February 28, 1998
with respect to K Shares of the Asset Allocation Fund; 4) five fiscal years in
the five year period ended February 28, 1998 with respect to A Shares of the
Capital Income Fund and the period July 22, 1996 through February 28, 1997 and
the fiscal year ended February 28, 1998 with respect to K Shares of the Capital
Income Fund; and 5) fiscal period ended February 28, 1997 and the fiscal year
ended February 28, 1998 with respect to A Shares and K Shares of the
International Equity Fund, has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report on the financial statements containing
such information is incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
10
<PAGE> 262
BLUE CHIP FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 13,
1994
(INCEPTION
FOR THE FOR THE FOR THE FOR THE DATE)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997(A) 1996 1995 1994
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning of
period................................ $25.22 $20.53 $15.81 $14.97 $15.00
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................. 0.16 0.23 0.26 0.31 0.02
Net realized and unrealized gains
(losses) on investment
transactions........................ 7.91 5.21 4.96 0.80 (0.05)
------ ------ ------ ------ ------
Total income (loss) from
investment operations........ 8.07 5.44 5.22 1.11 (0.03)
------ ------ ------ ------ ------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................... (0.15) (0.22) (0.28) (0.27) --
Distributions to shareholders from net
realized gains on investment
transactions........................ (3.24) (0.53) (0.22) -- --
------ ------ ------ ------ ------
Total dividends and
distributions................ (3.39) (0.75) (0.50) (0.27) --
------ ------ ------ ------ ------
Net change in net asset value per
share................................. 4.68 4.69 4.72 0.84 (0.03)
------ ------ ------ ------ ------
Net asset value per share, end of
period................................ $29.90 $25.22 $20.53 $15.81 $14.97
====== ====== ====== ====== ======
Total Return*.................. 33.96% 27.01% 33.39% 7.60% (0.20)%++
Ratios/Supplemental Data:
Net assets, end of period
(millions).......................... $ 288 $ 153 $ 67 $ 6 $ 1
Ratio of expenses to average net
assets**............................ 1.18% 1.28% 0.83% 0.00% 0.00%+
Ratio of net investment income to
average net assets**................ 0.63% 0.99% 1.63% 2.46% 2.92%+
Ratio of expenses to average net
assets.............................. 1.22% 1.71% 2.28% 6.32% 55.00%+
Ratio of net investment income (loss)
to average net assets............... 0.59% 0.56% 0.18% (3.86)% (52.08)%+
</TABLE>
- ---------------
* The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
** Reflects the Blue Chip Fund's proportionate share of the Blue Chip Master
Portfolio's expenses, the Master Portfolio's fee waivers and expense
reimbursements and fee waivers and expense reimbursements of the Blue Chip
Fund. Such fee waivers and expense reimbursements had the effect of reducing
the ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by .04%, 0.43%, 1.45%, 6.32% and
55.00% (annualized) for the periods ended February 28, 1998, February 28,
1997, February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
+ Annualized.
++ Not Annualized
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
11
<PAGE> 263
BLUE CHIP FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
FOR THE (INCEPTION DATE)
YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ----------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $25.20 $20.38
------ ------
Income from Investment Operations:
Net investment income..................................... 0.04 0.07
Net realized gains on investment transactions............. 7.83 5.35
------ ------
Total income from investment operations........... 7.87 5.42
------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.04) (0.07)
Distributions to shareholders from net realized gains on
investment transactions................................ (3.24) (0.53)
------ ------
Total dividends and distributions................. (3.28) (0.60)
------ ------
Net change in net asset value per share..................... 4.59 4.82
------ ------
Net asset value per share, end of period.................... $29.79 $25.20
====== ======
Total Return...................................... 33.08% 26.96%++
Ratios/Supplemental Data:
Net assets, end of period (millions)...................... $ 7 $ 1
Ratio of expenses to average net assets................... 1.67% 1.92%+
Ratio of net investment income to average net assets...... 0.12% 0.45%+
Ratio of expenses to average net assets*.................. 1.69% 2.12%+
Ratio of net investment income to average net assets*..... 0.10% 0.25%+
</TABLE>
- ---------------
+ Annualized. Reflects the Blue Chip Fund's proportionate share of the Blue
Chip Master Portfolio's expenses, the Blue Chip Master Portfolio's fee
waivers and expense reimbursements,and fee waivers and expense reimbursements
of the Blue Chip Fund. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and increasing
the ratio of net investment income to average net assets by .02% and .20%
(annualized) for the periods ended February 28, 1998 and February 28, 1997.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
12
<PAGE> 264
[THIS PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE> 265
AGGRESSIVE GROWTH FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997(A) 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net asset value per share, beginning of year................ $19.60 $ 23.49 $20.61
------ ------- ------
Income from Investment Operations:
Net investment income (loss).............................. (0.25) (0.25) (0.27)
Net realized and unrealized gains (losses) on investment
transactions............................................ 4.62 2.26 8.35
------ ------- ------
Total income (loss) from investment operations..... 4.37 2.01 8.08
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... -- -- --
Distributions to shareholders from net realized gains on
investment transactions................................. (1.33) (5.90) (5.20)
------ ------- ------
Net change in net asset value per share..................... 3.04 (3.89) 2.88
------ ------- ------
Net asset value per share, end of period.................... $22.64 $ 19.60 $23.49
====== ======= ======
Total Return*...................................... 23.30% 9.13% 40.88%
Ratios/Supplemental Data:
Net assets, end of period (millions)...................... $ 219 $ 202 $ 180
Ratio of expenses to average net assets................... 1.46% 1.42%++ 1.51%++
Ratio of net investment income (loss) to average net
assets.................................................. (1.18)% (1.26)% 1.35%
Portfolio turnover rate................................... 83% 99% 93%
Ratio of expenses to average net assets**................. 1.52%(b) 1.44% 1.64%(b)
Ratio of net investment income (loss) to average net
assets**................................................ (1.25)%(b) (b) (b)
</TABLE>
- ---------------
+ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America served as investment adviser commencing April 22,
1992.
++ Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of decreasing the ratio of expenses to
average net assets and increasing the ratio of net investment income (loss)
to average net assets by 0.02%, 0.03%, 0.09%, 0.01%, and 0.26%, for the
years ended February 28, 1993, February 29, 1992, February 28, 1991,
February 28, 1990 and February 28, 1989, respectively. During the fiscal
years ended February 28, 1998, February 28, 1997 and February 29, 1996, the
Fund received credits from its custodian for interest earned on uninvested
cash balances which were used to offset custodian fees and expenses. If such
credits had not occurred, the ratio of expenses to average net assets
(without fee waivers and/or expense reimbursements) would have been 1.52%,
1.44% and 1.64%, respectively. For the fiscal year ended February 28, 1998,
the ratio of net investment income to average net assets would have been
1.25%. For the fiscal years ended February 28, 1997 and February 1996, the
ratio of net investment income was not affected by such credits.
* The total return figures presented do not include the effect of the maximum
4.50% sales charge on A Shares.
** During the years ended February 28, 1998 and 1997 and February 29, 1996, the
Portfolio received credits from its custodian for interest earned on
uninvested balances which were used to offset custodian fees and expenses.
If such credits had not occurred, the expense ratios would have been as
indicated. The ratio of net investment income was not affected.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
(b) There were no waivers or reimbursements during the period.
14
<PAGE> 266
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993+ 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$25.70 $24.68 $27.93 $22.51 $17.17 $14.49 $13.41
------ ------ ------ ------ ------ ------ ------
(0.22) (0.37) (0.26) (0.15) (0.17) (0.17) (0.06)
(0.95) 3.02 (2.26) 9.21 6.33 2.85 1.14
------ ------ ------ ------ ------ ------ ------
(1.17) 2.65 (2.52) 9.06 6.16 2.68 1.08
-- -- -- -- -- -- --
(3.92) (1.63) (0.73) (3.64) (0.82) -- --
------ ------ ------ ------ ------ ------ ------
(5.09) 1.02 (3.25) 5.42 5.34 2.68 1.08
------ ------ ------ ------ ------ ------ ------
$20.61 $25.70 $24.68 $27.93 $22.51 $17.17 $14.49
====== ====== ====== ====== ====== ====== ======
(3.59)% 10.54% (8.76)% 41.11% 37.01% 18.50% 8.05%++
$ 132 $ 153 $ 160 $ 178 $ 107 $ 86 $ 96
1.46% 1.52% 1.49%++ 1.44%++ 1.55%++ 1.51%++ 1.28%++
1.04% 1.20% 1.15%++ 1.14%++ 0.85%++ 0.82%++ (0.30)%++
92% 43% 43% 73% 155% 175% 276%
(b) (b) 1.51% 1.47% 1.64% 1.52% 1.54%
(b) (b) 1.13% 1.11% 0.78% 0.81% 0.04%
</TABLE>
15
<PAGE> 267
AGGRESSIVE GROWTH FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
FOR THE (INCEPTION DATE)
YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ----------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $19.53 $24.20
------ ------
Income from Investment Operations:
Net investment (loss)..................................... (0.32) (0.06)
Net realized gains on investment transactions............. 4.56 1.29
------ ------
Total income from investment operations........... 4.24 1.23
Less Dividends and Distributions:
Distributions to shareholders from net realized gains on
investment transactions................................ (1.33) (5.90)
------ ------
Net change in net asset value............................... 2.91 (4.67)
------ ------
Net asset value per share, end of period.................... $22.44 $19.53
====== ======
Total Return...................................... 22.70% 5.65%+
Ratios/Supplemental Data:
Net assets, end of period (000)........................... $3,051 $ 340
Ratio of expenses to average net assets*.................. 1.93% 1.95%++
Ratio of net investment income (loss) to average net
assets*................................................ (1.63)% (1.78)%++
Portfolio Turnover Rate................................... 83% 99%
Ratio of expenses to average net assets................... 2.24% 2.22%++
Ratio of net investment income (loss) to average net
assets................................................. (1.88)% (2.03)%++
</TABLE>
- ---------------
+ Not Annualized.
++ Annualized.
* Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of decreasing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.25% and 0.25%, respectively, for the periods ended
February 28, 1998 and February 28, 1997. During the years ended February 28,
1998 and February 28, 1997, the Fund received credits from its custodian for
interest earned on uninvested balances which were used to offset custodian
fees and expenses. If such credits had not occurred, the ratio of expenses
to average net assets would have been 2.24% and 2.22% respectively. The
ratio of net investment income was not affected by such credits.
16
<PAGE> 268
ASSET ALLOCATION FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 13,
1994
(INCEPTION
FOR THE FOR THE FOR THE FOR THE DATE)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997(a) 1996 1995 1994
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning of
period................................. $ 19.40 $ 17.52 $ 15.15 $14.84 $15.00
------- ------- ------- ------ ------
Income from Investment Operations:
Net investment income.................. 0.52 0.48 0.52 0.48 0.03
Net realized and unrealized gains
(losses) on investment
transactions......................... 3.72 2.50 2.86 0.24 (0.19)
------- ------- ------- ------ ------
Total income (loss) from
investment operations......... 4.24 2.98 3.38 0.72 (0.16)
------- ------- ------- ------ ------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income.................... (0.47) (0.46) (0.53) (0.41) --
Distributions to shareholders from net
realized gains on investment
transactions......................... (1.76) (0.64) (0.48) -- --
------- ------- ------- ------ ------
Total dividends and
distributions................. (2.23) (1.10) (1.01) (0.41) --
------- ------- ------- ------ ------
Net change in net asset value per
share.................................. 2.01 1.88 2.37 0.31 (0.16)
------- ------- ------- ------ ------
Net asset value per share, end of
period................................. $ 21.41 $ 19.40 $ 17.52 $15.15 $14.84
======= ======= ======= ====== ======
Total Return++.................. 23.07% 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000)........ $49,240 $34,838 $22,355 $5,694 $ 666
Ratio of expenses to average net
assets*............................ 1.03% 1.25% 0.62% 0.00% 0.00%+
Ratio of net investment income to
average net assets*................ 2.67% 2.59% 3.49% 4.25% 4.20%+
</TABLE>
- ---------------
* Reflects the Asset Allocation Fund's proportionate share of the Asset
Allocation Master Portfolio's expenses, the Asset Allocation Master
Portfolio's fee waivers and expense reimbursements and fee waivers and
expense reimbursements of the Asset Allocation Fund. Such fee waivers and
expense reimbursements had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.06%, 0.69%, 2.30%, 7.89% and 83.95% (annualized) for
the periods ended February 28, 1998, February 28, 1997, February 29, 1996,
February 28, 1995 and February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
(a) As of July 22, 1996, the Fund designated the existing series of Shares as
"A" Shares.
17
<PAGE> 269
ASSET ALLOCATION FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22,
1996
(INCEPTION DATE)
FOR YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1998 1997
-------------- ----------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $19.40 $ 17.23
------ --------
Income from Investment Operations:
Net investment income.................................. 0.41 0.19
Net realized and unrealized gains (losses) on
investments........................................... 3.66 2.80
------ --------
Total income from investment operations........... 4.07 2.99
------ --------
Less Dividends and Distributions:
Dividends to shareholders from net investment income... (0.36) (0.18)
Distributions to shareholders from net realized gains
on investment transactions............................ (1.75) (0.64)
------ --------
Total dividends and distributions................. (2.11) (0.82)
------ --------
Net change in net asset value per share................... 1.96 2.17
------ --------
Net asset value per share, end of period.................. $21.36 $ 19.40
====== ========
Total Return...................................... 22.10% 17.69%*
Ratios/supplemental data:
Net assets, end of period (000)........................ $1,667 $ 748
Ratio of expenses to average net assets.............. 1.52% 1.94%+
Ratio of net investment income to average net
assets.............................................. 2.17% 2.31%+
</TABLE>
- ---------------
* Not Annualized.
+ Annualized. Reflects the Asset Allocation Fund's proportionate share of the
Asset Allocation Master Portfolio's expenses, the Asset Allocation Master
Portfolio's fee waivers and expense reimbursements and the fee waivers and
expense reimbursements of the Asset Allocation Fund. Such fee reductions and
expense reimbursements had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.06% and 1.32% for the year ended February 28, 1998 and
the period ended February 28, 1997.
18
<PAGE> 270
[THIS PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE> 271
CAPITAL INCOME FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
FEBRUARY 28 FEBRUARY 28, FEBRUARY 29,
1998 1997(a) 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net asset value per share, beginning of period.............. $17.35 $16.42 $13.65
------ ------ ------
Income from Investment Operations:
Net investment income..................................... 0.58 0.57 0.62
Net realized and unrealized gains (losses) on investment
transactions............................................ 2.89 2.34 2.84
------ ------ ------
Total income (loss) from investment operations..... 3.47 2.91 3.46
------ ------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.59) (0.57) (0.69)
Distributions to shareholders from net realized gains on
investment transactions................................. (2.95) (1.41) --
------ ------ ------
Total dividends and distributions.................. (3.54) (1.98) (0.69)
------ ------ ------
Net change in net asset value per share..................... (0.07) 0.93 2.77
------ ------ ------
Net asset value per share, end of period.................... $17.28 $17.35 $16.42
====== ====== ======
Total return++..................................... 21.54% 18.53% 25.96%
Ratios/Supplemental Data:
Net assets, end of period (millions)...................... $ 391 $ 309 $ 247
Ratio of expenses to average net assets***................ 1.10% 1.18% 1.23%
Ratio of net investment income to average net assets***... 3.35% 3.40% 4.05%
Portfolio turnover ratio.................................. 69% 124% 57%
</TABLE>
- ---------------
** For the period September 1, 1989 through February 28, 1990.
*** Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of decreasing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.02%, 0.17%, 0.74%, 3.27%, 6.23%, 14.64%, 27.82%
(annualized), 35.19% and 61.95% (annualized) for the fiscal years or
periods ended February 28, 1998, February 28, 1995, February 28, 1994,
February 28, 1993, February 29, 1992, February 28, 1991, February 28, 1990,
August 31, 1989 and August 31, 1988, respectively. During the fiscal years
ended February 28, 1998, 1997 and February 29, 1996, the Fund received
credits from its custodian for interest earned on uninvested cash balances
which were used to offset custodian fees and expenses. If such credits had
not occurred, the ratio of expenses to average net assets (without fee
waivers and/or expense reimbursements) would have been 1.12%, 1.19% and
1.26%, respectively. The ratio of net investment income to average net
assets was not affected by such credits.
+ Not annualized.
++ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America served as investment adviser commencing April 22,
1992.
++ The total return figures listed do not include the effect of the maximum
4.50% sales charge on A Shares.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
20
<PAGE> 272
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------ PERIOD ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, AUGUST 31,
1995 1994 1993++ 1992 1991 1990** 1989
------------ ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.42 $13.32 $12.01 $10.23 $ 9.83 $10.88 $ 8.99
------ ------ ------ ------ ------ ------ ------
0.57 0.50 0.56 0.53 0.59 0.28 0.55
(1.43) 2.36 1.79 2.06 0.35 (0.12) 1.96
------ ------ ------ ------ ------ ------ ------
(0.86) 2.86 2.35 2.59 0.94 0.16 2.51
------ ------ ------ ------ ------ ------ ------
(0.54) (0.48) (0.60) (0.55) (0.54) (0.31) (0.62)
(0.37) (0.28) (0.44) (0.26) -- (0.90) --
------ ------ ------ ------ ------ ------ ------
(0.91) (0.76) (1.04) (0.81) (0.54) (1.21) (0.62)
------ ------ ------ ------ ------ ------ ------
(1.77) 2.10 1.31 1.78 0.40 (1.05) 1.89
------ ------ ------ ------ ------ ------ ------
$13.65 $15.42 $13.32 $12.01 $10.23 $ 9.83 $10.88
====== ====== ====== ====== ====== ====== ======
(5.61)% 21.85% 20.62% 26.21% 10.17% 1.46% 29.34%+
$ 198 $ 191 $ 19 $ 6 $ 1 $ 1 $ 6
0.97% 0.46% 0.07% -- -- -- --
4.48% 4.19% 5.00% 5.63% 6.32% 5.87% 6.26%+
94% 103% 216% 278% 236% 153% 253%
</TABLE>
21
<PAGE> 273
CAPITAL INCOME FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
FOR THE (INCEPTION DATE)
YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ----------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $ 17.30 $ 16.24
------- -------
Income from Investment Operations:
Net investment income..................................... 0.48 0.32
Net realized and unrealized gains on investment
transactions........................................... 2.89 2.43
------- -------
Total income from investment operations........... 3.37 2.75
------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.48) (0.28)
Distributions to shareholders from net realized gains on
investment transactions................................ (2.95) (1.41)
------- -------
Total dividends and distributions................. (3.43) (1.69)
------- -------
Net change in net asset value per share..................... (0.06) 1.06
------- -------
Net asset value per share, end of period.................... $ 17.24 $ 17.30
======= =======
Total Return...................................... 20.97% 17.47%*
Ratios/supplemental data:
Net assets, end of period (millions)...................... $ 3.00 $ 1.00
Ratio of expenses to average net assets................... 1.60% 1.66%+
Ratio of net investment income to average net assets...... 2.85% 2.85%+
Portfolio turnover rate................................... 69% 124%
</TABLE>
- ---------------
* Not Annualized.
+ Annualized. During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee waivers and expense reimbursements had the effect of
reducing the ratio of expenses to average net assets and increasing the ratio
of net investment income to average net assets by 0.26% and 0.25% for the
periods ended February 28, 1998 and 1997. Fees paid by third parties had no
effect on the ratio of expenses to average net assets.
22
<PAGE> 274
INTERNATIONAL EQUITY FUND
Selected data for an A Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(A)
------------ ------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $ 9.91 $ 10.00
------- -------
Income from Investment Operations:
Net investment income..................................... 0.07 (0.01)
Net realized and unrealized gains on investment
transactions........................................... 0.92 (0.07)
------- -------
Total income from investment operations........... 0.99 (0.08)
------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income... (0.08) --
Distributions to shareholders from net realized gains
on investment transactions............................ (0.27) (0.01)
------- -------
Total Dividends and Distributions................. (0.35) (0.09)
------- -------
Net change in asset value per share......................... 0.64 (0.09)
------- -------
Net asset value per share, end of period.................... $ 10.55 $ 9.91
======= =======
Total Return**.................................... 10.32% (0.79)%(c)
Ratios/supplemental data:**
Net assets, end of period (000)........................... $41,643 $16,217
Ratio of expenses to average net assets*.................. 1.22% 0.92%(b)
Ratio of net investment income to average net assets*..... 1.05% 0.40%(b)
Portfolio Turnover Rate................................... 79% 114%(c)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee waivers and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 3.00% and 3.01%, for the period
ended February 28, 1997 and 1.35% for the period ended February 28, 1998.
** The total return listed is not annualized for the period ended February 28,
1997, and does not include the effect of the maximum 4.50% sales charge on A
Shares.
(a) Period from May 13, 1996 (inception date of fund) through February 28,
1997.
(b) Annualized.
(c) Not Annualized.
23
<PAGE> 275
INTERNATIONAL EQUITY FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(a)
------------ ------------
<S> <C> <C>
K SHARES
Net asset value per share, beginning of period.............. $ 9.88 $ 9.82
------- -------
Income from Investment Operations:
Net investment (loss)..................................... 0.03 (0.01)
Net realized and unrealized gains on investment
transactions........................................... 0.87 0.08
------- -------
Total income from investment operations........... 0.90 0.07
------- -------
Dividends to shareholders from net investment income...... (0.06) --
Distributions to shareholders from net realized gains on
investment transactions................................ (0.27) (0.01)
------- -------
Total Dividend and Distributions.................. (0.33) (0.01)
Net change in asset value per share......................... 0.57 0.06
------- -------
Net asset value per share, end of period.................... $ 10.45 $ 9.88
======= =======
Total return...................................... 9.35% 0.72%**
Ratios/supplemental data:
Net assets, end of period (000)........................... $ 559 $ 116
Ratio of expenses to average net assets*.................. 1.72% 1.49%(b)
Ratio of net investment income to average net assets*..... 0.48% (0.31)%(b)
Portfolio Turnover rate................................... 79% 114%**
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and or reimbursed.
Such fee waivers and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 2.04% and 2.03% for the period
ended February 28, 1997 and 1.58% for the period ended February 28, 1998.
** Not annualized.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Annualized.
24
<PAGE> 276
FUND INVESTMENTS
INVESTMENT OBJECTIVES
The BLUE CHIP FUND seeks to achieve long-term capital appreciation through
investments in blue chip stocks. The Blue Chip Fund may be appropriate for
investors who want the potential for capital appreciation over the long-term.
The Blue Chip Fund seeks to achieve its investment objective by investing all of
its investable assets in the Blue Chip Master Portfolio. The Blue Chip Master
Portfolio has the same investment objective as the Blue Chip Fund.
The AGGRESSIVE GROWTH FUND seeks to achieve maximum capital appreciation. In
seeking its investment objective, the Aggressive Growth Fund invests primarily
in common stocks and securities convertible into common stocks of issuers from a
variety of industries that it is believed have the potential for above-average
growth. Any income received is incidental to capital appreciation. The
Aggressive Growth Fund may be appropriate for investors who want long-term asset
growth and are willing to accept stock market volatility and who want to
participate in a diversified portfolio of companies with strong growth
potential.
The ASSET ALLOCATION FUND seeks to obtain long-term growth from capital
appreciation and dividend and interest income. The Asset Allocation Fund seeks
to achieve its objective by actively allocating investments among the three
major asset categories: bonds, equity securities and cash equivalents. The Asset
Allocation Fund may be appropriate for investors who want long-term capital
appreciation and current dividend and interest income.
The CAPITAL INCOME FUND seeks to provide investors with a total investment
return, comprised of current income and capital appreciation, consistent with
prudent investment risk. In seeking its investment objective, the Capital Income
Fund invests in a diversified portfolio consisting principally of convertible
bonds and convertible preferred stocks of domestic issuers. The Capital Income
Fund may be appropriate for investors who are seeking a highly competitive
return over the long term comprised of current income and capital appreciation
and who are also willing to accept the relative risks described in this
Prospectus associated with seeking such returns.
The INTERNATIONAL EQUITY FUND seeks long-term capital growth by investing
primarily in foreign equity securities. The International Equity 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 EACH FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
BLUE CHIP MASTER PORTFOLIO -- GENERAL INVESTMENTS. The Blue Chip Master
Portfolio is a diversified portfolio which will invest either in securities
listed on the DJIA or the S&P 500. However, up to 15% of its total assets may be
invested in stocks that are not included in the DJIA and S&P 500 indices. The
Blue Chip Master Portfolio will hold approximately 100 stocks. The Blue Chip
Master Portfolio expects that under normal market conditions at least 65% of its
total assets will be invested in blue chip stocks. A blue chip stock is one of a
well established, nationally known company that has a long record of
profitability and a reputation for quality management, products and services.
The Blue Chip Master Portfolio may also make other investments as described more
fully below under "Other Investment Practices and Considerations."
25
<PAGE> 277
AGGRESSIVE GROWTH FUND -- GENERAL INVESTMENTS. The Aggressive Growth Fund is a
diversified fund comprised mainly of common stocks and securities convertible
into common stocks. The Aggressive Growth Fund's holdings will consist primarily
of common stocks of domestic companies, most of which will be
small-capitalization companies, that Bank of America expects will achieve
above-average growth in earnings and price. Small-capitalized companies
generally have limited product lines, markets and financial resources, and are
dependent upon a limited management group. As a result of the Aggressive Growth
Fund's investments, an investment in the Aggressive Growth Fund involves
substantial risks (see "Additional Risk Factors" below).
While the Aggressive Growth Fund intends to invest primarily in common stock and
securities convertible into such stock, its policy is flexible as to the
proportion of its assets that will be invested in common stocks, and the
proportion may be changed without shareholder approval. Not less than 65% of the
Aggressive Growth Funds's total assets will be invested in equity securities
(except during temporary defensive periods).
During temporary defensive periods, or at other times subject to the limitation
above, the Aggressive Growth Fund may hold cash equivalents such as money market
instruments, which include short-term bank time deposits, certificates of
deposit and bankers' acceptances, commercial paper (consisting of unsecured
promissory notes issued by corporations) and obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (some of which may be
subject to repurchase agreements) and invest in preferred stocks and other
fixed-income corporate and U.S. Government bonds with ratings of AA or better by
a nationally recognized statistical rating organization (or unrated bonds of
comparable quality) that cannot be converted into common stocks.
In addition, up to 20% of the Aggressive Growth Fund's total assets may be
invested in securities issued by foreign issuers. Such investments will be made
either directly in such issuers or indirectly through American Depository
Receipts ("ADRs") (described below in "International Equity Fund -- General
Investments") or closed-end investment companies. (Investments in closed-end
investment companies will not make up more than 10% of the Aggressive Growth
Fund's total assets.)
The Aggressive Growth Fund may also purchase put and call options, write covered
call options, purchase and sell futures contracts and purchase futures options
as described below under "Other Investment Practices."
ADDITIONAL RISK FACTORS. Although investing in any mutual fund has certain
inherent risks, an investment in the Aggressive Growth Fund may have even
greater risks than investments in most other types of mutual funds. The
Aggressive Growth Fund is not a complete investment program, and it may not be
appropriate for an investor if he or she cannot bear financially the loss of at
least a significant portion of his or her investment. The Aggressive Growth
Fund's net asset value per share is subject to rapid and substantial changes
because greater risk is assumed in seeking maximum growth. The securities of the
smaller companies which the Aggressive Growth Fund expects to emphasize may be
subject to more abrupt or erratic market movements than larger, more established
companies, both because the securities typically are traded in lower volume and
because the issuers typically are subject to a greater degree to changes in
earnings and prospects. Many of the securities which Bank of America believes
would have the greatest growth potential may be considered highly speculative.
Additionally, such securities may not be traded every day or in the volume
typical of trading on a national securities exchange. As a result, the
disposition by the Aggressive Growth Fund of portfolio securities, to meet
redemptions or otherwise, may require the Aggressive Growth Fund to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable, or to make many small sales over a lengthy period
of time.
26
<PAGE> 278
ASSET ALLOCATION FUND -- GENERAL INVESTMENTS
The Asset Allocation Fund is a diversified portfolio which will invest
substantially all of its assets through a balanced approach using bonds, equity
securities and cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index,
however up to 15% of the Fund's assets that are invested in equity securities
may be invested in stocks that are not included in these indices. Bonds acquired
by the Asset Allocation Fund will be investment grade at the time of purchase,
and may include corporate and government obligations, mortgage-backed securities
and municipal securities. Investment grade bonds are bonds that are rated in one
of the four highest rating categories by a nationally recognized statistical
rating organization, i.e., BBB or better by Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Duff & Phelps Credit Co. ("D&P") or Fitch IBCA,
Inc. ("Fitch IBCA") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). While bonds with such ratings are regarded as having adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay interest and
repay principal. Bonds with the lowest investment grade rating (i.e., BBB or
Baa) do not have outstanding investment characteristics and may have speculative
characteristics as well. Unrated securities will be purchased only if Bank of
America determines that they are of comparable quality to the rated securities
in which the Asset Allocation Fund may invest. Under normal market conditions at
least 25% of the Fund's total assets will be invested in fixed income senior
securities.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government or one of its
agencies or instrumentalities. The Asset Allocation Fund will not invest more
than 35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if the bond interest rate is
higher than currently prevailing interest rates. Similarly, a risk associated
with mortgage-backed securities is early pay down resulting from refinancing of
the underlying mortgages. The rate of such prepayments, and hence the life of
the security, will primarily be a function of current market rates. In periods
of falling interest rates, the rate of prepayments tends to increase. During
such periods, the reinvestment of prepayment proceeds will generally be at lower
rates than the rates on the prepaid obligations.
The Asset Allocation Fund may also invest, from time to time, in obligations
issued by state and local governmental issuers ("Municipal Securities"). The
purchase of Municipal Securities may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the performance of such
securities, on a pre-tax basis, is comparable to that of corporate or U.S.
Government obligations. Dividends received by shareholders which are
attributable to interest income received from Municipal Securities generally
will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Asset Allocation Fund are "general obligation" securities and "revenue'
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Asset Allocation
Fund are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of such
private activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
27
<PAGE> 279
The Asset Allocation Fund may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The value of securities held by the Asset Allocation Fund will vary with changes
in interest rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P or similarly rated by another NRSRO or if unrated, will be
determined by Bank of America to be of comparable quality under procedures
established by the Board.
Subject to its investment objective and the policies stated above, the Asset
Allocation Fund may invest in securities of foreign issuers that may or may not
be publicly traded in the United States, such as Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Asset Allocation
Fund to invest no more than 25% of its net assets (at the time of purchase) in
foreign securities. For more information, See "Risk Factors -- Risks Associated
with Foreign Securities and Currencies."
The Asset Allocation Fund may also make other investments as described more
fully below under "Other Investment Practices and Considerations."
CAPITAL INCOME FUND -- GENERAL INVESTMENTS
The convertible bonds and preferred stock ("Convertible Securities") held in the
Capital Income Fund's portfolio will, for the most part, be securities issued by
U.S. issuers. The Capital Income Fund will invest under normal circumstances at
least 65% of its total assets in Convertible Securities. Up to 15% of its assets
also may be held in Eurodollar Convertible Securities.
The Company's Board of Directors will evaluate whether a satisfactory total
return has been achieved by comparing the Capital Income Fund's return against a
number of indices such as:
X the Standard & Poor's 500 Stock Index;
X the First Boston Convertible Index; and
X the Lipper Convertible Bond Market Index.
Similar to straight debt obligations, convertible securities pay a fixed rate of
interest and return principal at maturity; unlike straight debt, they may be
converted into a set amount of corporate common stock. Investors should note
that the Capital Income Fund may convert its Convertible Securities when
conditions are not necessarily favorable for their disposition or because of
developments with respect to the issuers or trading markets of such Convertible
Securities.
Notwithstanding the fundamental investment policy above, however, for temporary
defensive purposes at times when Bank of America believes such a position is
warranted by uncertain or unusual market conditions, the Capital Income Fund may
invest without limit in securities issued or guaranteed by the
28
<PAGE> 280
U.S. Government (and its agencies and instrumentalities), money market
securities and investment grade debt securities, or may hold its assets in cash.
The Convertible Securities in which the Capital Income Fund invests (including
bonds, notes and preferred stock) are convertible into common stock at a stated
price within a specified period of time. When investing in such Convertible
Securities the Capital Income Fund is looking for the opportunity, through the
conversion feature, to participate in the capital appreciation of the common
stock into which the Convertible Securities are convertible, while earning
higher current income than is available from the common stock.
CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible Securities have unique
investment characteristics because they:
X generally have higher yields than common stocks;
X generally are less subject to a decline in value than their underlying common
stocks because of their fixed income characteristics; and
X generally provide for the potential of capital appreciation if the market
value of their underlying common stock increases.
An issuer of a Convertible Security may have the option to redeem it at a price
established in the Convertible Security's governing instruments. If a
Convertible Security is called for redemption, the Capital Income Fund will have
to either permit the redemption, convert the Convertible Security into the
underlying common stock or sell the Convertible Security to a third party. Any
of these actions could adversely affect the Capital Income Fund's ability to
attain its objective.
The Capital Income Fund would convert a Convertible Security either to permit
the orderly disposition of the investment or when it has reached maturity or
been called for redemption. The Capital Income Fund might also convert a
Convertible Security if the underlying common stock's dividend rate increased
above the yield on the Convertible Security.
Generally, Convertible Securities are not "investment grade" (that is, not rated
within the four highest rating categories by a nationally recognized statistical
rating organization such as S&P, D&P, Fitch IBCA or Moody's). Convertible
Securities acquired by the Capital Income Fund that are rated below investment
grade, or that are not rated, present greater risks as to the timely payment of
principal and interest (or dividends). The Capital Income Fund intends that the
Convertible Securities it purchases will be rated at least "B" by a nationally
recognized statistical rating organization, or that if the investment is unrated
it will be deemed of comparable quality by Bank of America.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries some risk,
some of the risks associated with lower-rated Convertible Securities are
different from the risks associated with investment grade securities. The risk
of loss through default is greater because lower-rated securities are usually
unsecured and are often subordinate to an issuer's other obligations.
Additionally, the issuers of these securities frequently have high debt levels
and are thus more sensitive to difficult economic conditions, individual
corporate developments and rising interest rates. Consequently, the market price
of these securities, and the net asset value of the Capital Income Fund's
shares, may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market for
lower-rated securities, at least in its present size and form, is relatively
new, there remains some uncertainty about its performance level under adverse
market and economic environments. An economic downturn or increase in interest
rates could have a negative impact on both the market for lower-rated securities
29
<PAGE> 281
(resulting in a greater number of bond defaults) and the value of lower-rated
securities held in the Capital Income Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect lower-rated securities differently than other securities. For
example, the prices of lower-rated securities are more sensitive to adverse
economic changes or individual corporate developments than are the prices of
higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, the Capital Income Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices of
lower-rated securities as well as the Capital Income Fund's net asset value. In
general, both the prices and yields of lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, the
Capital Income Fund's valuation of a security and the price it is actually able
to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by the Capital Income Fund, especially in a thinly traded market. Illiquid or
restricted securities held by the Capital Income Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for lower-rated securities.
CREDIT RATINGS. S&P, Moody's and other nationally recognized statistical rating
organizations evaluate the safety of a lower-rated security's principal and
interest payments, but do not address market value risk. Because the ratings of
the rating agencies may not always reflect current conditions and events, in
addition to using recognized rating agencies and other sources, Bank of America
performs its own analysis of the issuers whose lower-rated securities the
Capital Income Fund purchases. Because of this, the Capital Income Fund's
performance may depend more on the investment adviser's own credit analysis than
is the case for mutual funds investing in higher rated securities.
In selecting Convertible Securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the Convertible Securities, the protections afforded the Convertible
Securities and the diversity of the Capital Income Fund's portfolio. Bank of
America continuously monitors the issuers of lower-rated securities held in the
Capital Income Fund's portfolio for their ability to make required principal and
interest payments, as well as in an effort to control the liquidity of the
Capital Income Fund's portfolio so that it can meet redemption requests.
If a portfolio security undergoes a rating revision, the Capital Income Fund may
continue to hold the security if Bank of America determines such retention is
warranted.
EURODOLLAR CONVERTIBLE SECURITIES. Eurodollar Convertibles, in which the Capital
Income Fund may invest up to 15% of its total assets, are fixed income
securities of a U.S. or foreign issuer that are issued
30
<PAGE> 282
in U.S. dollars outside of the U.S. and are convertible into or exchangeable for
specified equity securities.
Eurodollar Convertibles in which the Capital Income Fund invests will be
convertible into or exchangeable for foreign equity securities.
Investments in foreign issuers may be affected by changes in currency rates and
exchange control regulations. There is typically less publicly available
information about a foreign company than about a U.S. company, and foreign
brokerage commissions and custody fees are generally higher than in the U.S. In
addition, foreign companies may be subject to less stringent reserve, auditing
and reporting requirements than their U.S. counterparts, and their securities
may be less liquid and more volatile than those of U.S. issuers. Investments in
foreign securities are also subject to local political and economic
developments, expropriation or nationalization of assets and the imposition of
withholding taxes.
OTHER SECURITIES. In addition to Convertible Securities, and subject to the
fundamental investment policy above, the Capital Income Fund also may invest in:
X securities issued or guaranteed by the U.S. Government (and its agencies and
instrumentalities);
X nonconvertible bonds and dividend-paying equity securities that are consistent
with the Fund's investment objective;
X options and futures; and
X money market securities.
The Capital Income Fund may purchase bank obligations including CDs and bankers'
acceptances issued by domestic branches of U.S. banks that have total assets of
more than $2.5 billion. The Capital Income Fund may also make interest-bearing
savings deposits in commercial banks in amounts not exceeding 5% of its total
assets.
Commercial paper rated in the top rating category by S&P, Moody's or other
rating agencies, and unrated commercial paper determined to be of comparable
quality by Bank of America may also be purchased. In addition, the Capital
Income Fund may invest in debt securities rated BBB or higher by S&P or other
rating agencies or Baa or higher by Moody's. See "Convertible Securities" for
the rating requirements for convertible securities.
As noted above, the Capital Income Fund can purchase obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of some of these agencies and instrumentalities, such as the Small
Business Administration or the Maritime Administration, are backed by the full
faith and credit of the U.S.; others, like the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, including the Student Loan
Marketing Association, are backed solely by the issuer's credit. There is no
assurance that the U.S. Government would support a U.S. Government-sponsored
entity if it were not required to do so by law.
INTERNATIONAL EQUITY FUND -- GENERAL INVESTMENTS
During normal market conditions, the International Equity 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 International Equity 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
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half of its assets or derives over half of its revenues or profits. Equity
securities in which the International Equity Fund may invest consist of common
stocks, preferred stocks, securities convertible into common stocks or preferred
stocks, and warrants to purchase such securities. The International Equity Fund
may also invest in futures and options for purposes of adjusting country
exposure, hedging, or income enhancement. The International Equity Fund will be
primarily invested in securities denominated in currencies other than the U.S.
dollar; currency will be hedged at the discretion of Wellington Management.
The International Equity 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 International Equity Fund will limit its purchases of debt securities to
investment grade obligations, as described above in "Asset Allocation Fund
General Investments." In the event that the rating of any security held by the
International Equity Fund falls below the required rating, the International
Equity 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 International Equity Fund may also invest, without limitation, in securities
of foreign issuers in the form of ADRs or other similar securities evidencing
ownership of underlying securities issued by foreign issuers. ADRs purchased for
the International Equity 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 International Equity Fund may invest without limit in securities issued or
guaranteed by the U.S. Government (and its agencies and instrumentalities),
foreign or domestic money market instruments and investment grade debt
securities, or may hold its assets in cash (U.S. dollars, foreign currencies or
multinational currency units).
RISK FACTORS. Although investing in any mutual fund has certain inherent risks,
an investment in the International Equity Fund may have even greater risks than
investments in most other types of mutual funds. The Fund is not a complete
investment program, and it may not be appropriate for an investor if he or she
cannot bear financially the loss of at least a significant portion of his or her
investment. The Fund's net asset value per share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Fund's
objective.
Risks Associated with Foreign Securities and Currencies. Investments in
securities of foreign issuers carry certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Fund will invest heavily in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will, to the extent the Fund does not hedge against such fluctuations,
affect the value of securities in the Fund so far as U.S. investors are
concerned. Foreign currency exchange rates are determined by forces of supply
and demand on the foreign exchange markets and the regulatory control of the
exchanges on which the currencies trade.
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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 International Equity
Fund may have greater difficulty taking appropriate legal action in a foreign
court than in a United States court.
The expense ratio of the International Equity 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 International Equity 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
International Equity Fund's shareholders. See "Tax Information."
ADDITIONAL INVESTMENTS
The International Equity 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 International Equity 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
IBCA 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 International Equity 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 objectives of the Funds and the Master Portfolio are not
fundamental, and may be changed by the Board of Directors (or the Master
Portfolio's Board of Trustees) without a vote by the holders of a majority of
the outstanding shares of a particular Fund (or of the outstanding interests of
the Master Portfolio). Each Fund is subject to investment limitations which are
fundamental, and therefore which may not be changed without a vote by the
holders of a majority of the outstanding shares of a particular Fund
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(or of the outstanding interests of the Master Portfolio). A complete list of
fundamental, and certain non-fundamental, investment limitations is set out in
the Statement of Additional Information.
MORE ABOUT RISK
A Fund's risk profile is largely defined by its primary securities and
investment practices.
The Funds are permitted to use -- within limits established by the
directors -- certain other securities and investment practices that have higher
risks and opportunities associated with them. To the extent that a Fund utilizes
these securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of types
of investment risks and certain investment securities and investment practices
of each Fund.
As with any mutual fund, there is no guarantee that a Fund will achieve its
goals or show a positive total return over any period of time -- days, months or
years.
TYPES OF INVESTMENT RISK
The following are some of the principal types of investment risks involved with
the securities and investment practices the Funds are permitted to use.
CORRELATION RISK. The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment). Incomplete correlation
can result in unanticipated risks.
CREDIT RISK. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
DERIVATIVES RISK. When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the Fund
also holds, any loss generated by the derivative should be substantially offset
by gains on the hedged investment, and vice versa. Derivatives may also be used
in lieu of the underlying securities, for example to gain equity exposure from
cash held by a Fund or with respect to the International Equity Fund to adjust
currency exposure. While hedging can reduce or eliminate losses, it can also
reduce or eliminate gains.
To the extent that a derivative is not used as a hedge, the fund is directly
exposed to the potential gains and losses of that derivative. Gains or losses
from non-hedging derivative positions in a derivative may be substantially
greater than the derivative's original cost.
CURRENCY RISK. The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK. The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INFORMATION RISK. The risk that key information about a security or market is
inaccurate or unavailable.
INTEREST RATE RISK. The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK. Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
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LIQUIDITY RISK. The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
MANAGEMENT RISK. The risk that a strategy used by a Fund's management may fail
to produce the intended result.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole.
NATURAL EVENT RISK. The risk of losses attributable to natural disasters, crop
failures and similar events.
OPPORTUNITY RISK. The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
POLITICAL RISK. The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK. The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK. The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
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HIGHER-RISK SECURITIES AND PRACTICES
This table shows each Fund's investment limitations as a percentage of portfolio
assets. Numbers in this table show allowable usage only; for actual usage,
consult the fund's Fund Growth Fund annual/semiannual reports. For more
information about these investments, see "Other Investment Practices and
Considerations."
<TABLE>
<CAPTION>
BLUE CHIP AGGRESSIVE
FUND GROWTH FUND
--------- -----------
<S> <C> <C>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
X No policy limitation on usage; fund may be using
currently
o Permitted, but has not typically been used
- -- Not permitted.
- ----------------------------------------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing of
money from banks or through reverse repurchase
agreements................................................ 33.3 33.3
REPURCHASE AGREEMENTS. The purchase of a security that must
later be sold back to the issuer at the same price plus
interest.................................................. X X
SECURITIES LENDING. The lending of securities to financial
institutions, which provide cash or government securities
as collateral............................................. 10 30
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The purchase
or sale of securities for delivery at a future date;
market value may change before delivery................... 25 25
- ----------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities issued by foreign governments
or companies as well as American Depository Receipts which
are dollar denominated securities typically issued by
banks and are based on ownership of securities issued by
foreign companies......................................... o 20
RESTRICTED AND ILLIQUID SECURITIES. Securities which can not
be disposed of in 7 days in the ordinary course of
business at fair value.................................... 15 15
INVESTMENT COMPANY SECURITIES. Securities issued by other
investment companies...................................... o o
- ----------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX
OPTIONS. Contracts involving the right or obligation to
deliver or receive assets or money depending on the
performance of one or more assets or an economic index.
X Futures and related options............................... * *
X Options on securities and indices......................... * *
* See "Options" and "Futures" for a description of
applicable investment limitations.
</TABLE>
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HIGHER-RISK SECURITIES AND PRACTICES
This table shows each Fund's investment limitations as a percentage of portfolio
assets. Numbers in this table show allowable usage only; for actual usage,
consult the Fund's annual/semiannual reports.
<TABLE>
<CAPTION>
ASSET CAPITAL
ALLOCATION INCOME
FUND FUND
---------- -------
<S> <C> <C>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
- - No policy limitation on usage; fund may be using
currently
o Permitted, but has not typically been used
- -- Not permitted
- -----------------------------------------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing of
money from banks or through reverse repurchase
agreements................................................ 33.3 33.3
REPURCHASE AGREEMENTS. The purchase of a security that must
later be sold back to the issuer at the same price plus
interest.................................................. - -
SECURITIES LENDING. The lending of securities to financial
institutions, which provide cash or government securities
as collateral............................................. 33.3 33.3
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The purchase or sale of securities for
delivery at a future date; market value may change before
delivery.................................................. 25 25
- -----------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities issued by foreign governments
or companies.............................................. 25 --
RESTRICTED AND ILLIQUID SECURITIES. Securities which can not
be disposed of in 7 days in the ordinary course of
business at fair value. May include illiquid Rule 144A
securities................................................ 15 15
INVESTMENT COMPANY SECURITIES. Securities issued by other
investment companies...................................... o o
MUNICIPAL SECURITIES. Obligations issued by state or local
governments............................................... - --
- -----------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES. Securities backed by unsecured
debt, such as credit card debt; these securities are often
guaranteed or over-collateralized to enhance their credit
quality................................................... - --
MORTGAGE-BACKED SECURITIES. Securities backed by pools of
mortgages................................................. 35 --
- -----------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX
OPTIONS. Contracts involving the right or obligation to
deliver or receive assets or money depending on the
performance of one or more assets or an economic index.
- - Futures and related options............................... * *
- - Options on securities and indices......................... * *
* See "Options" and "Futures" for a description of
applicable investment limitations.
</TABLE>
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ANALYSIS OF FUNDS WITH 25% OR MORE IN BONDS.(1)
<TABLE>
<S> <C> <C>
Investment-Grade Quality rating Capital Income
Bonds (S&P/Moody's) Fund
-----------
AAA/Aaa 5.4%/ 5.4%
AA/Aa 0%/ 0%
A/A %/ %
BBB/Baa %/ %
Junk Bonds BB/Ba or lower 52.5%/63.4%
Not Rated 1.9%/ 1.9%
Comparable to AAA/Aaa --%
Comparable to AA/Aa --%
Comparable to A/A --%
Comparable to BBB/Baa --%
Comparable to BB/Ba
or Lower 1.9%
</TABLE>
- ---------------
(1) Average weighted quality distribution for the most recent fiscal year.
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HIGHER-RISK SECURITIES AND PRACTICES
This table shows the Fund's investment limitations as a percentage of portfolio
assets. Numbers in this table show allowable usage only; for actual usage,
consult the fund's annual/semiannual reports. For more information about these
investments see 'Other Investment Practices and Considerations.'
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FUND
-------------
<S> <C>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
X No policy limitation on usage; fund may be using
currently
o Permitted, but has not typically been used
- -- Not permitted
- -----------------------------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing of
money from banks or through reverse repurchase
agreements................................................ o
REPURCHASE AGREEMENTS. The purchase of a security that must
later be sold back to the issuer at the same price plus
interest.................................................. X
SECURITIES LENDING. The lending of securities to financial
institutions, which provide cash or government securities
as collateral............................................. 33 1/3
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The purchase or sale of securities for
delivery at a future date; market value may change before
delivery.................................................. 25
- -----------------------------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities issued by foreign governments
or companies as well as American Depository Receipts which
are dollar denominated securities typically issued by
banks and are based on ownership of securities issued by
foreign companies......................................... 80+
RESTRICTED AND ILLIQUID SECURITIES. Securities which can not
be disposed of in 7 days in the ordinary course of
business at fair value. May include illiquid Rule 144A
securities................................................ 15
INVESTMENT COMPANY SECURITIES. Securities issued by other
investment companies...................................... o
- -----------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
CURRENCY CONTRACTS AND FORWARDS. Contracts involving the
right or obligation to buy or sell a given amount of
foreign currency at a specified price and future date..... X
X Hedged.................................................... *
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX
OPTIONS. Contracts involving the right or obligation to
deliver or receive assets or money depending on the
performance of one or more assets or an economic index.
X Futures and related options............................... *
X Options on securities, currencies and indices............. *
* See "Options," "Options on Foreign Currencies" and Stock
Index, Interest Rate and "Foreign Currency Futures
Contracts and Options" for a description of applicable
investment limitations.
</TABLE>
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<PAGE> 291
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
Options. The Blue Chip Master Portfolio and Asset Allocation Fund may purchase
put and call options on listed securities and stock indexes so long as the
aggregate of the premiums paid for options does not exceed 2% of the net assets
of the Blue Chip Master Portfolio or Asset Allocation Fund (this restriction
does not apply to options on futures contracts). Put options may be purchased in
order to protect the Blue Chip Master Portfolio's or the Asset Allocation Fund's
securities in expectation of a declining market, and call options may be
purchased to benefit from anticipated price increases in the underlying
securities or index. Neither the Blue Chip Master Portfolio nor the Asset
Allocation Fund may write put options but may write fully covered call options
as long as the Blue Chip Master Portfolio or the Asset Allocation Fund remain
fully covered throughout the life of the option, either by owning the optioned
securities or possessing a call issued by another writer that is identical in
all respects to the call written by the Blue Chip Master Portfolio or the Asset
Allocation Fund. The International Equity 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.
The Aggressive Growth, Capital Income and International Equity Funds may sell,
or "write," covered call options and may buy put and call options on particular
securities or various stock indices. The Capital Income Fund may buy only puts
that are covered.
Premiums paid for options purchased by the Aggressive Growth and the Capital
Income Funds will not exceed 5% of their net assets and securities subject to
options written by the Aggressive Growth and the Capital Income Funds will not
exceed 25% of their net assets. All options purchased or sold by the Aggressive
Growth Fund and the International Equity Fund may write, will be listed on a
national securities exchange and issued by the Options Clearing Corporation. The
International Equity 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.
Call options written by a 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 a 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 a Fund
holds a call on the same security and in the same principal amount as the call
written and the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, government
securities or other high grade debt obligations in a segregated account with its
custodian.
Put options sold or "written" by a Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A put option written
by a Fund is "covered" if the Fund maintains cash or other liquid portfolio
securities with a value equal to the exercise price in a segregated account with
its custodian, or holds a put on the same security and in the same principal
amount as the put written and the exercise price of the put held is equal to or
greater than the exercise price of the put written.
Put options purchased by a Fund give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. A Fund may sell a put option to the time the
securities underlying the option are actually sold, which will result in a gain
or loss to the Fund depending on whether the amount received from the sale is
more or less than the premium and other transaction costs associated with the
option.
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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.
Closing purchase transactions on previously written options may be entered into
by the Funds to realize a profit and/or to permit the Funds to write another
option on the underlying security. A Fund might write another option on the
underlying security in order to provide for a different exercise price or
expiration date. A profit or loss will be realized when an option is closed to
the extent the cost of the closing transaction is less or more, respectively,
than the premium received for writing the option.
When an option written by a Fund is exercised, the Fund will receive the
exercise price for the security as provided for in the option, but it loses the
opportunity to receive the price which it could have obtained for the security
in the open market, which will likely be higher than the exercise price of the
option.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, a Fund will not be able
to sell the underlying security on which a call option has been written until
the option expires or is exercised or the Portfolio closes out the option. In
addition, except to the extent that a call option written by the Portfolio or a
particular index is covered by an option on the same index purchased by a Fund,
movements in the index may cause a Fund to incur a loss. Such loss might be
lessened to the extent that the value of the securities held by the Portfolio
changed during the time the option was outstanding.
OPTIONS ON FOREIGN CURRENCIES. The Aggressive Growth and International Equity
Funds may purchase foreign currency options and write put and call options on
foreign currencies 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. The International Equity Fund may also use foreign currency options to
increase the Fund's gross income. 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 a 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 a Fund's position, such Fund may forfeit the entire amount
of the premium paid plus related transaction costs. Options on foreign
currencies written or purchased by a Fund may be traded on United States and
foreign exchanges or over-the-counter. There is no specific percentage
limitation on the International Equity Fund's investments in options on foreign
currencies.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. In the case of domestically-traded
options, the Funds will only write options where Bank of America believes a
liquid secondary market will exist on a national securities exchange for options
of the same series, which would permit a Fund to close out its option positions.
There are no assurances that a liquid secondary market will exist on an exchange
for a particular option or at any particular time. In fact, for some options no
secondary market on an exchange may exist at all. If a Fund cannot close out an
option, it will not be able to sell the securities underlying the option until
the option expires or is exercised.
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<PAGE> 293
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Funds may purchase and sell futures contracts on financial
instruments to hedge against changes resulting from market conditions in the
values of the securities held by a particular Fund or which a Fund intends to
purchase, or, in the case of the Aggressive Growth Fund and International Equity
Fund, to protect against fluctuating currency exchange rates. The Funds may
purchase and sell stock index futures contracts (and purchase related options;
the International Equity Fund may also sell such related options), and the Asset
Allocation, Capital Income and International Equity Funds may purchase and sell
interest rate futures contracts (as well as purchase or sell related options).
The Funds will only enter into these transactions where they are economically
appropriate for the reduction of risks inherent in the ongoing management of the
particular Fund.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the value of a specified stock index
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. A Fund may not purchase or sell a futures
contract or purchase related options unless immediately after any such
transaction the aggregate amount of margin deposits on its existing futures
positions and the amount of premiums paid for related options does not exceed 5%
of the Fund's total assets (after taking into account certain technical
adjustments).
Because perfect correlation between a futures position and portfolio position
that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and a Fund may be exposed to risk of loss. The
loss incurred by a Fund in entering into futures contracts and in writing call
options on futures contracts is potentially unlimited and may exceed the amount
of the premium received. Futures markets are highly volatile and the use of
futures may increase the volatility of a Fund's net asset value. In addition,
because of the low margin deposits normally required in futures trading, a
relatively small price movement in a futures contract may result in substantial
losses to a Fund.
A 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).
For a more detailed description of futures contracts and options and the costs
and risks related to such instruments, see the Statement of Additional
Information.
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 (in the case of International Equity Fund) to forecast stock price,
interest rate and currency exchange rate movements correctly. Should stock
price, 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
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over a period of time. In addition, the correlation between movements in the
prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses. The Fund's ability to dispose of its positions in futures
contracts, options and forward contracts will depend on the availability of
liquid markets in such instruments. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. In order to prevent leverage in connection with the purchase of
futures contracts or call options thereon by the Fund, an amount of cash, cash
equivalents or liquid portfolio securities equal to the market value of the
obligation under the futures contracts (less any related margin deposits) will
be maintained in a segregated account with the custodian.
SHORT-TERM OBLIGATIONS. Subject to the investment policies stated above, the
Blue Chip Master Portfolio may invest in short-term obligations such as variable
and floating rate instruments, including master demand notes. Although payable
on demand by the Blue Chip Master Portfolio, master demand notes may not be
marketable. Consequently, the ability to redeem such notes may depend on the
borrower's ability to pay, which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, or the
equivalent from another nationally recognized statistical rating organization
("NRSRO") (b) have commercial paper rated at least Prime-2 by Moody's or A-2 by
S&P, or the equivalent by another NRSRO (c) are backed by a bank letter of
credit or (d) are determined by Bank of America to be of a quality comparable to
securities described in either clause (a) or (b).
The Blue Chip Master Portfolio may invest up to 20% of its total assets in cash
equivalent securities. Cash equivalents are the following short-term interest
bearing instruments: obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities (some of which may be subject to repurchase
agreements), certificates of deposit, bankers' acceptances, time deposits and
other interest-bearing deposits issued by domestic and foreign banks and foreign
branches of U.S. banks, foreign government securities, and commercial paper
issued by U.S. and foreign issuers which is rated at the time of purchase at
least Prime-2 by Moody's or A-2 by S&P, D&P and Fitch IBCA.
Money market instruments such as short-term bank time deposits, certificates of
deposit and bankers' acceptances, commercial paper, and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities as well as
repurchase agreements and variable and floating rate instruments, may be
purchased by the Aggressive Growth Fund as long as such instruments are rated
within the two highest rating categories. Unrated instruments may also be
purchased if they are of comparable quality. Investments in variable and
floating rate instruments that have no active trading market and are not payable
upon seven days' notice will be subject to the percentage limitation on illiquid
instruments described above. During the current fiscal year, the Aggressive
Growth Fund does not expect to invest more than 5% of its total assets at any
time in any particular type of money market instrument.
INVESTMENT COMPANY SECURITIES. The Funds may invest in securities issued by
other investment companies (including money market funds advised by Bank of
America,) to the extent permitted in the 1940 Act, except that with respect to
the investment in a money market mutual fund advised by Bank of America, a Fund
is permitted to invest the greater of 5% of its net assets or $2.5 million.)
REPURCHASE AGREEMENTS. The Funds may also enter into repurchase agreements.
Under these agreements, the Funds will enter into repurchase agreements only
with financial institutions (such as banks and broker-dealers) deemed
creditworthy by Bank of America (or Wellington Management, as applicable), under
guidelines approved by the Company's Board of Directors. Repurchase agreements
are considered to be loans under the 1940 Act. Repurchase agreements will be
entered into only for debt obligations issued or guaranteed by the U.S.
Government,
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its agencies or instrumentalities, certificates of deposit, bankers' acceptances
or commercial paper, and either the Fund's custodian or its agent will have
physical possession of the securities or the securities will be transferred to
the Fund's custodian, by appropriate entry in the Federal Reserve Bank's records
and, in either case, will be maintained in a segregated account.
Bank of America (or Wellington Management, as appropriate) will monitor the
value of securities acquired under repurchase agreements to ensure that the
value of such securities will always equal or exceed the repurchase price under
the repurchase agreement. If the other party to a repurchase agreement defaults,
a Fund might incur a loss if the value of the securities securing the repurchase
agreement declines, and might incur disposition costs in connection with
liquidating the securities. In addition, if bankruptcy proceedings are commenced
with respect to the seller, realization upon the securities by a Fund may be
delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements. Under these arrangements, a Fund will sell a security held by the
Fund to either a bank (which has a commercial paper rating of A-2 or better by
S&P, Prime-2 or better by Moody's or the equivalent by another NRSRO) or a
registered broker-dealer, with an agreement to repurchase the security on an
agreed date, price and interest payment. When a Fund enters into a reverse
repurchase agreement, it places in a separate custodial account either liquid
assets or other liquid high grade debt securities that have a value equal to or
greater than the repurchase price (including accrued interest). The account is
then continuously monitored to make sure that an appropriate value is
maintained. Reverse repurchase agreements involve the possible risk that the
value of portfolio securities the Funds relinquish may decline below the price
the Funds must pay when the transaction closes. Reverse repurchase agreements
are considered to be borrowings under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of the particular Fund's outstanding shares. The Capital
Income and International Equity Funds will only enter into reverse repurchase
agreements to avoid the need to sell portfolio securities to meet redemption
requests during unfavorable market conditions.
SECURITIES LENDING. In order to earn additional income, each Fund may lend its
portfolio securities to broker-dealers, banks and other financial institutions
that Bank of America or Wellington Management (as appropriate) consider to be of
good standing. Borrowers of portfolio securities may not be affiliated directly
or indirectly with the Company or the particular Fund. If the broker-dealer or
other counterparty should become bankrupt, however, a Fund could experience
delays in recovering its securities. A securities loan will only be made when,
in Bank of America's judgment, the possible reward from the loan justifies the
possible risks. In addition, such loans will not be made if, as a result, the
value of securities loaned exceeds 33 1/3% of the total assets of a Fund.
Securities loans will be fully collateralized.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, the Aggressive Growth, Capital
Income and International Equity Funds may purchase or sell securities on a
"delayed settlement" basis. When-issued and forward commitment transactions,
which involve a commitment by a Fund to purchase or sell particular securities
with payment and delivery taking place at a future date (perhaps one or two
months later), permit a Fund to lock in a price or yield on a security 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 Funds will set aside in a segregated account cash or
liquid securities equal to the amount of any when-issued, forward commitment or
delayed settlement
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transactions. When-issued purchases, forward commitments and delayed settlements
are not expected to exceed 25% of the value of a Fund's total assets under
normal circumstances. These transactions will not be entered into for
speculative purposes, but primarily in order to hedge against anticipated
changes in interest rates.
ILLIQUID SECURITIES. The Funds will not invest more than 15% of the value of
their respective total assets (determined at the time of acquisition) in
securities that are illiquid. If, after the time of acquisition, events cause
this limit to be exceeded, a Fund will take steps to reduce the aggregate amount
of illiquid securities as soon as is reasonably practicable. The International
Equity 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.
VARIABLE RATE INSTRUMENTS. The Asset Allocation Fund may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Asset Allocation Fund, master demand notes may not be
marketable. Consequently, the ability to redeem such notes may depend on the
borrower's ability to pay which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or the
equivalent by another NRSRO, (c) are backed by a bank letter of credit or (d)
are determined by Bank of America to be of a quality comparable to securities
described in either clause (a) or (b).
ASSET-BACKED SECURITIES. The Asset Allocation Fund may purchase asset-backed
securities. Asset-backed securities consist of undivided fractional interests in
pools of consumer loans (unrelated to mortgage loans) or receivables held in a
trust. Examples include certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on the loans
or receivables are passed through to certificate holders. Asset-backed
securities may be issued by either governmental or non-governmental entities.
Payment on asset-backed securities of private issuers is typically supported by
some form of credit enhancement, such as a letter of credit, surety bond,
limited guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's par value
until exhausted. Ultimately, asset-backed securities are dependent upon payment
of the consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables. All asset-backed securities purchased by the Asset Allocation Fund
will either be issued or guaranteed by a U.S. Government entity or rated AAA by
S&P, Aaa by Moody's or have an equivalent rating from any other rating agency.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Asset Allocation Fund must be reinvested
in securities whose yields reflect interest rates prevailing at the time. Thus,
the Asset Allocation Fund's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
reinvestments are in lower yielding securities. The actual maturity and realized
yield will therefore vary based upon the prepayment experience of the underlying
asset pool and prevailing interest rates at the
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time of prepayment. Asset-backed securities may be subject to greater risk of
default during periods of economic downturn than other instruments. Also, while
the secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress, the secondary market may not be as liquid as the
market for other types of securities, which could result in the Asset Allocation
Fund's experiencing difficulty in valuing or liquidating such securities.
YEAR 2000 RISKS. An issue has emerged in the investment services industry and
for the economy overall regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. The Fund has been informed by Bank of America that it has a
team in place working on year 2000 systems compliance and that Bank of America
expects to have its systems ready by the year 2000. Certain other service
providers have provided similar information to the Fund. Nevertheless, the
inability of Bank of America and the other service providers to successfully
address year 2000 issues could result in interruptions in the Fund's business
and have a material adverse impact on the Fund's operations.
PORTFOLIO TRANSACTIONS. Investment decisions for each Fund are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities, or Wellington Management. Such
other investment companies and accounts may also invest in the same securities
as a Fund. When a purchase or sale of the same security is made at substantially
the same time on behalf of a Fund and another investment company or account,
available investments or opportunities for sales will be equitably allocated
pursuant to procedures of Bank of America or Wellington Management. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold by a Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), 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 and the Fund's distributor to the extent permitted by
law), provided it believes the quality of the transaction and the price to the
particular Fund are not less favorable than what they would be with any other
qualified firm.
PORTFOLIO TURNOVER. The Funds' investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs than would otherwise be the case. Higher rates of turnover may
require payment of brokerage commissions, impose other transaction costs and
could increase substantially the amount of income received by a Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). Portfolio turnover will not be a limiting factor in
making investment decisions for the Fund. The Aggressive Growth Fund's
investment practices in particular, which involve an effort to own stocks during
periods of accelerating earnings growth and strong relative price momentum, may
result in portfolio turnover greater than that of other mutual fund portfolios.
See "Financial Highlights" for the Funds' portfolio turnover rates for the
period ended February 28, 1998.
MASTER-FEEDER STRUCTURE. The Blue Chip Fund is an open-end investment portfolio
that seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio which has
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the same investment objective as the Blue Chip Fund. The Blue Chip Fund may
withdraw its investment in the Master Portfolio at any time if the Board of
Directors of the Company determines that it is in the best interest of the Blue
Chip Fund to do so. Upon such withdrawal, the Board of Directors would consider
what action might be taken, including the investment of all of the assets of the
Blue Chip Fund in another pooled investment entity having the same investment
objective as the Blue Chip Fund or the hiring of an investment adviser to manage
the Blue Chip Fund's assets in accordance with the investment policies described
above with respect to the Master Portfolio. See "Expense Summary," "Fund
Investments" and "Fund Management" for a description of this investment
objective and the investment policies, restrictions, management and expenses of
the Blue Chip Fund and the Master Portfolio.
The Blue Chip Master Portfolio is a separate series of Master Investment Trust,
Series I (the "Master Trust"), which is organized as a business trust under the
laws of Delaware. The Blue Chip Fund and other entities that may invest in the
Blue Chip Master Portfolio from time to time (e.g., other investment companies
and commingled trust funds) will each be liable for all obligations of the Blue
Chip Master Portfolio. However, the risk of the Blue Chip Fund's incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Blue Chip Master Portfolio itself is
unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Blue Chip Fund nor its shareholders will be adversely
affected by reason of the Blue Chip Fund's investing in the Blue Chip Master
Portfolio. As with any mutual fund, other investors in the Blue Chip Master
Portfolio could control the results of voting at the Blue Chip Master Portfolio
level in certain instances (e.g., a change in fundamental policies by the Blue
Chip Master Portfolio which was not approved by the Blue Chip Fund's
shareholders). This could result in the Blue Chip Fund's withdrawal of its
investment in the Blue Chip Master Portfolio, and in increased costs and
expenses for the Blue Chip Fund. Further, the withdrawal of other entities that
may from time to time invest in the Blue Chip Master Portfolio could have an
adverse effect on the performance of the Blue Chip Master Portfolio and the Blue
Chip Fund, such as decreased economies of scale and increased per share
operating expenses. In addition, the total withdrawal by another investment
company as an investor in the Blue Chip Master Portfolio will cause the Blue
Chip Master Portfolio to terminate automatically in 120 days unless the Blue
Chip Fund and any other investors in the Blue Chip Master Portfolio unanimously
agree to continue the business of the Blue Chip Master Portfolio. If unanimous
agreement is not reached to continue the Blue Chip Master Portfolio, the Board
of Directors of the Company would need to consider alternative arrangements for
the Blue Chip Fund, such as those described above. When the Fund is required to
vote as a shareholder of the Blue Chip Master Portfolio, current regulations
provide that in those circumstances the Fund may either seek instructions from
its security holders with regard to voting of such proxies and vote such proxies
in accordance with such instructions, or the Fund may vote its shares in the
Blue Chip Master Portfolio in the same proportion of all other security holders
in the Blue Chip Master Portfolio. The policy of the Fund, and other similar
investment companies, to invest their investable assets in trusts such as the
Blue Chip Master Portfolio is a relatively recent development in the mutual fund
industry and, consequently, there is a lack of substantial experience with the
operation of this policy.
There may also be other investment companies through which you can invest in the
Master Portfolio which may have higher or lower fees and expenses than those of
the Blue Chip Fund and which may therefore have different performance results
than the Blue Chip Fund. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling 800-346-2087.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUNDS' SHARES AND
REGARDING THE FUNDS' DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- -----------
<S> <C> <C>
Regular Account.................................. $ 500* $ 50
Automatic Investment Plan........................ $ 50 $ 50
IRAs, SEP-IRAs (one participant)................. $ 500 No minimum
Spousal IRAs**................................... $ 250 No minimum
SEP-IRAs (more than one participant)............. $2,500 No minimum
</TABLE>
- ---------------
* The minimum investment is $100 for purchases made through Bank of America or
its affiliates' trust and agency accounts or a Service Organization (defined
below) whose clients have made aggregate minimum purchases of $1,000,000. The
minimum investment is $200 for BankAmericard holders with an appropriate
award certificate.
** A regular IRA must be opened in conjunction with this account.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds generally issue three 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. B Shares are sold to investors choosing
the contingent deferred sales charge alternative. K Shares, which are not
available to investors in the Short-Term Government Fund, 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
Provident Distributors, Inc. and Bank of America, respectively, or their
affiliates; (c) accounts opened for IRA rollovers from a 401(k) plan in which
the assets were held in any Pacific Horizon or Time Horizon Fund and subsequent
purchases into an IRA rollover account opened as described above, so long as the
original IRA rollover account remains open on the Company's books; (d) accounts
under Section 403(b)(7) of the Code; (e) deferred compensation plans under
Section 457 of the Code; and (f) certain other retirement plans. The three
classes of shares in each Fund represent interests in the same portfolio of
investments of the particular Fund, have the same rights and are identical in
all respects except as discussed below. A Shares are sold with a front-end sales
load, bear the expenses of a Shareholder Services Plan and have exclusive voting
rights with respect to the Plan. B Shares bear the expenses of a Distribution
and Services Plan and have exclusive
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voting rights with respect to the Distribution and Services Plan. B Shares also
bear the expenses of the contingent deferred sales charge arrangements and any
expenses resulting from such arrangements. 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 three classes also have
different exchange privileges, as described below. The net income attributable
to A, B and K Shares and the dividends payable on A, B and K Shares will be
reduced by the amount of the: (a) Shareholder Services Plan fees attributable to
A Shares, (b) Distribution and Services Plan fees attributable to B Shares, (c)
Distribution Plan fees and/or Administrative and Shareholder Services Plan fees
attributable to K Shares, respectively, and (d) the incremental expenses
associated with such Plans. Lastly, B Shares of the Fund held for 9 years will
automatically convert into A Shares of the Fund.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
<TABLE>
<S> <C> <C>
(Value of Assets Attributable to the Class)
- (Liabilities Attributable to the Class)
NAV =
---------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
A Fund's investments are valued at market value or, where market quotations are
not readily available, at fair value as determined in good faith by the Fund (or
the Blue Chip Master Portfolio, as appropriate), pursuant to procedures adopted
by the Board of Directors (or Master Portfolio's Board of Trustees). Short-term
debt securities are valued at amortized cost, which approximates market value.
For further information about valuing securities, see the Statement of
Additional Information. For price information call (800) 346-2087.
The per share net asset values of A, B and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 5.50% and may decrease as the amount you invest increases, as
shown in the following chart:
<TABLE>
<CAPTION>
DEALER'S
SALES CHARGE SALES CHARGE REALLOWANCE*
(AS A % OF (AS A % OF (AS A % OF
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE) INVESTED) PRICE)
----------- ------------ --------------- ------------
<S> <C> <C> <C>
Less than $50,000..................................... 5.50% 5.82% 5.00%
$50,000 but less than $100,000........................ 4.50% 4.71% 4.00%
$100,000 but less than $250,000....................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000....................... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000..................... 2.00% 2.04% 1.75%
</TABLE>
- ---------------
* Dealer's reallowance may be changed periodically.
There is no initial sales charge on purchases of Class A shares of $1 million or
more. However, unless you participated in the Bank of America Daily
Advantage(TM) or Advantage Plus(TM) programs, a contingent
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deferred sales charge of 1% will be imposed on redemptions made within 18 months
after purchase. The Distributor will pay dealers of record commissions on
purchases above $1 million in an amount equal to (i) 1.00% on sales up to $5
million; (ii) 0.50% on the next $45 million; and (iii) 0.25% on sales over $50
million.
From time to time, the Funds' distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Funds.
To the extent that no other A Share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon Fund or Time Horizon
Fund equals or exceeds $1,000,000.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B Shares may be purchased at net
asset value per share without the imposition of a sales charge at the time of
purchase. The Fund's distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time the
shares are purchased. The proceeds of the contingent deferred sales charges and
the ongoing distribution and services plan fees described below are used to
reimburse Bank of America for its expenses, including the compensation of
broker-dealers.
B Shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value of the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. B Shares will convert to A Shares at the end of the month in
which the ninth anniversary of the date of purchase occurs unless the B Shares
have been exchanged for Y Shares of the Pacific Horizon Prime Fund.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF THE
NUMBER OF YEARS DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
---------------------- -----------------------------
<S> <C>
Less than one..................................... 5.00%
More than one, but less than or equal to two...... 4.00%
More than two, but less than or equal to three.... 3.00%
More than three, but less than or equal to four... 3.00%
More than four, but less than or equal to five.... 2.00%
More than five, but less than or equal to six..... 1.00%
After six years................................... 0.00%
</TABLE>
- ---------------
* The time period during which Y Shares of the Pacific Horizon Prime Fund
acquired through an exchange are held is not included when the amount of the
contingent deferred sales charge is calculated.
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B Shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B Shares above the total amount of payments for
the purchase of B Shares during the preceding 6 years, then of amounts
representing the cost of B Shares held beyond the applicable
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contingent deferred sales charge period; and finally, of amounts representing
the number of the B Shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Y Shares of the Pacific Horizon
Prime Fund, that in the third year after purchase the net asset value per share
is $12, and that during the three-year period you had acquired 10 additional
shares through dividend reinvestment. If at such time you make your first
redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the
charge because of dividend reinvestment. With respect to the remaining 40
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 3.00% (the applicable rate in
the third year after purchase).
WHEN NO FRONT-END SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
X reinvestment of dividends or distributions;
X any purchase by an investor who is a shareholder of SRF shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
X 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;
X any purchase through FundAdvisor(TM) or FundManager(TM) from BA Investment
Services, Inc. (However, existing clients who purchased the Funds load- waived
through Fund Selections(TM) will be able to make additional purchases without
paying the front-end sales charge until June 30, 1998. Clients who have
Automatic Investment Programs may continue to invest no-load after June 30,
1998.)
X 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;
X any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
or by or on behalf of agency accounts administered by any bank or trust
company affiliate of Bank of America;
X any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open
on the Company's books;
X 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;
X any purchase of shares pursuant to the Reinstatement Privilege described
below; and
X any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
X members of the Company's Board of Directors and their spouses;
X 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
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parents, spouses, minor children and grandchildren, as well as members of the
Board of Directors of Bank of America or any of its affiliates;
X registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
X holders of the BankAmericard with an appropriate award certificate;
X former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
X Lucky Store Cardholders during periodic promotions under the Periodic No- Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Funds may be purchased without
a front-end sales load pursuant to the Program.)
X Investors who during periodic retail merchandising campaigns of Bank of
America request information and subsequently purchase shares. (Promotional
material will delineate the beginning and ending date during which information
must be requested and Fund shares purchased.)
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES
The CDSC will be waived on redemptions of B shares (i) following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended (the
"Code")) of a shareholder (including a registered joint owner), (ii) in
connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified corporate or self-employed retirement plan
following retirement (or in the case of a "key employee" of a "top heavy" plan,
following attainment of age 59 1/2); (b) distributions from an IRA or Custodial
Account under Section 403(b)(7) of the Code following attainment of age 59 1/2;
(c) a tax-free return of an excess contribution to an IRA; and (d) distributions
from a qualified retirement plan that are not subject to 10% additional Federal
withdrawal tax pursuant to Section 72(t)(2) of the Code, (iii) payments made to
pay medical expenses which exceed 7.5% of income and distributions to pay for
insurance by an individual who has separated from employment and who has
received unemployment compensation under a federal or state program for at least
12 weeks, (iv) effected pursuant to the Funds' right to liquidate a
shareholder's account, including instances where the aggregate net asset value
of the B shares held in the account is less than the minimum account size, (v)
effected pursuant to the Automatic Withdrawal Plan discussed below, provided
that such redemptions do not exceed, on an annual basis, 12% of the net asset
value of the B Shares in the account, and (vi) in connection with the
combination of the Funds with any other registered investment company by a
merger, acquisition of assets or by any other transaction. Shareholders are
responsible for providing evidence sufficient to establish that they are
eligible for any waiver of the CDSC.
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).
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To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
EXAMPLE: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Municipal Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of a Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.50% 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 $50,000 or more in shares of any Pacific Horizon or
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. A Shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A, B or K shares, you should consider all
relevant factors, including the dollar amount of your purchase, the length of
time you expect to hold the shares, the amount of any applicable front-end sales
charge or contingent deferred sales charge, the amount of any applicable
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distribution, administrative or service fee that may be incurred while you own
the shares, whether or not you will be reinvesting income or capital gain
distributions in additional shares, whether or not you meet applicable
eligibility requirements or qualify for a sales charge waiver or reduction in
the case of A shares, whether to have the entire initial purchase price invested
in the Fund with the investment thereafter being subject to a contingent
deferred sales charge in the case of B Shares, whether you are eligible to
purchase K shares, and the relative level of services that are provided to
different classes.
When you purchase A shares, you will normally pay a front-end sales charge. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the absence of a front-end sales charge. A Shares also
bear the expense of a shareholder service plan. As an illustration, investors
who qualify for a significantly reduced sales load, as described above, might
elect the front-end sales charge alternative (A Shares) because similar sales
charge reductions are not available for purchases under the contingent deferred
sales charge alternative (B Shares). Moreover, A Shares would not be subject to
ongoing distribution and services plan fees, as described below. However,
because front-end sales charges are deducted at the time of purchase, such
investors who pay a front-end sales charge would not have all their funds
invested initially. The Company will not accept any order for B Shares from an
investor who is eligible to purchase A Shares without a sales load or from an
investor eligible to purchase K Shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in a Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing Distribution and Services Plan fees related to B Shares may exceed
the front-end sales charge and ongoing Shareholder Services Plan fees related to
A Shares. However, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
distribution and services plan fees may be offset to the extent any return is
realized on the additional funds initially invested under the contingent
deferred sales charge alternative.
Certain investors might determine it to be more advantageous to have all their
funds invested initially in B Shares, although subject to continuing
distribution and services plan fees and to a contingent deferred sales charge
for a 6-year period of time. Alternatively, when you purchase K shares, you will
not pay a front-end sales charge and all of your monies will be fully invested
at the time of purchase. However, K shares are subject to annual distribution
and/or administrative and shareholder service fees. K Shares are only available
to certain types of investors and are not available to investors in the
Short-Term Government Fund. See "What Alternative Sales Arrangements are
Available?" Investors not qualifying for a reduced front-end sales charge who
expect to maintain their investment in the Fund for an extended period of time
might also elect the front-end sales charge alternative because over time the
accumulated continuing Distribution and Services Plan fees related to B Shares
may exceed the front-end sales charge and ongoing Shareholder Services Plan fees
related to A Shares. However, such investors must weigh this consideration
against the fact that not all their funds will be invested initially.
Furthermore, the ongoing distribution and services plan fees may be offset to
the extent any return is realized on the additional funds initially invested
under the contingent deferred sales charge alternative. Investors not qualifying
for a reduced front-end sales charge who expect to maintain their investment in
the Fund for an extended period of time might also elect the front-end sales
charge alternative because over time the accumulated continuing Distribution and
Services Plan fees related to B Shares may exceed the front-end sales charge and
ongoing Shareholder Services Plan fees related to A Shares. However, such
investors must weigh this consideration against the fact that not all their
funds will be invested initially. Furthermore, the ongoing distribution and
services plan fees may be offset to the
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extent any return is realized on the additional funds initially invested under
the contingent deferred sales charge alternative.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
TO BUY SHARES
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------ --------------------
<S> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete an Account Application Mail all subsequent investments
and mail it with a check to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. The Company P.O. Box 8968
will not accept third party Wilmington, DE 19899-8968
checks for investment.
IN PERSON Deliver an Account Application Deliver your payment directly to
Pacific Horizon Funds, Inc. and your payment directly to the the address on the left.
c/o PFPC, Inc. address on the left.
400 Bellevue Parkway
Suite 108
Wilmington, DE 19809
BY WIRE Initial purchases of shares into Contact the Fund's transfer
a new account may not be made by agent at 800-346-2087 for
wire. complete wiring instructions.
Instruct your bank to transmit
immediately available funds for
purchase of shares of a
particular Fund in your name.
Be sure to include your name and
your Fund account number.
Consult your bank for information on remitting funds by wire and
any associated bank charges.
</TABLE>
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<PAGE> 307
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------ --------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not be Purchases may be made in the
(a service permitting transfers used to make an initial minimum amount of $500 and the
of money from your checking, purchase. maximum amount of $50,000 per
savings or bank money market transaction as soon as
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.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
You may use other investment options, including automatic investments
and exchanges, to invest in your Fund account.
Please refer to the section entitled "Shareholder Services" for more
information.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' Transfer Agent.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Funds are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
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WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, B or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by a Fund. If you purchase or redeem
shares directly from a Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
a Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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<PAGE> 309
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<TABLE>
<S> <C>
BY MAIL Send a signed, written request (each owner, including
Pacific Horizon Funds, Inc. each joint owner, must sign) to the Transfer Agent. If
[NAME OF FUND] you hold stock certificates for the shares being
P.O. Box 8968 redeemed, make sure to endorse them for transfer, have
Wilmington, DE 19899-8968 your signature on them guaranteed by your bank or
another guarantor institution (as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") and include them with your request.
IN PERSON Deliver your signed, written request (each owner,
Pacific Horizon Funds, Inc. including each joint owner, must sign) and any
c/o PFPC, Inc. certificates (endorsed for transfer and signature
400 Bellevue Parkway guaranteed as described in the section entitled "What
Suite 108 Wilmington, DE 19809 Kind Of Paperwork Is Involved In Selling Shares?") to
the address on the left.
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you
may write, telephone or telegraph redemption requests to
the Transfer Agent, and redemption proceeds will be
wired in federal funds to the commercial bank you have
specified. Information regarding your bank account may
be provided on the Account Application or in a signature
guaranteed letter of instruction to the Transfer Agent.
Signature guarantee requirements are discussed in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?"
Redemption proceeds will normally be wired the business
day after your request and any other necessary documents
have been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written
notice to the Transfer Agent that you do not wish to
have them.
Requests must be for at least $1,000 and may be subject
to limits on frequency and amount.
Wire Privileges may be modified or suspended at any
time, and are not available for shares issued in
certificate form.
Contact your bank for information on any charges imposed
by the bank in connection with receipt of redemptions by
wire.
</TABLE>
58
<PAGE> 310
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum
(a service permitting transfers of money to your of $50,000 per transaction) by telephone after
checking, savings or bank 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 guarantee requirements are
discussed in the section entitled "What Kind of
Paperwork Is Involved in Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you
indicate on the Account Application or in a subsequent
written notice to the Transfer Agent that you do not
wish to have them. You should refer to the "Shareholder
Services" section for additional important information
about the TeleTrade Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS,
ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED
"SHAREHOLDER SERVICES" FOR MORE INFORMATION.
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent. Although the
Funds impose no charge when A Shares are redeemed, if you purchase shares
through Bank of America or a Service Organization they may charge a fee for
providing certain services in connection with investments in Fund shares.
When you redeem your B Shares within 6 years of purchase (or longer if you
shares have been exchanged for Y Shares of the Pacific Horizon Prime Fund), you
may be subject to a contingent deferred sales charge as described above.
The Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance. 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, B
or K Shares. If you own either A or K as well as B Shares of the Fund, A or K
Shares will be redeemed first unless you request otherwise. Certain types of
redemption requests as well as all endorsed share certificates will need to
include a signature guarantee. Signature guarantees must accompany redemption
requests for (i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of record on
the Company's books, or (iii) an amount of $50,000 or less if the address of
record has not been on the Company's books for sixty days.
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<PAGE> 311
A signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association who are participants in a
Medallion Program recognized by the Securities Transfer Association. The three
recognized Medallion Programs are Securities Transfer Agent Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Program (MSP). Signature Guarantees which are not a part of these
programs will not be accepted. Please note that a notary public stamp or seal is
not acceptable.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds, within 120 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Funds' distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed B Shares or any Y 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 Blue Chip Fund are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments in the Master Portfolio which are allocable to that Fund.
The Blue Chip, Asset Allocation and Capital Income Funds' net income is declared
and paid as a dividend quarterly. The Aggressive Growth and International Equity
Funds' net income is declared and paid as a dividend annually. Net realized
capital gains (if any) from each Fund are distributed at least annually.
Dividends are paid within five business days after the end of the quarter or
year, as applicable.
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<PAGE> 312
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at per
share net asset value determined as of the date of payment of the distribution.
In addition, any undeliverable checks or checks that remain uncashed for six
months will be cancelled and will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, PFPC Inc., at P.O. Box 8968, Wilmington,
Delaware 19899-8968. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to B Shares 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
Funds' at 800-346-2087. Investors should also read the IRA Disclosure Statement
and the Bank Custodial Agreement for further details on eligibility, service
fees and tax implications, and should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares, B Shares may be
exchanged for other B 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
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SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME HORIZON FUNDS. B Shares may
be exchanged for other B Shares or for Y Shares of the Pacific Horizon Prime
Fund without the payment of any contingent deferred sales charge at the time the
exchange is made. In addition, Y Shares of the Pacific Horizon Prime Fund that
were acquired through an exchange of B Shares may be exchanged for B Shares
without the payment of any contingent deferred sales charge at the time the
exchange is made. In determining the holding period for calculating the
contingent deferred sales charge payable upon redemption of B Shares, the
holding period of the shares originally held will be added to the holding period
of the shares acquired through the exchange unless the shares acquired through
the exchange are Y Shares of the Pacific Horizon Prime Fund. The time period
during which Y Shares of the Pacific Horizon Prime Fund acquired through an
exchange are held is not included when the amount of the contingent deferred
sales charge is calculated.
An investment in a Fund automatically entitles you to use this Privilege, unless
you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, savings 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,
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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,
savings or bank money market account designated by you will be debited in the
specified amount, and Fund shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days. Only accounts maintained
at a domestic financial institution which permits automatic withdrawals and is
an Automated Clearing House member are eligible. The Automatic Investment
Program is one means by which you may use Dollar Cost Averaging in making
investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
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CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
Use of this Plan may also be disadvantageous for B Shares due to a potential
need to pay a contingent deferred sales charge.
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
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SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Funds. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and NationsBank
Corporation ("NationsBank") announced a definitive agreement to merge and form a
new holding company to be named BankAmerica Corporation (the "Merger"). The
Merger is anticipated to close by the end of 1998, however, it is subject to a
number of approvals including shareholder and regulatory approvals.
In separate advisory agreements with the Master Trust and the Company (the
"Advisory Agreements"), Bank of America has agreed to manage the Funds'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Fund's securities. The Advisory
Agreements also provide that Bank of America may: 1) in its discretion, provide
advisory services through its own employees or employees of one or more of its
affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation, provided such employees are under the management of
Bank of America and 2) employ a sub-adviser provided that Bank of America
remains fully responsible to the Company and Master Trust for the acts and
omissions of the sub-adviser.
Bank of America Illinois' Investment Advisors Division is responsible for the
day-to-day investment activities of the Blue Chip Master Portfolio and
Aggressive Growth Fund (effective July 12, 1998). The investment management team
is headed by James Miller, Executive Vice President and Chief Investment Officer
of BofA Illinois (a wholly-owned subsidiary of BankAmerica Corporation). Mr.
Miller has been the Master Portfolio's manager since May 1995 and has been
associated with BofA Illinois Investment Management (and its predecessor
Continental Bank) since 1988. Mr. Miller is a Chartered Financial Analyst, a
member of the Association of Investment Management and Research, and a former
Director of the Investment Analysts Society of Chicago.
An investment management team headed by James Miller, Chief Investment Officer
of Quantitative Based Equity Management for Bank of America is responsible for
day-to-day investment activities of the equity portion of the Asset Allocation
Fund. Mr. Miller has been associated with Bank of America since 1988. Steven L.
Vielhaber is primarily responsible for the selection of particular securities
for the fixed-income portion of the Asset Allocation Fund. Mr. Vielhaber has
been the Asset Allocation Fund's manager since April 1994 and has been employed
by Bank of America since 1993. Prior thereto, Mr. Vielhaber had been Director of
Fixed Income Marketing at Dimensional Fund Advisers since 1990, and Vice
President and Manager of Investments at Gibraltar Savings from 1986 to 1990.
Ed Cassens, Vice President and Senior Portfolio Manager of BofA Capital
Management, Inc. is primarily responsible for the day-to-day investment
activities of the Capital Income Fund. Mr. Cassens has been the Capital Income
Fund's manager since November 1994 and has been associated with Bank of
America's Northwest Division and its predecessor since 1966. Mr. Cassens
currently manages Bank of America's EBT Convertible Securities Trust and
Convertible Securities Common Trust Fund and has managed the Seafirst Equity
Income Common Trust Fund since 1987.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.50%, 0.60%,
0.40%, 0.45% and 0.75% of the Blue Chip Master Portfolio's, Aggressive Growth
Fund's, Asset Allocation Fund's, Capital Income Fund's and International Equity
Fund's average daily net assets, respectively. These amounts may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers.") For
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the year ended February 28, 1998, the Blue Chip Master Portfolio, Aggressive
Growth Fund, Asset Allocation Fund and Capital Income Fund paid Bank of America
advisory fees at an effective annual rate of 0.50%, 0.60%, 0.40% and 0.45% of
the respective average daily net assets of the Blue Chip Master Portfolio,
Aggressive Growth Fund, Asset Allocation Fund and Capital Income Fund and Bank
of America waived a portion of its fee at an effective annual rate of 0.04% of
the Blue Chip Master Portfolio's average daily net assets. For the year ended
February 28, 1998, Bank of America waived its entire investment advisory fee
payable by the International Equity Fund. Prior to June 23, 1997, Bank of
America was entitled to receive an investment advisory fee at the annual rate of
0.55% of the average daily net assets of the Asset Allocation Master Portfolio.
On that date, the Asset Allocation Fund withdrew its investment in the Asset
Allocation Master Portfolio and began investing directly in portfolio securities
pursuant to a new investment advisory agreement between the Company and Bank of
America which superseded the existing advisory agreement between the Master
Trust and Bank of America with respect to the Asset Allocation Master Portfolio.
For the period from March 1, 1997 through June 23, 1997, Bank of America waived
its entire advisory fee payable by the Asset Allocation Fund. For the period
March 1, 1997 through June 23, 1997, the Asset Allocation Master Portfolio paid
Bank of America advisory fees at the effective annual rate of 0.02% and Bank of
America waived a portion of its advisory fees at an effective annual rate of
0.13% of such Portfolio's average daily net assets. For the period June 24, 1997
through February 28, 1998, the Asset Allocation Fund paid Bank of America
advisory fees at an effective annual rate of 0.28% of such Fund's average daily
net assets, and Bank of America waived fees at an effective annual rate of .12%
of the Asset Allocation Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
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 International Equity
Fund. Subject to the oversight and supervision of the Adviser and the Company's
Board of Directors, the Sub-Adviser provides a continuous investment program for
the International Equity Fund, including investment research and management with
respect to all securities, investments, cash and cash equivalents in the
International Equity Fund. Wellington Management will from time to time
determine what securities and other investments will be purchased, retained or
sold by the International Equity Fund.
Wellington Management is entitled to a fee, payable by the Adviser, for its
services and expenses incurred with respect to the International Equity Fund.
The fee is payable quarterly at the following annual rates based on the average
month-end net assets of the Fund: 0.40% on the Fund's first $50 million of
average month-end net assets, 0.30% on the next $100 million, 0.25% on the next
$350 million and 0.20% of the International Equity Fund's average month-end net
assets in excess of $500 million. For the year ended February 28, 1998, Bank of
America paid Wellington Management sub-advisory fees at an effective rate of
0.12% of the International Equity Fund's average month-end net assets and
Wellington Management waived a portion of its sub-advisory fee at an effective
rate of 0.28% of the International Equity Fund's average month-end net assets.
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Trond Skramstad, Senior Vice President and Director of International Equity
Investments, and Andrew S. Offit, Vice President and Associate Portfolio
Manager, have primary responsibility for the day to day management of the Fund.
Mr. Skramstad is chairman of Wellington Management's Global Equity Strategy
Group, which is a group of regional equity portfolio managers and senior
investment professionals responsible for providing investment research and
recommendations, and has been responsible for managing the Fund since January 1,
1997.
Prior to joining Wellington Management in 1993, Mr. Skramstad was an
international equity portfolio manager and principal at Scudder, Stevens & Clark
since 1990. Prior to joining Wellington Management, Mr. Offit was a portfolio
manager at Chestnut Hill Management during 1997, and at Fidelity Investments
since 1987.
ADMINISTRATOR
Bank of America serves as Administrator of the Funds. Bank of America's
principal office is located at 555 California Street, San Francisco, California
94104. For the period from March 1, 1997 through September 15, 1997, the BISYS
Group, Inc., through its wholly-owned subsidiary BISYS Fund Services, L.P.
(collectively, "BISYS"), served as administrator to the Funds and the Master
Portfolio. For the period September 15, 1997 through February 28, 1998 Bank of
America served as the Funds' administrator. PFPC International, Ltd., an
indirect, wholly-owned subsidiary of PNC Bank, serves as administrator and
accounting services agent to the Master Portfolio.
Under its administration agreement with the Company, Bank of America has agreed
to: pay the costs of maintaining the offices of the Company; provide a facility
to receive purchase and redemption orders; provide statistical and research
data, data processing services and clerical services; coordinate the preparation
of reports to shareholders of the Funds and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds; calculate the net asset value of the Funds; calculate the
dividends and capital gains distributions paid to shareholders; and generally
assist in all aspects of the operations of the Funds.
For its services as administrator, Bank of America is entitled to receive an
administration fee from the Blue Chip Fund at the annual rate of 0.15% of the
Fund's average daily net assets. PFPC International, Ltd. is entitled to receive
an administration fee from the Blue Chip Master Portfolio's net assets computed
daily and payable monthly at an annual rate of .05% on the Master Portfolio's
average daily net assets. (See the information below under "Fee Waivers.")
During the period March 1, 1997 through September 15, 1997, the Blue Chip Master
Portfolio paid BISYS administration fees at an effective annual rate of 0.03% of
the Blue Chip Master Portfolio's average daily net assets. During the period
September 15, 1997 through February 28, 1998, the Blue Chip Master Portfolio
paid PFPC International, Ltd. administration fees at an effective annual rate of
0.02% of the Blue Chip Master Portfolio's average daily net assets. For the year
ended February 28, 1998, neither BISYS nor PFPC International, Ltd. waived
administration fees with respect to the Blue Chip Master Portfolio. During the
period March 1, 1997 through September 15, 1997, the Blue Chip Fund paid BISYS
administration fees at an effective annual rate of 0.49% of the Blue Chip Fund's
average daily net assets and BISYS waived a portion of its fees at an effective
annual rate of 0.01% of the Blue Chip Fund's average daily net assets. During
the period September 15, 1997 through February 28, 1998 the Blue Chip Fund paid
Bank of America administration fees at an effective annual rate of 0.07% of the
Blue Chip Fund's average daily net assets. Bank of America waived no fees with
respect to the Blue Chip Fund during the same period. For its services as
administrator, Bank of America is entitled to receive an administration fee from
the
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Aggressive Growth Fund, Asset Allocation Fund, Capital Income Fund and
International Equity Fund at the annual rates of 0.30%, 0.15%, 0.20% and 0.20%,
respectively, of such Fund's average daily net assets. These amounts may be
reduced pursuant to undertakings by Bank of America. (See the information below
under "Fee Waivers.") Prior to June 23, 1997, BISYS was entitled to receive an
administration fee payable at the annual rate of 0.15% of the Asset Allocation
Fund's average daily net assets and 0.05% of the Asset Allocation Master
Portfolio's average daily net assets. During the period from March 1, 1997
through June 23, 1997, the Asset Allocation Master Portfolio paid BISYS
administration fees at an effective annual rate of 0.01% of such Portfolio's
average daily net assets, and BISYS waived a portion of its fee with respect to
the Asset Allocation Master Portfolio at an effective annual rate of 0.01% of
the Master Portfolio's average daily net assets. For the same period, BISYS
waived its entire administration fee with respect to the Asset Allocation Fund.
During the period June 24, 1997 through September 15, 1997, the Asset Allocation
Fund paid BISYS at an effective annual rate of 0.03% of such Fund's average
daily net assets. During the period September 15, 1997 to February 28, 1998 the
Asset Allocation Fund paid Bank of America at an effective annual rate of 0.07%
of its average daily net assets. During the period June 24, 1997 through
February 28, 1998, neither BISYS nor Bank of America waived administration fees
with respect to the Asset Allocation Fund. During the period March 1, 1997,
through September 15, 1997, the Aggressive Growth Fund and Capital Income Fund
paid BISYS administration fees at an effective annual rate of 0.15% and 0.10%,
respectively. During the period September 15, 1997 through February 28, 1998 the
Aggressive Growth Fund and Capital Income Fund paid Bank of America
administration fees at the effective annual rates of 0.15% and 0.10%. For the
period March 1, 1997 through September 15, 1997, BISYS waived its entire
administration fee for the International Equity Fund, and for the period
September 15, 1997 through February 28, 1998, Bank of America waived its entire
administration fee for the International Equity Fund. Bank of America also
reimbursed a portion of the operating expenses, with respect to the
International Equity Fund.
Bank of America has entered into an agreement with PFPC Inc., an indirect,
wholly-owned subsidiary of PNC Bank Corp., ("PFPC") pursuant to which PFPC has
agreed to provide certain sub-administration services to the Funds, including,
among other things, assisting in the developing and monitoring of compliance
procedures, participating in periodic updating of Funds' prospectuses and
statements of additional information, providing periodic reports to the
Company's Board and providing certain record-keeping services. Bank of America
will bear all fees and expenses charged by PFPC for these services.
Pursuant to the authority granted in its administration agreements, Bank of
America has entered into agreements with PFPC Inc. ("PFPC") (with respect to the
Blue Chip, International Equity and Asset Allocation Funds) and The Bank of New
York ("BONY") (with respect to the Aggressive Growth and Capital Income Funds)
under which PFPC and BONY provide certain accounting, bookkeeping, pricing and
dividend and distribution calculation services to the Funds. The Funds bear all
fees and expenses charged by PFPC or BONY for these services.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Provident Distributors,
Inc. (the "Distributor"). The Distributor is located at Four Falls Corporate
Center, 6th Floor, West Conshohocken, PA 19428.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania 19103 serves as the Custodian of the Blue Chip Master Portfolio,
Asset Allocation Fund and International
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Equity Fund. The Bank of New York, 90 Washington Street, New York, New York
10286, serves as the Custodian of the Aggressive Growth Fund and Capital Income
Fund. PFPC Inc., an indirect, wholly-owned subsidiary of PNC Bank Corp.
("PFPC"), is the transfer and dividend disbursing agent for each of the Funds
and its address as transfer agent is P.O. Box 8968, Wilmington, Delaware
19899-8968.
FEE WAIVERS
Except as noted in this Prospectus and the Statement of Additional Information,
the service contractors bear all expenses in connection with the performance of
their services, and the Funds and Master Portfolio bear the expenses incurred in
their operations. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Bank of America and other service providers. Periodically,
during the course of each Fund's fiscal year, Bank of America and other service
providers may prospectively choose not to receive fee payments and/or may assume
certain expenses of the Funds or the Master Portfolio as a result of competitive
pressures and in order to preserve and protect the business and reputation of
these entities. However, the service providers retain the ability to discontinue
such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR
ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE
YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN
THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time each Fund held the relevant assets). You will be subject to
income tax on these distributions regardless whether they are paid in cash or
reinvested in additional shares.
You should note that if you purchase shares just prior to a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends that were received with
respect to the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges, and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
It is expected that the International Equity Fund itself will be subject to
foreign withholding taxes with respect to dividends or interest received from
sources in foreign countries. The International Equity Fund may make an election
to treat a proportionate amount of such taxes as constituting a distribution to
each shareholder, which would allow each shareholder either (1) to credit such
proportionate
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amount of taxes against U.S. federal income tax liability, or (2) to take such
amount as an itemized deduction.
For more information regarding the taxation of the Funds, consult the Statement
of Additional Information under the heading "Additional Information Concerning
Taxes." You should also consult your tax adviser for information regarding the
federal, state and local tax consequences and the applicability of any foreign
taxes or U.S. withholding taxes with respect to your specific situation.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN
AND AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), may be
quoted in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares and the applicable contingent
deferred sales charge for B Shares. Each Fund may also advertise total return
data without reflecting the sales load imposed on the purchase of Fund shares in
accordance with the rules of the Securities and Exchange Commission. Quotations
that do not reflect the sales load will, of course, be higher than quotations
that do reflect sales loads.
Each Fund may compare its total return to that of other mutual funds with
similar investment objectives and to stock and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Europe, Asia and Far East Index ("EAFE"); the Standard &
Poor's 500 Stock Index; the Shearson Lehman Bond Indexes; the Wilshire 5000
Equity Indexes; the Financial Times World Stock Index; the Lipper International
Fund Index; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in a Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
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DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class D Common Stock, 100 million shares of Class D -- Special Series 3 Common
Stock and 100 million shares of Class D -- Special Series 5 Common Stock
representing interests in the Aggressive Growth Fund; 100 million shares of
Class N Common Stock, 100 million shares of Class N -- Special Series 3 Common
Stock; 100 million shares of Class N -- Special Series 5 Common Stock; and 100
million shares of Class N -- Special Series 7 Common Stock, representing
interests in the Blue Chip Fund; 100 million shares of Class F Common Stock, 100
million shares of Class F -- Special Series 3 Common Stock and 100 million
shares of Class F -- Special Series 5 Common Stock, representing interests in
the Capital Income Fund; 100 million shares of Class O Common Stock, 100 million
shares of Class O -- Special Series 3 Common Stock, 100 million shares of Class
O -- Special Series 5 Common Stock and 100 million shares of Class O -- Special
Series 7 Common Stock, representing interests in the Asset Allocation Fund; 100
million shares of Class T Common Stock, 100 million shares of Class T -- Special
Series 3 Common Stock and 100 million shares of Class T -- Special Series 5
Common Stock, representing interests in the Fund; and additional classes of
shares representing interests in other investment portfolios of the Company.
Class D Common Stock, Class N Common Stock, Class F Common Stock, Class O Common
Stock and Class T Common Stock are the "A" Shares; Class D -- Special Series 3
Common Stock, Class N -- Special Series 3 Common Stock, Class F-Special Series 3
Common Stock, Class O -- Special Series 3 Common Stock and Class T-Special
Series 3 Common Stock are the "B" Shares; Class D -- Special Series 5 Common
Stock, Class N -- Special Series 5 Common Stock Class F-Special Series 5 Common
Stock, Class O -- Special Series 5 Common Stock and Class T -- Special Series 5
Common Stock are the "K" Shares; and Class N -- Special Series 7 Common Stock
and Class O -- Special Series 7 Common Stock are the "SRF" Shares. The Board of
Directors may similarly classify or reclassify any class of shares (including
unissued Class D Common Stock, Class D- -Special Series 3 Common Stock, Class
D -- Special Series 5 Common Stock, Class N Common Stock, Class N -- Special
Series 3 Common Stock, Class N -- Special Series 5 Common Stock, Class
N -- Special Series 7 Common Stock International Equity into one or more series.
This Prospectus relates primarily to the Funds' A, B and K Shares. As of the
date of this prospectus, B Shares have not been offered to the public. For more
information about the Blue Chip Fund's SRF Shares or about the Company's other
portfolios, contact the Company at the telephone number listed on the cover page
of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into the
Company. A Shares are sold to investors choosing the front-end sales charge
alternative unless an exemption to the sales charge is otherwise available,
which is the case for eligible retirement accounts. A Shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. B Shares are sold
without a
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front-end sales charge but are subject to a contingent deferred sales charge. K
Shares are neither subject to a front-end sales charge nor a contingent deferred
sales charge. See "Shareholder Guide -- What Alternative Sales Arrangements
are Available?" for a description of eligible purchasers of K Shares.
A Shares, B Shares, K Shares and SRF Shares each have certain purchase,
redemption and exchange privileges. Additionally, A, B and K Shares have certain
shareholder services, such as TeleTrade, an automatic investment program, an
automatic withdrawal plan, a directed distribution plan and a direct deposit
program.
The four classes of shares in the Blue Chip Fund and Asset Allocation Fund and
the three classes of Shares in the Aggressive Growth Fund, Capital Income Fund
and International Equity Fund which are publicly offered represent interests in
the same portfolio of investments of the particular Fund, have the same rights
and are identical in all respects except (a) SRF Shares (where applicable) and A
Shares bear the expenses of their respective Shareholder Services Plans; (b) B
Shares bear the expenses of the Distribution and Services Plan; and (c) K Shares
bear the expenses of a Distribution Plan and/or Administrative and Shareholder
Services Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A, B and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution and Services Plan fees attributable to B Shares,
(c) Distribution Plan fees and/or Administrative and Shareholder Services Plan
fees attributable to K Shares, and (d) the incremental expenses associated with
such Plans. SRF, A, B and K Shares may have different performance results due to
sales charges and other expenses attributable to distribution, administrative
service and/or shareholder servicing plans applicable with respect to a
particular share class.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board may grant in its discretion. When issued for payment as
described in this Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). Only holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares; only holders of B Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution and Services Plan attributable to B Shares; only holders of
K Shares will be entitled to vote on matters submitted to a vote of shareholders
relating to the Distribution Plan and Administrative and Shareholder Services
Plan attributable to K Shares and only holders of SRF Shares will be entitled to
vote on matters submitted to a vote of shareholders relating to the Shareholder
Services Plan attributable to SRF Shares. The Funds do not presently intend to
hold annual meetings of shareholders to elect directors or for other business
unless and until such time as less than a majority of the directors holding
office have been elected by the shareholders. At that time, the directors then
in office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
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Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN
(THE "PLAN") FOR A SHARES, A DISTRIBUTION AND SERVICES PLAN
FOR B SHARES, AND A DISTRIBUTION PLAN AND AN
ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which A
Shares of each Fund reimburse the Distributor for shareholder servicing fees the
Distributor pays to Service Organizations. The Company has also adopted a
Distribution and Services Plan pursuant to Rule 12b-1 under the 1940 Act, under
which the B Shares of each Fund reimburse Bank of America for costs incurred in
connection with distribution of the B Shares and for shareholder servicing fees
Bank of America pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1998, the Blue Chip Fund, Aggressive Growth Fund,
Asset Allocation Fund, Capital Income Fund and International Equity Fund made
payments under the Plan at the effective annual rate of 0.25%, 0.25%, 0.25%,
0.25% and 0.03%, respectively of the A Shares' average daily net assets and the
Distributor waived fees at an effective annual rate of 0.00%, 0.00%, 0.00% and
0.22% of the Fund's average daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation
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of the Company might occur and a shareholder serviced by such bank might no
longer be able to avail itself of the automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN
AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's K Shares. Under
the Distribution and Services Plan, each Fund pays Bank of America for
distribution expenses primarily intended to result in the sale of such Fund's B
Shares and with respect to B Shares for shareholder servicing expenses. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's B and K Shares; payments to Service Organizations for
assistance in connection with the distribution of B and K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Funds (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing B and K shareholders of the Funds) and in implementing and operating
the Distribution and Services Plan and Distribution Plan.
Shareholder servicing expenses under the Distribution and Services Plan and the
Administrative and Shareholder Services Plan include, but are not limited to,
expenses incurred in connection with shareholder services provided by Bank of
America or the Distributor and payments to Service Organizations for the
provision of support services with respect to the beneficial owners of B and K
Shares, such as assisting clients in processing exchange and redemption requests
and in changing dividend options and account descriptions and responding to
client inquiries concerning their investments. Administrative servicing expenses
under the Administrative and Shareholder Services Plan include, but are not
limited to, expenses incurred in connection with administrative services
provided by the Distributor and payments to Service Organizations for the
provision of administrative services to beneficial owners of K Shares, such as
establishing and maintaining accounts and records relating to their clients who
invest in K Shares, providing information to the Funds necessary for accounting
or sub-accounting, and providing statements periodically to clients showing
their position in K Shares.
Under the Distribution and Services Plan and the Distribution Plan, payments by
a Fund for distribution expenses may not exceed 0.75% (annualized), of the
average daily net assets of such Fund's B and K Shares. Under the Distribution
and Services Plan and the Administrative and Shareholder Services Plan, payments
for shareholder servicing expenses may not exceed 0.25% (annualized), of the
average daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's B and K Shares. These amounts
may be reduced pursuant to undertakings by Bank of America or the Distributor.
Payments for distribution expenses under the Distribution and Services Plan and
Distribution Plan are subject to Rule 12b-1 under the 1940 Act. For the period
ended February 28, 1998, the Blue Chip, Aggressive Growth, Asset Allocation,
Capital Income and International Equity Funds made payments under the
Distribution Plan and Administrative and Shareholder Services Plan at the
effective annual rates of 0.75%, 0.75%, 0.75%, 0.75% and 0.53%, respectively, of
the average daily net assets of such Funds' K Shares, and the Distributor waived
fees under the Distribution Plan and Administrative and Shareholder Services
Plan at the effective annual rate of 0.00%, 0.25%, 0.00%, 0.25% and 0.47%,
respectively, of the average daily net assets of such Funds' K Shares. During
the fiscal year ended February 28, 1998, no B Shares were offered by the
Company.
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PACIFIC HORIZON MUTUAL FUNDS
BLUE CHIP FUND
AGGRESSIVE GROWTH
FUND
ASSET ALLOCATION FUND
CAPITAL INCOME FUND
INTERNATIONAL EQUITY FUND
PROSPECTUS
JULY 1, 1998
NOT FDIC INSURED
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APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa -- judged to be of high quality by all
standards; A -- deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa -- considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of desirable investment, Caa represents bonds which are in poor
standing, Ca represents a high degree of speculation and C represents the lowest
rated class of bonds); Caa, Ca and C bonds may be in default. Moody's applies
numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa to
B. The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic rating
category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and to repay
principal for debt in this category than for higher rated categories. Debt rated
"BB," "B," "CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. Debt rated
"CI" is reserved for income bonds on which no interest is being paid. Debt rated
"D" is in default. This rating is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. The ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Excerpts from Fitch IBCA's description of its corporate bond ratings:
"AAA" -- considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA" -- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A" -- deemed investment grade and of high credit quality,
although the capacity to pay interest and repay principal may be more
susceptible to the adverse changes in economic conditions and circumstances than
bonds with higher ratings; "BBB" is considered to be investment grade and is
regarded as having satisfactory credit quality with an adequate capacity to pay
interest and repay
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principal although adverse changes in economic conditions and circumstances are
more likely to impair timely payment than for higher rated categories; "BB,"
"B," "CCC," "CC," "C," "DDD," "DD," and "D" -- regarded as speculative
investments. The ratings "BB" to "C" represent the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch IBCA's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
designation "F-1" indicates that the securities possess very strong credit
quality. Those securities determined to possess exceptionally strong credit
quality are denoted with a plus (+) sign designation. Securities rated "F-2" are
considered to possess good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
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PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus provides vital information about PACIFIC HORIZON FLEXIBLE INCOME FUND (FORMERLY,
these funds. For your own benefit and protection, CORPORATE BOND FUND)
please read it before you invest, and keep it on -- a diversified portfolio seeking high current
hand for future reference. income with reasonable investment risk
Please note that these funds: -- primarily invests in investment grade corporate
X are not bank deposits debt
X are not federally insured PACIFIC HORIZON INTERMEDIATE BOND FUND
X are not endorsed by any bank or government agency -- a diversified portfolio seeking interest income
X are not guaranteed to achieve their goals and capital appreciation
X involve investment risk, including possible loss -- primarily invests in investment grade,
of principal intermediate and longer term bonds
More detailed information is available in a PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
Statement of Additional Information dated July 1, -- a portfolio seeking current income consistent
1998. You may obtain a free copy by calling with preservation of capital
800-332-3863. -- primarily invests in securities of the U.S.
The Statement of Additional Information has been Government, its agencies, instrumentalities or
incorporated by reference into this prospectus (is sponsored enterprises
legally a part of this prospectus) and has been PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
filed with the Securities and Exchange Commission. -- a diversified portfolio seeking high current
You may visit the Securities and Exchange income with relative stability of principal
Commission's Internet web site (http://www.sec.gov) -- primarily invests in securities issued or
to view the Statement of Additional Information, guaranteed by the U.S. Government, its agencies,
material incorporated by reference and other instrumentalities or sponsored enterprises
information. PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
Like all mutual fund shares, these securities have -- a diversified portfolio seeking as high a level
not been approved or disapproved by the Securities of current interest income free of regular Federal
and Exchange Commission or any state securities income tax as is consistent with prudent
commission, nor has the Securities and Exchange investment management and preservation of
Commission or any state securities commission capital
passed upon the accuracy or adequacy of this -- primarily invests in investment grade municipal
prospectus. Any representation to the contrary is a debt securities
criminal offense. PACIFIC HORIZON CALIFORNIA MUNICIPAL BOND FUND
(FORMERLY, CALIFORNIA TAX-EXEMPT BOND FUND)
-- a diversified portfolio seeking as high a level
of current interest income free of Federal income
tax and California state personal income tax as
is consistent with prudent investment
management and preservation of capital
-- primarily invests in investment grade municipal
obligations by the State of California and other
governmental entities
</TABLE>
Investment Portfolio Offered by
Pacific Horizon Funds, Inc.
<PAGE> 330
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 4
FINANCIAL HIGHLIGHTS 13
FUND INVESTMENTS 25 INVESTMENT OBJECTIVES
DURATION AND MATURITY
27 TYPES OF INVESTMENTS
32 FUNDAMENTAL LIMITATIONS
33 MORE ABOUT RISK
37 RISK FACTORS -- OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
SHAREHOLDER GUIDE 52 HOW TO BUY SHARES
52 What Is My Minimum Investment In The Fund?
52 What Alternative Sales Arrangements Are Available?
53 How Are Shares Priced?
58 How Do I Decide Whether To Buy A or B Shares?
58 How Can I Buy Shares?
60 What Price Will I Receive When I Buy Shares?
61 What Else Should I Know To Make A Purchase?
61 HOW TO SELL SHARES
61 How Do I Redeem My Shares?
64 What NAV Will I Receive For Shares I Want To Sell?
64 What Kind Of Paperwork Is Involved In Selling Shares?
64 How Quickly Can I Receive My Redemption Proceeds?
65 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES 65
SHAREHOLDER SERVICES 66 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
66 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
67 WHAT IS TELETRADE?
68 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
68 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
68 CAN I ARRANGE PERIODIC WITHDRAWALS?
69 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
69 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 69 FUND MANAGEMENT
Expenses
69 Service Providers
72 Fee Waivers
TAX INFORMATION 72
MEASURING PERFORMANCE 74
DESCRIPTION OF SHARES 75
PLAN PAYMENTS 78
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings and Trust Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
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FIXED INCOME FUNDS
GOAL, STRATEGY AND PORTFOLIO SECURITIES. The FLEXIBLE INCOME (formerly, the
Corporate Bond Fund) FUND seeks to provide investors with a high current income
consistent with reasonable investment risk. To pursue this goal, the fund
invests primarily in a diversified portfolio of investment grade corporate debt
securities although it may invest a portion of its assets in other types of debt
securities and money market instruments.
Under normal circumstances, the Flexible Income Fund invests at least 65% of
total assets in investment grade corporate debt obligations. The fund may invest
up to 20% of its assets in debt obligations of foreign issuers. The fund also
may invest up to 35% of its total assets in lower quality, higher yielding
securities ("junk bonds"). The Fund may, for temporary defensive purposes,
invest without limitation in cash equivalents.
The INTERMEDIATE BOND FUND seeks to provide investors with interest income and
capital appreciation. To pursue this goal, the fund invests primarily in a
diversified portfolio of investment grade intermediate and longer term bonds.
The Intermediate Bond Fund seeks to achieve its investment objective by
investing all of its investable assets in the securities of a portfolio of
another open-end managed investment company, Master Investment Trust, Series I
(the "Intermediate Bond Master Portfolio"). The Intermediate Bond Master
Portfolio has the same investment objective as the Intermediate Bond Fund.
Under normal circumstances, the Master Portfolio invests at least 65% of total
assets in investment grade bonds. The Master Portfolio may invest up to 35% of
its total assets in mortgage-backed securities. The Master Portfolio also may
invest, from time to time, in obligations issued by state and local government
issuers (municipal securities).
The U.S. GOVERNMENT SECURITIES FUND seeks to provide investors with a high level
of current income consistent with preservation of capital. To pursue this goal,
the fund invests primarily in a portfolio of securities issued by the U.S.
Government, its agencies, instrumentalities and sponsored enterprises. The Fund
may also invest in non-government related securities rated in the highest rating
category by a nationally recognized statistical rating organization.
Under normal circumstances, the U.S. Government Securities Fund invests at least
65% of total assets in securities issued by the U.S. Government, its agencies,
instrumentalities and sponsored enterprises. The Fund may also invest up to 35%
of its total assets in non-government related securities rated in the highest
rating category by a nationally recognized statistical rating organization. The
Fund may, for temporary defensive purposes, invest without limitation in cash
equivalents.
The SHORT-TERM GOVERNMENT FUND seeks to provide investors with a high level of
current income consistent with relative stability of principal. To pursue this
goal, the fund invests primarily in a diversified portfolio of securities issued
or guaranteed by the U.S. Government, its agencies, its instrumentalities or
sponsored enterprises.
Under normal circumstances, the Short-Term Government Fund will invest at least
65% of its total assets in securities issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or sponsored
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enterprises. The Fund may also invest up to 35% of its total assets in
investment grade non-government securities.
The NATIONAL MUNICIPAL BOND FUND seeks to provide investors with as high a level
of current interest income free of regular Federal income tax as is consistent
with prudent investment management and preservation of capital. To pursue this
goal, the fund invests primarily in a diversified portfolio of investment grade
municipal debt securities.
Under normal circumstances, the National Municipal Bond Fund invests at least
65% of total assets in debt obligations issued by or on behalf of state,
territories and possessions of the United States and the District of Columbia
which, in the opinion of bond counsel to the issuer, is exempt from regular
Federal income tax ("Municipal Securities"). Under normal market conditions, the
Fund expects at least 65% of total assets will consist of investment grade
issues. The Fund may, for temporary defensive purposes or if suitable tax-exempt
obligations are unavailable, hold without limitation uninvested cash reserves.
The CALIFORNIA MUNICIPAL BOND (FORMERLY, THE CALIFORNIA TAX-EXEMPT BOND) FUND
seeks to provide investors with as high a level of current interest income free
of Federal income tax and California state personal income tax as is consistent
with prudent investment management and preservation of capital. To pursue this
goal, the fund invests primarily in a diversified portfolio of investment grade
municipal obligations issued by the State of California and other governmental
issuers.
Under normal circumstances, the California Municipal Bond Fund invests at least
65% of total assets in municipal securities issued by California and other
states, territories and possessions of the United States and the District of
Columbia, provided these instruments are free of Federal income tax. Under
normal market conditions, it is expected that the California Municipal Bond Fund
will invest at least 65% of its total assets in investment grade securities. For
temporary defensive purposes, or if suitable tax-exempt obligations cannot be
found, the Fund may purchase taxable obligations.
RISK FACTORS. As with most funds that invest in fixed income securities, the
value of your investment will fluctuate with changes in interest rates.
Typically, a rise in interest rates causes a decline in the market value of debt
securities (including municipal securities). There are also risks related to
investing in lower rated securities including higher risks of volatility and
default. These risks are defined in "More about risk" starting on page 33. Other
factors may affect the market price and yield of the funds' securities,
including investor demand and domestic and worldwide economic conditions.
Although the California Municipal Bond Fund is diversified, it concentrates in
securities of California issuers and its performance is largely dependent on
factors that may disproportionately affect these issuers.
PORTFOLIO MANAGEMENT. Bank of America National Savings and Trust Association
("Bank of America") serves as investment adviser to the Flexible Income, U.S.
Government Securities, Short-Term Government, National Municipal Bond and
California Municipal Bond Funds and to the Intermediate Bond Master Portfolio.
Based in San Francisco, California, Bank of America and its affiliates have over
$77 billion under management, including over $22 billion in mutual funds.
Portfolio management services for the Flexible Income, U.S. Government
Securities and Short-Term Government Funds and the Intermediate Bond Master
3
<PAGE> 333
Portfolio are conducted by an investment committee of the Fixed Income Division
of the Investment Management Group of Bank of America. Portfolio management
services for the National Municipal Bond Fund and California Municipal Bond Fund
are conducted by Stephen P. Scharre. Mr. Scharre has been associated with the
investment adviser since 1984.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer three classes of shares. A Shares are
offered at net asset value plus a front-end sales charge (see page 51 of the
Prospectus for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. B Shares are offered at net asset value, without a
front-end sales charge but are subject to a contingent deferred sales charge
plus distribution and shareholder servicing fees. K Shares of each of the Funds
described herein (except for the Short-Term Government Fund, which does not
offer K Shares) are offered at net asset value with neither a front-end sales
charge nor a contingent deferred sales charge, but are subject to distribution,
administrative servicing and shareholder servicing fees. B Shares of a Fund held
for 9 years will convert to A Shares of a Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Intermediate Bond Master Portfolio which are allocable to the Intermediate Bond
Fund. Operating expenses include fees for portfolio management, maintenance of
shareholder accounts, general administration, distribution (in the case of B and
K Shares only), shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A, B and K Shares reflecting the operating expenses (including the operating
expenses of the Intermediate Bond Master Portfolio which are allocable to the
Intermediate Bond Fund) 1) expected to be incurred during the current fiscal
year with respect to B Shares of each Fund; A and B Shares of the Short-Term
Government Fund and B Shares of the U.S. Government Securities Fund and 2)
incurred during the last fiscal year with respect to A and K Shares of the U.S.
Government Securities Fund. Actual expenses may vary. A hypothetical example
based on the summary is also shown. Expenses of the Flexible Income Fund are
based upon historical costs for the Corporate Bond Fund which will differ from
the historical costs of the Corporate Bond Fund's predecessor fund as a result
of the change in organization of the Corporate Bond Fund from a closed-end fund
to an open-end fund and the change from a master-feeder structure to a directly
managed portfolio.
4
<PAGE> 334
FLEXIBLE INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 4.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+........................ 0% 0% 0%
---- ---- ----
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
---- ---- ----
Shareholder Services Fee (After Fee Waivers)*............... 0.20% 0.20% 0.25%
---- ---- ----
Other Expenses.............................................. 0.65% 0.65% 0.65%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+..... 0.85% 1.60% 1.40%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Management Fees for each class of shares of the Fund would
be 0.65% of the average net assets (annualized) and Total Operating Expenses
for the Fund's A, B and K Shares would be 1.55%, 2.30% and 2.30% of average
net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's B and K Shares. The total
of all 12b-1 fees, administrative services fees and shareholder services fees
may not exceed the annual rate of 1.00% of the average net assets of the
Fund's B and K Shares. However, it is expected that during the current fiscal
year, such fees will not exceed 1.00 and 0.75% of the average net assets of
the Fund's B and K Shares, respectively. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Corporate Bond
Fund as shown in the above table, long-term B and K shareholders may pay more
than the economic equivalent of the maximum front-end sales charge permitted
by NASD Regulation, Inc. Absent fee waivers, shareholder services fees would
be 0.25% of the average net assets (annualized) of the Fund's A and B Shares.
For a further description of shareholder transaction expenses and the Flexible
Income Fund's operating expenses, see the sections entitled "Shareholder
Guide," "The Business of the Funds" and "Plan Payments" below.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $63 $81 $100 $154
B Shares Assuming complete redemption at end of
period(2)................................................ $56 $83 $104 $190(3)
Assuming no redemption..................................... $16 $51 $ 87 $190(3)
K Shares................................................... $14 $44 $ 77 $168
</TABLE>
- ---------------
(1)Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2)Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3)Assumes conversion of B Shares to A Shares after 9 years.
5
<PAGE> 335
INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 4.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After fee waivers)+........................ 0.16% 0.16% 0.16%
---- ---- ----
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
---- ---- ----
Shareholder Services Fee* (After fee waivers)*.............. 0.17% 0.17% 0.17%
---- ---- ----
Other Expenses.............................................. 0.57% 0.57% 0.56%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+..... 0.90% 1.65% 1.39%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Management Fees for each class of shares of the Fund would
be 0.50% of the average net assets (annualized) and Total Operating Expenses
for the Intermediate Bond Fund's A, B and K Shares would be 1.32%, 2.07% and
2.07% of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's B and K Shares. The total
of all 12b-1 fees, administrative services fees and shareholder services fees
may not exceed the annual rate of 1.00% of the average net assets of the
Fund's B and K Shares. However, it is expected that during the current fiscal
year, such fees will not exceed 1.00% and 0.75% of the average net assets of
the Fund's B and K Shares. Because of the Rule 12b-1, administrative and/or
shareholder services fees paid by the Intermediate Bond Fund as shown in the
above table, long-term B and K shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by NASD Regulation,
Inc. Absent fee waivers, Shareholder Services Fees for the Fund's A, B and K
Shares would be 0.75% (annualized). For a further description of shareholder
transaction expenses and the Intermediate Bond Fund's operating expenses, see
the sections entitled "Shareholder Guide," "The Business of the Funds" and
"Plan Payments" below.
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................. $64 $82 $102 $160
B Shares Assuming complete redemption at end of period(2)... $56 $84 $107 $195(3)
Assuming no redemption...................................... $17 $52 $ 90 $195(3)
K Shares.................................................... $14 $44 $ 76 $167
</TABLE>
6
<PAGE> 336
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 4.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After fee waivers)+........................ 0.10% 0.10% 0.10%
---- ---- ----
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
---- ---- ----
Shareholder Services Fee (After fee waivers)*............... 0.20% 0.20% 0.10%
---- ---- ----
Other Expenses.............................................. 0.45% 0.45% 0.45%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+..... 0.75% 1.50% 1.21%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers, Management Fees for each class of shares of the Fund would
be 0.55% of the average net assets (annualized) and Total Operating Expenses
for the U.S. Government Securities Fund's A, B and K Shares would be 1.26%,
2.01% and 2.01% of average net assets, respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's B and K Shares. The total
of all 12b-1 fees, administrative services fees and shareholder services fees
may not exceed the annual rate of 1.00% of the average net assets of the
Fund's B and K Shares. However, it is expected that during the current fiscal
year, such fees will not exceed 1.00% of the average net assets of the B and K
Shares. Because of the Rule 12b-1, administrative and/or shareholder services
fees paid by the U.S. Government Securities Fund as shown in the above table,
long-term B and K shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by NASD Regulation, Inc. Absent
fee waivers, Shareholder Services Fees for the Fund's A, B and K Shares would
be 0.25% (annualized). For a further description of shareholder transaction
expenses and the U.S. Government Securities Fund's operating expenses, see the
sections entitled "Shareholder Guide," "The Business of the Funds" and "Plan
Payments" below.
7
<PAGE> 337
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................. $62 $78 $94 $143
B Shares Assuming complete redemption at end of period(2)... $55 $80 $99 $179(3)
Assuming no redemption...................................... $15 $47 $82 $179(3)
K Shares.................................................... $12 $38 $67 $147
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
SHORT-TERM GOVERNMENT FUND
<TABLE>
<CAPTION>
A SHARES B SHARES
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 4.00%
Redemption Fees............................................. None None
Exchange Fee................................................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+........................ 0% 0%
12b-1 Fee (After Fee Waivers)*.............................. 0% 0.75%
Shareholder Services Fee (After Fee Waivers)+............... 0% 0%
Other Expenses (After Expense Reimbursements)+.............. 0.25% 0.25%
---- ----
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements)+......................... 0.25% 1.00%
==== ====
</TABLE>
- ---------------
+ Management intends to waive fees and reimburse certain Other Expenses on
behalf of the Fund. Absent fee waivers and/or expense reimbursements,
Management Fees would be 0.45% of the average net assets (annualized); Other
Expenses would be 0.52% of the average net assets (annualized) of the Fund's
A and B Shares. Total Operating Expenses for the Fund's A and B Shares would
be 1.22% and 1.97% of average net assets (annualized).
8
<PAGE> 338
Because of the Rule 12b-1 and shareholder services fees paid by the Fund as
shown in the above table, long-term B shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
NASD Regulation, Inc. Absent fee waivers, Shareholder Services Fees for the
Fund's A and B Shares would be 0.25% (annualized) of average daily net assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Fund" and "Plan Payments" below.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................. $57 $63 $68 $ 85
B Shares Assuming complete redemption at end of period(2)... $50 $64 $73 $122(3)
Assuming no redemption.................................... $10 $32 $55 $122(3)
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
load.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3)Assumes conversion of B Shares to A Shares after 9 years.
NATIONAL MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 4.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+........................ 0% 0% 0%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee (After Fee Waivers)*............... .02% 0.02% 0.25%
Other Expenses (After Fee Waivers and Expense
Reimbursements)+.......................................... 0.48% 0.48% 0.48%
---- ---- ----
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements)+........................ .50% 1.25% 1.23%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers and/or expense reimbursement, Management Fees for each
class of shares of the Fund would be .55% of the average net assets
(annualized); Other Expenses for the National Municipal Bond Fund's A, B and K
Shares would be 0.80% of average net assets (annualized) and Total Operating
Expenses for the National Municipal Bond Fund's A, B and K Shares would be
1.60%, 2.35% and 2.35% of average net assets (annualized), respectively.
9
<PAGE> 339
* Absent fee waivers and/or expense reimbursements, 12b-1 fees or administrative
services fees would be 0.75% and 0.75% of the average net assets (annualized)
of the Fund's B and K Shares, respectively. The total of all 12b-1 fees,
administrative services fees and shareholder services fees may not exceed the
annual rate of 1.00% of the average net assets of the National Municipal Bond
Fund's B and K Shares. However, it is expected that during the current fiscal
year, such fees will not exceed 1.00% of the average net assets of each of the
Fund's B and 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 B and K shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by NASD Regulation, Inc. Absent fee
waivers, Shareholder Services fees for A, B and K Shares would be 0.25%, 0.25%
and 0.25%, (annualized), respectively, of average daily net assets. For a
further description of shareholder transaction expenses and the National
Municipal Bond Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments" below.
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 AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $60 $70 $81 $114
B Shares Assuming complete redemption at end of
period(2)................................................ $53 $72 $86 $151(3)
Assuming no redemption..................................... $13 $40 $69 $151(3)
K Shares................................................... $15 $47 $81 $177
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
10
<PAGE> 340
CALIFORNIA MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 5.50% None None
Maximum Sales Load Imposed on Reinvested Dividends.......... None None None
Maximum Contingent Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds, whichever
is lower)................................................. None 4.00% None
Redemption Fees............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.50% 0.50% 0.50%
12b-1 Fees (or in the case of certain Class K Shares,
Administrative Service Fees) (After Fee Waivers)*......... 0% 0.75% 0.50%
Shareholder Services Fee*................................... 0.25% 0.25% 0.25%
Other Expenses (After Fee Waivers and Expense
Reimbursements)+.......................................... 0.15% 0.15% 0.15%
---- ---- ----
Total Operating Expenses (After Fee Waivers)+..... 0.90% 1.65% 1.40%
==== ==== ====
</TABLE>
- ---------------
+ Absent fee waivers and expense reimbursements, Other Expenses for the
California Municipal Bond Fund's A, B and K Shares would be 0.31% of average
net assets (annualized); Total Operating Expenses for the California Municipal
Bond Fund's A, B and K Shares would be 1.06%, 1.81% and 1.81% of average net
assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
of the average net assets (annualized) of the Fund's B and K Shares. The total
of all 12b-1 fees, administrative services fees and shareholder services fees
may not exceed the annual rate of 1.00% of the average net assets of each of
the Fund's B and K Shares. However, it is expected that during the current
fiscal year such fees will not exceed 1.00 and 0.75% of the average net assets
of each of the Fund's B and K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the California
Municipal Bond Fund as shown in the above table, long-term B and K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulation, Inc. For a further
description of shareholder transaction expenses and the California Municipal
Bond Fund's operating expenses, see the sections entitled "Shareholder Guide,"
"The Business of the Funds" and "Plan Payments" below.
11
<PAGE> 341
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 AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1)................................................ $64 $ 82 $102 $160
B Shares Assuming complete redemption at end of
period(2)................................................ $57 $ 84 $107 $195(3)
Assuming no redemption..................................... $17 $ 52 $ 90 $195(3)
K Shares................................................... $14 $ 44 $ 77 $168
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction at redemption of maximum applicable contingent deferred
sales charge.
(3) Assumes conversion of B Shares to A Shares after 9 years.
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
X an investment advisory fee payable at the annual rate of 0.45%, 0.30%, 0.35%,
0.25%, 0.35% and 0.30% of the Flexible Income Fund's, Intermediate Bond Master
Portfolio's, U.S. Government Securities Fund's, Short-Term Government Fund's,
National Municipal Bond Fund's and California Municipal Bond Fund's respective
average daily net assets; and
X an administration fee payable at the annual rate of 0.20%, 0.15%, 0.20%,
0.20%, 0.20% and 0.20% of the Flexible Income, Intermediate Bond, U.S.
Government Securities, Short-Term Government, National Municipal Bond and
California Municipal Bond Funds' respective average daily net assets and 0.05%
of the Master Portfolio's average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Intermediate Bond Fund and the Intermediate Bond Master
Portfolio in which the Fund's assets are invested will be less than or
approximately equal to the expenses which the Intermediate Bond Fund would incur
if the Company retained the services of an investment adviser for that Fund and
the assets of that Fund were invested directly in the type of securities held by
the Intermediate Bond Master Portfolio. Further, the Directors believe that the
shareholders of the Intermediate Bond Fund may participate in the ownership of a
larger portfolio of securities than could be achieved directly by the
Intermediate Bond Fund. There can be no assurance, however, that such will be
the case or that any economies of scale that might occur if other investors
acquire shares of the Intermediate Bond Master Portfolio will be realized,
inasmuch as the Company is not aware of any other potential investor in the
Intermediate Bond Master Portfolio.
SELECTION OF APPROPRIATE SHARE CLASS
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more
12
<PAGE> 342
advantageous to incur a front-end sales charge (A Shares of the Short-Term
Government Fund are sold without a sales load) and thereafter be subject to
annual fees under a Shareholder Services Plan, with respect to A Shares; have
the entire initial purchase price invested in the Funds with the investment
thereafter being subject to annual fees under a Distribution and Services Plan
and contingent deferred sales charge upon redemption within the first six years
of investment with respect to B 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 to certain types on
investors. See the Sections entitled "What Alternative Sales Arrangements are
Available?" and "How Do I Decide Whether to Buy A, B or K Shares?" below.
FINANCIAL HIGHLIGHTS
The Flexible Income Fund (formerly, "Corporate Bond Fund") commenced operations
in 1973 as a diversified, closed-end management investment company (that is, as
an investment company with non-redeemable shares) known as Bunker Hill Income
Securities, Inc. (the "Corporate Predecessor Fund"). Following its initial
public sale of common shares in 1973, the Corporate Predecessor Fund did not
regularly issue additional common shares except in connection with dividend
reinvestments. On April 25, 1994, the Corporate Predecessor Fund was reorganized
as a new open-end portfolio of the Company and, in connection with the
reorganization, all of the assets and liabilities of the Corporate Predecessor
Fund were transferred to the Corporate Bond Master Portfolio (as defined below).
The Corporate Predecessor Fund received investment advisory services from Bank
of America. Prior to September 1, 1996, the Corporate Bond Fund operated as part
of a master-feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company called the
Corporate Bond Master Portfolio of Master Investment Trust, Series I (the
"Corporate Bond Master Portfolio"), which had an identical investment objective.
On September 1, 1996, the Fund withdrew its assets from the Corporate Bond
Master Portfolio and invested them directly in portfolio securities.
The U.S. Government Securities Fund commenced operations on January 7, 1988 as
The Horizon Capital GNMA Extra Fund (the "Government Predecessor Fund"), a
separate portfolio of a Massachusetts business trust called The Horizon Capital
Funds. On January 1, 1989 the Government Predecessor Fund changed its name to
The Pacific Horizon GNMA Extra Fund, and on January 9, 1990 was reorganized as a
portfolio of the Company. On June 28, 1991 the U.S. Government Securities Fund
changed its name to the Pacific Horizon U.S. Government Securities Fund.
The California Municipal Bond Fund (formerly, the California Tax-Exempt Bond
Fund) commenced operations on March 30, 1984 as a separate Maryland corporation
called Pacific Horizon Tax-Exempt Fund, Inc. (the "California Predecessor
Fund"). The California Predecessor Fund subsequently changed its name to Pacific
Horizon California Municipal Bond Fund Portfolio, Inc. On January 19, 1990, the
California Predecessor Fund was reorganized as a separate portfolio of the
Company.
Prior to July 1, 1996, the National Municipal Bond Fund operated as part of a
master-feeder structure and invested all of its assets in a master portfolio
("National Municipal Master Portfolio") which had an identical investment
objective. On July 1, 1996, the National Municipal Bond Fund withdrew its
investment in the National Municipal Master Portfolio and began investing its
assets directly in investment securities.
The tables below show certain information concerning the investment results of
the Corporate Predecessor Fund for the periods ended on or prior to September
30, 1993; the combined investment results of the Flexible Income Fund and the
Corporate Predecessor Fund for the period October 1, 1993
13
<PAGE> 343
through September 30, 1994; and the Flexible Income Fund's investment results
for the period October 1, 1994 through February 28, 1995, and the years ended
February 29, 1996, February 28, 1997 and February 28, 1998. The tables below
also show certain information concerning the Intermediate Bond Fund (formerly,
the Flexible Bond Fund) for the years and period indicated. The tables below
also show certain information concerning the investment results of the
Government Predecessor Fund for the periods ended on or prior to August 31,
1989, the combined results of the U.S. Government Securities Fund and the
Government Predecessor Fund for the period September 1, 1989 through February
28, 1990 and the U.S. Government Securities Fund's investment results for the
eight fiscal years in the eight year period ended February 28, 1998. The tables
below also show certain information concerning the investment results of the
Short-Term Government Fund for the period indicated. The Short-Term Government
Fund commenced operations on August 2, 1996 by offering a single series of
shares known as A Shares. The tables below also show certain information
concerning the investment results for the National Municipal Bond and California
Municipal Bond Funds for the periods indicated (including the California
Predecessor Fund's investment results for the fiscal years ended on or prior to
February 28, 1989, the combined investment results of both the California
Predecessor Fund and the California Municipal Bond Fund for the fiscal year
ended February 28, 1990 and the California Municipal Bond Fund's investment
results for the eight years in the eight year period ended February 28, 1998).
On July 22, 1996, each of the Funds except the Short-Term Government Fund
initially funded K Shares. During the periods shown, no Fund offered B Shares.
Actual investment results of the B Shares may be different. The information for
the years and periods indicated was audited by Price Waterhouse LLP, the
independent accountants for the Funds and the Predecessor Funds, whose
unqualified reports on the financial statements containing such information for
the five fiscal years or periods in the five-year period ended February 28, 1998
are incorporated by reference in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
free of charge by calling 800-332-3863.
14
<PAGE> 344
PACIFIC HORIZON FLEXIBLE INCOME (FORMERLY, CORPORATE BOND) FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR 10/1/94 YEAR ENDED SEPTEMBER 30
ENDED ENDED ENDED THROUGH ---------------------------------------------------------
2/28/98 2/28/97(a) 2/29/96 2/28/95 1994(b) 1993(c) 1992(c) 1991(c) 1990(c) 1989(c)
------- ---------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $15.79 $ 16.09 $15.03 $14.86 $16.94 $16.12 $15.22 $14.79 $17.02 $ 17.56
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income From Investment
Operations:
Net investment income..... 0.99 0.93 0.98 0.45 1.58 1.34 1.48 1.68 1.85 1.98
Net realized and
unrealized gains
(losses) on investment
transactions............ 0.63 (0.30) 1.11 0.17 (2.06) 0.82 0.95 0.52 (2.15) (0.65)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
investment
operations............ 1.62 0.63 2.09 0.62 (0.48) 2.16 2.43 2.20 (0.30) 1.33
Less Dividends and
Distributions:
Dividends to shareholders
from net investment
income.................. (0.99) (0.93) (0.98) (0.45) (1.58) (1.34) (1.53) (1.77) (1.93) (1.87)
Distributions to
shareholders from net
realized gains on
investment
transactions............ -- -- (0.05) -- (0.02) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Dividends and
Distributions:........ (0.99) (0.93) (1.03) (0.45) (1.60) (1.34) (1.53) (1.77) (1.93) (1.87)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net asset
value per share........... 0.63 (0.30) 1.06 0.17 (2.08) 0.82 0.90 0.43 (2.23) (0.54)
Net asset value per share,
end of period............. $16.42 $ 15.79 $16.09 $15.03 $14.86 $16.94 $16.12 $15.22 $14.79 $ 17.02
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return (excludes
sales charge)......... 10.55% 4.13% 14.12% 4.26% (2.29)% 7.05% 13.36% 36.64% (15.11)% 13.95%
Ratios/Supplemental Data:
Net assets, end of year
(000)................... $37,105 $32,790 $32,387 $31,372 $33,046 $46,999 $44,642 $41,807 $40,528 $46,426
Ratio of expenses to
average net assets...... 0.85% 1.27%** 1.33%** 1.04%(d)** 0.91%** 1.02% 1.09% 1.09% 1.06% 1.05%
Ratio of net investment
income to average net
assets.................. 6.15% 6.01%** 6.12%** 7.32%(d)** 7.85%** 8.14% 9.42% 11.16% 11.65% 11.35%
Ratio of expenses to
average net assets*..... 1.56% 1.88% 2.23% 1.94%(d) 1.07% -- -- -- -- --
Ratio of net investment
income to average net
assets*................. 5.44% 6.62% 7.02% 8.22%(d) 8.01% -- -- -- -- --
Portfolio Turnover........ 63% 59% N/A N/A N/A 154.34% 251.97% 54.79% 83.92% 88.48%
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratio would have been as indicated.
** Reflects the Corporate Bonds Fund's proportionate share of the Corporate Bond
Master Portfolio's expenses and fee waivers.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
(b) Includes the combined results of operations of Bunker Hill Income
Securities, Inc. and the Corporate Bond Fund.
(c) The financial highlights for the years ended September 30, 1989, 1990, 1991,
1992 and 1993 are for Bunker Hill Income Securities, Inc., a closed-end
fund.
(d) Annualized.
15
<PAGE> 345
PACIFIC HORIZON FLEXIBLE INCOME FUND (FORMERLY, CORPORATE BOND) FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED ENDED
FEBRUARY 28, 1998 February 28, 1997(a)
----------------- --------------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $15.80 $15.56
------ ------
Income from Investment Operations:
Net investment income..................................... 0.90 0.53
Net realized and unrealized gains on investment
transactions........................................... 0.62 0.24
------ ------
Total income from investment operations.............. 1.52 0.77
------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.90) (0.53)
Distributions to shareholders from net realized gains on
investment transactions................................ -- (--)
------ ------
Total Dividends and Distributions.................... (0.90) (0.53)
------ ------
Net change in net asset value per share..................... 0.62 0.24
------ ------
Net asset value per share, end of period.................... $16.42 $15.80
====== ======
Total return......................................... 9.88% 5.01%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)......................... $ 312 $ 237
Ratio of expenses to average net assets................... 1.40% 1.64%(c)
Ratio of net investment income to average net assets...... 5.58% 5.60%(c)
Ratio of expenses to average net assets*.................. 2.30% 2.25%(c)
Ratio of net investment income to average net assets*..... 4.68% 4.99%(c)
Portfolio turnover rate................................... 63% 59%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.
16
<PAGE> 346
PACIFIC HORIZON INTERMEDIATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 13,
1994
(INCEPTION
FOR THE FOR THE FOR THE FOR THE DATE)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997(b) 1996 1995 1994(a)
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning of
period............................... $ 9.54 $ 9.75 $ 9.44 $ 9.81 $ 10.00
------- ------- ------- ------ -------
Income from Investment Operations:
Net investment income................ 0.49 0.52 0.59 0.59 0.08
Net realized and unrealized gains
(losses) on investment
transactions...................... 0.20 (0.15) 0.33 (0.37) (0.19)
------- ------- ------- ------ -------
Total income (loss) from
investment operations........... 0.69 0.37 0.92 0.22 (0.11)
------- ------- ------- ------ -------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................. (0.51) (0.52) (0.59) (0.59) (0.08)
Distributions to shareholders from
net realized gains on investment
transactions...................... (0.03) (0.06) (0.02) -- --
------- ------- ------- ------ -------
Total dividends and
distributions................... (0.54) (0.58) (0.61) (0.59) (0.08)
------- ------- ------- ------ -------
Net change in net asset value per
share................................ 0.15 (0.21) 0.31 (0.37) (0.19)
------- ------- ------- ------ -------
Net asset value per share, end of
period............................... $ 9.69 $ 9.54 $ 9.75 $ 9.44 $ 9.81
======= ======= ======= ====== =======
Total return (excludes sales charge)... 7.40% 3.92% 10.45% 2.27% (1.10)%++
Ratios/supplemental data:
Net assets, end of period (000)...... $41,875 $22,937 $13,179 $1,964 $ 356
Ratio of expenses to average net
assets............................ 0.90% 0.75% 0.27% 0.00% 0.00%+
Ratio of net investment income to
average net assets................ 5.50% 5.45% 6.13% 6.43% 5.70%*
Ratio of expenses to average net
assets*........................... 1.21% 2.26% 5.00% 17.95% 160.20%+
Ratio of net investment income (loss)
to average net assets*............ 5.19% 3.94% 1.40% (11.52)% (154.50)%+
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
++ Not Annualized.
(a) Period from January 13, 1994 (inception date) to February 28, 1994.
(b) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
17
<PAGE> 347
PACIFIC HORIZON INTERMEDIATE BOND FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED FEBRUARY 28,
FEBRUARY 28, 1998 1997(a)
----------------- ------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $9.54 $9.53
Income from Investment Operations:
Net investment income..................................... 0.44 0.31
Net realized and unrealized gain on investments........... 0.19 0.07
----- -----
Total income from investment operations.............. 0.63 0.38
----- -----
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.42) (0.31)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.03) (0.06)
----- -----
Total Dividends and Distributions........................... (0.45) (0.37)
----- -----
Net change in net asset value per share..................... 0.18 0.01
----- -----
Net asset value per share, end of period.................... $9.72 $9.54
===== =====
Total return................................................ 6.80% 3.73%(c)
Ratios/Supplemental Data:
Net assets at end of period (000)......................... $ 513 $ 332
Ratio of expenses to average net assets................... 1.39% 1.43%(b)
Ratio of net investment income to average net assets...... 4.99% 5.41%(b)
Ratio of expenses to average net assets*.................. 1.73% 2.71%(b)
Ratio of net investment income to average net assets*..... 4.65% 4.13%(b)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Annualized.
(c) Not Annualized.
18
<PAGE> 348
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1998 1997(b) 1996 1995 1994 1993n 1992 1991
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period............ $ 9.30 $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59
------- ------- ------- ------- -------- -------- -------- ------
Income from Investment
Operations:
Net investment income.......... 0.62 0.59 0.61 0.55 0.45 0.70 0.81 0.87
Net realized and unrealized
gains (losses) on
securities................... 0.22 (0.12) 0.16 (0.54) (0.11) 0.37 0.37 0.29
------- ------- ------- ------- -------- -------- -------- ------
Total income from investment
operations................. 0.84 0.47 0.77 0.01 0.34 1.07 1.18 1.16
------- ------- ------- ------- -------- -------- -------- ------
Less Dividends and
Distributions:
Dividends to shareholders from
net investment income........ (0.62) (0.59) (0.61) (0.52) (0.45) (0.70) (0.81) (0.87)
Distributions to shareholders
from net realized gains on
investment transactions...... -- -- (0.01) -- (0.16) (0.38) (0.03) --
Tax return of capital.......... -- (0.01) (0.03) (0.03) (0.09) -- -- --
------- ------- ------- ------- -------- -------- -------- ------
Total dividends and
distributions.............. (0.62) (0.60) (0.65) (0.55) (0.70) (1.08) (0.84) (0.87)
------- ------- ------- ------- -------- -------- -------- ------
Net change in net asset value
per share...................... 0.22 (0.13) 0.12 (0.54) (0.36) (0.01) 0.34 0.29
------- ------- ------- ------- -------- -------- -------- ------
Net asset value per share, end
of period...................... $ 9.52 $ 9.30 $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88
======= ======= ======= ======= ======== ======== ======== ======
Total return (excludes sales
charge).................... 9.27% 5.23% 8.47% 0.30% 3.40% 10.92% 12.45% 12.73%
Ratios/Supplemental Data:
Net assets, end of period
(000)........................ $71,101 $74,485 $89,491 $87,354 $157,984 $119,127 $100,444 $7,466
Ratio of expenses to average
net assets................... 0.75% 0.85% 1.15% 1.15% 0.96% 0.51% 0.37% 0.39%
Ratio of net investment income
to average net assets........ 6.32% 6.11% 6.36% 5.57% 4.45% 6.80% 7.60% 8.88%
Ratio of expenses to average
net assets*.................. 1.26%** 1.25%** 1.26%** (a) 1.00% 1.10% 8.35% 12.79%
Ratio of net investment income
to average net assets*....... 5.81% 5.71% 6.28% (a) 4.41% 6.21% 6.85% 4.97%
Portfolio turnover rate........ 51% 94% 137% 189% 255% 252% 165% 80%
<CAPTION>
PERIOD YEAR
ENDED ENDED
FEB. 28, AUG. 31,
1990(d) 1989
-------- --------
<S> <C> <C>
Net asset value per share,
beginning of period............ $ 9.62 $ 9.50
------ ------
Income from Investment
Operations:
Net investment income.......... 0.44 0.86
Net realized and unrealized
gains (losses) on
securities................... (0.03) 0.12
------ ------
Total income from investment
operations................. 0.41 0.98
------ ------
Less Dividends and
Distributions:
Dividends to shareholders from
net investment income........ (0.44) (0.86)
Distributions to shareholders
from net realized gains on
investment transactions...... -- --
Tax return of capital.......... -- --
------ ------
Total dividends and
distributions.............. (0.44) (0.86)
------ ------
Net change in net asset value
per share...................... (0.03) 0.12
------ ------
Net asset value per share, end
of period...................... $ 9.59 $ 9.62
====== ======
Total return (excludes sales
charge).................... 4.28%nn(c) 10.81%(c)
Ratios/Supplemental Data:
Net assets, end of period
(000)........................ $3,562 $2,986
Ratio of expenses to average
net assets................... 0.51%+ 0.70%
Ratio of net investment income
to average net assets........ 9.06%+ 9.02%
Ratio of expenses to average
net assets*.................. 15.93% 13.51%
Ratio of net investment income
to average net assets*....... 2.19% 4.53%
Portfolio turnover rate........ 4% 5%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced and
expenses reimbursed. If such voluntary fee reductions and
expense reimbursements has not occurred, the ratios would
have been as indicated.
** During the years ended February 28, 1998 and 1997 and
February 29, 1996, the Portfolio received credits from its
custodian for interest earned on uninvested balances which
were used to offset custodian fees and expenses. If such
credits had not occurred, the expense ratios would have been
as indicated. The ratio of net investment income was not
affected.
+ Annualized.
n Security Pacific National Bank served as investment adviser
through April 21, 1992. Bank of America served as investment
adviser commencing April 22, 1992.
nn Not Annualized.
(a) There were no fee waivers or expense reimbursements during
the period.
(b) As of July 22, 1996, the Fund designated the existing series
of Shares as "A" Shares.
(c) Unaudited.
(d) For the period September 1, 1989 through February 28, 1990.
</TABLE>
19
<PAGE> 349
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, 1998 February 28, 1997(a)
----------------- --------------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $ 9.30 $9.22
-------- -----
Income from Investment Operations:
Net investment income.................................. 0.59 0.35
Net realized and unrealized gains on investment
transactions......................................... 0.22 0.08
-------- -----
Total income from investment operations........... 0.81 0.43
-------- -----
Less dividends to shareholders from net investment income... (0.58) (0.35)
Net change in net asset value per share................ 0.23 0.08
-------- -----
Net asset value per share, end of period............... $ 9.53 $9.30
======== =====
Total return...................................... 8.92% 4.75%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)...................... $ 920 $ 418
Ratio of expenses to average net assets................ 1.21% 1.35%(c)
Ratio of net investment income to average net assets... 5.86% 6.11%(c)
Ratio of expenses to average net assets*............... 1.99%** 2.06%(c)**
Ratio of net investment income to average net
assets*.............................................. 5.08% 5.73%(c)
Portfolio turnover rate................................ 51% 94%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
** During the years ended February 28, 1998 and 1997 the Portfolio received
credits from its custodian for interest earned on uninvested balances which
were used to offset custodian fees and expenses. If such credits had not
occurred, the expense ratios would have been as indicated. The ratio at net
investment income was not affected.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.
20
<PAGE> 350
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
Selected data for an A Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
FEBRUARY 28, 1998 February 28, 1997(a)
----------------- --------------------
<S> <C> <C>
Net asset value per share, beginning of period.............. $10.00 $ 10.00
------ -------
Income from Investment Operations:
Net investment income..................................... 0.55 0.32
Net realized gains on investment transactions............. 0.03 0.01
Total income from investment operations........... 0.58 0.33
------ -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.55) (0.32)
Distributions to shareholders from net realized gains on
investment transactions................................ --(d) (0.01)
------ -------
Total Dividends and Distributions................. (0.55) (0.33)
------ -------
Net change in net asset value per share..................... 0.03 0.00
------ -------
Net asset value per share, end of period.................... $10.03 $ 10.00
====== =======
Total Return...................................... 5.99% 3.33%(c)
Ratios/supplemental data:
Net assets, at end of period (millions)................... 33 16
Ratio of expenses to average net assets................... 0.25% 0.11%(b)
Ratio of net investment income to average net assets...... 5.49% 5.53%(b)
Ratio of expenses to average net assets*.................. 1.15% 3.15%(b)
Ratio of net investment income to average net assets*..... 4.59% 2.49%(b)
Portfolio turnover rate................................... 82% 81%(c)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such fee reductions and/or expense reimbursements had not occurred, the
ratios would have been as indicated.
(a) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
(b) Annualized.
(c) Not annualized.
(d) Amount represents less than a penny per share.
21
<PAGE> 351
PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JAN. 28, 1994
(COMMENCEMENT
FOR THE FOR THE FOR THE FOR THE OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28,
1998 1997(a) 1996 1995 1994
---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning of
period.................................. $ 10.18 $ 10.15 $ 9.64 $ 9.89 $ 10.00
------- ------- ------- ------ -------
Income from Investment Operations:
Net Investment income................... 0.50 0.50 0.54 0.50 0.01
Net realized and unrealized gains
(losses) on invest transaction........ 0.36 0.06 0.51 (0.25) (0.11)
------- ------- ------- ------ -------
Total income (loss) from
investment operations.......... 0.86 0.56 1.05 0.25 (0.10)
------- ------- ------- ------ -------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income..................... (0.50) (0.50) (0.54) (0.50) (0.01)
------- ------- ------- ------ -------
Distributions to shareholders from net
realized gains on investment
transactions.......................... (0.02) (0.03) -- -- --
------- ------- ------- ------ -------
Total Dividends and
Distributions.................. (0.52) (0.53) (0.54) (0.50) (0.01)
------- ------- ------- ------ -------
Net change in net asset value per share... 0.34 0.03 0.51 (0.25) (0.11)
------- ------- ------- ------ -------
Net asset value per share, end of
period.................................. $ 10.52 $ 10.18 $ 10.15 $ 9.64 $ 9.89
======= ======= ======= ====== =======
Total return++................... 8.65% 5.66% 1.16% 2.78% (1.00)%
Ratios/Supplemental Data:
Net assets, end of period (000)......... $14,263 $15,414 $12,242 $2,520 $ 733
Ratio of expenses to average net
assets................................ 0.50% 0.49% 0.12% 0.00% 0.00%+
Ratio of net investment income to
average net assets.................... 4.84% 4.96% 5.24% 5.30% 1.15%+
Ratio of expenses to average net
assets*............................... 1.60%** 2.22%** 2.71%** 17.46% 170.99+
Ratio of net investment income (loss) to
average net assets*................... 3.74% 3.25% 2.65% (12.16)% (169.84)%
Portfolio Turnover Rate................. 36% 12% 38% 20% 15%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
** During the years ended February 28, 1998 and 1997 and February 29, 1996, the
Fund received credits from its custodian for interest earned on uninvested
balances which were used to offset custodian fees and expenses. If such
credits had not occurred, the expense ratios would have been as indicated.
The ratio of net investment income was not affected.
+ Annualized.
++ The total return listed does not include the effect of the maximum 4.50%
sales charge on A Shares, and is not annualized for the period ended February
28, 1994.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
22
<PAGE> 352
PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEBRUARY 28,
1997++
----------------
<S> <C>
Net asset value per share, beginning of period.............. $ 9.96
Income from Investment Operations:
Net Investment income..................................... 0.28
Net realized and unrealized gains on investment
transactions........................................... 0.25
Total income from investment operations........... 0.53
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.28)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.03)
------
Total Dividends and Distributions................. (0.31)
------
Net change in net asset value per share..................... 0.22
------
Net asset value per share, end of period.................... $10.18
======
Total Return...................................... 5.38%**
Ratios/Supplemental Data:
Net assets, end of period (millions)...................... $ 1
Ratio of expenses to average net assets*.................. 0.76%+
Ratio of net investment income to average net assets*..... 4.54%+
Portfolio turnover rate................................... 12%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee reductions and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by % and 0.92% (annualized) for
the period ended February 28, 1997. Fees paid by third parties, however, had
no effect on the ratios.
** Not Annualized.
+ Annualized.
++ As of September 15, 1997, K Shares of the Pacific Horizon National Municipal
Bond Fund ceased operations and were no longer offered.
23
<PAGE> 353
PACIFIC HORIZON CALIFORNIA MUNICIPAL BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------------
FEB. 28, FEB. 28 FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1998 1997(a) 1996 1995 1994 1993+ 1992 1991
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset value per share,
beginning of period........... $7.35 $7.45 $7.12 $7.49 $7.51 $7.07 $6.90 $6.84
----- ----- ----- ----- ----- ----- ----- -----
Income from Investment
Operations:
Net investment income......... 0.35 0.36 0.37 0.38 0.38 0.43 0.43 0.45
Net realized and unrealized
gains (losses) on
securities.................. 0.29 (0.05) 0.33 (0.37) 0.04 0.52 0.22 0.06
----- ----- ----- ----- ----- ----- ----- -----
Total income from investment
operations................ 0.64 0.31 0.70 0.01 0.42 0.95 0.65 0.51
----- ----- ----- ----- ----- ----- ----- -----
Less Dividends and
Distributions:
Dividends to shareholders from
net investment income....... (0.35) (0.36) (0.37) (0.38) (0.38) (0.43) (0.43) (0.45)
Distributions to share-holders
from net realized gains on
investment transactions..... -- (0.05) -- -- (0.06) (0.08) (0.05) --
----- ----- ----- ----- ----- ----- ----- -----
Total dividends and
distributions............. (0.41) (0.37) (0.38) (0.44) (0.51) (0.48) (0.45)
----- ----- ----- ----- ----- ----- ----- -----
Net change in net asset value
per share..................... 0.29 (0.10) 0.33 (0.37) (0.02) 0.44 0.17 0.06
----- ----- ----- ----- ----- ----- ----- -----
Net asset value per share, end
of period..................... $7.64 $7.35 $7.45 $7.12 $7.49 $7.51 $7.07 $6.90
===== ===== ===== ===== ===== ===== ===== =====
Total Return*............... 9.18% 4.29% 10.12% 0.36% 5.65% 14.01% 9.63% 7.72%
Ratios/Supplemental Data:
Net assets, end of period
(millions).................. $ 214 $ 221 $ 221 $ 195 $ 245 $ 189 $ 149 $ 108
Ratio of expenses to average
net assets.................. 0.90% 0.90% 0.94% 0.95% 0.96% 0.62% 1.01% 0.98%
Ratio of net investment income
to average net assets....... 4.74% 4.88% 5.11% 5.43% 4.96% 5.95% 6.05% 6.57%
Ratio of expenses to average
net assets**................ 1.06%*** 1.10%*** 1.14%*** 1.15% 1.11% 1.14% 1.16% 1.20%
Ratio of net investment
income/(loss) to average net
assets**.................... 4.58% 4.68% 4.91% 5.23% 4.81% 5.43% 5.90% 6.35%
Portfolio turnover............ 28% 34% 57% 20% 15% 32% 24% 33%
<CAPTION>
YEAR ENDED
-------------------
FEB. 28, FEB. 28,
1990 1989
-------- --------
<S> <C> <C>
Net Asset value per share,
beginning of period........... $6.72 $6.87
----- -----
Income from Investment
Operations:
Net investment income......... 0.47 0.47
Net realized and unrealized
gains (losses) on
securities.................. 0.12 (0.15)
----- -----
Total income from investment
operations................ 0.59 0.32
----- -----
Less Dividends and
Distributions:
Dividends to shareholders from
net investment income....... (0.47) (0.47)
Distributions to share-holders
from net realized gains on
investment transactions..... -- --
----- -----
Total dividends and
distributions............. (0.47) (0.47)
----- -----
Net change in net asset value
per share..................... 0.12 (0.15)
----- -----
Net asset value per share, end
of period..................... $6.84 $6.72
===== =====
Total Return*............... 8.94% 4.90%n
Ratios/Supplemental Data:
Net assets, end of period
(millions).................. $ 102 $ 89
Ratio of expenses to average
net assets.................. 0.95% 1.03%
Ratio of net investment income
to average net assets....... 6.81% 6.93%
Ratio of expenses to average
net assets**................
Ratio of net investment
income/(loss) to average net
assets*.....................
Portfolio turnover............ 58% 54%
</TABLE>
- ---------------
+ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
* The total return figures presented do not include the effect of the maximum
4.50% sales charge on A Shares.
** During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
*** During the years ended February 28, 1998 and 1997 and February 29, 1996, the
Fund received credits from its custodian for interest earned on uninvested
balances which were used to offset custodian fees and expenses. If such
credits had not occurred, the expense ratios would have been as indicated.
The ratio of net investment income was not affected.
n Unaudited
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
24
<PAGE> 354
PACIFIC HORIZON CALIFORNIA MUNICIPAL BOND FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 22, 1996
(INCEPTION DATE)
THROUGH
FEB. 28,
1997++
----------------
<S> <C>
Net asset value per share, beginning of period.............. $7.25
-----
Income from Investment Operations:
Net Investment income..................................... 0.20
Net realized and unrealized gains on securities........... 0.15
Total income from investment operations........... 0.35
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.20)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.05)
-----
Total Dividends and Distributions................. (0.25)
-----
Net change in net asset value per share..................... 0.10
-----
Net asset value per share, end of period.................... $7.35
=====
Total Return...................................... 4.90%**
Ratios/Supplemental Data:
Net assets, end of period (millions)...................... $ 1
Ratio of expenses to average net assets*.................. 1.21%+
Ratio of net investment income to average net assets*..... 4.51%+
Portfolio turnover rate................................... 34%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
Such fee reductions and expense reimbursements had the effect of reducing the
ratio of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 0.35%, (annualized) for the period
ended February 28, 1997. Fees paid by third parties, however, had no effect
on the ratios.
** Not Annualized.
+ Annualized.
++ As of September 15, 1997, K Shares of the Pacific Horizon California
Municipal Bond Fund ceased operations and were no longer offered.
FUND INVESTMENTS
INVESTMENT OBJECTIVES
THE FLEXIBLE INCOME (FORMERLY, CORPORATE BOND FUND) FUND seeks to provide
investors with high current income consistent with reasonable investment risk.
The Fund seeks to achieve its objective through investment primarily in a
diversified portfolio of investment grade corporate debt securities although it
may invest a portion of its assets in other types of securities and money market
instruments.
25
<PAGE> 355
The Flexible Income Fund may be suited for investors looking for high current
income who are willing to accept some price and yield fluctuations.
THE INTERMEDIATE BOND FUND seeks primarily to provide interest income and
capital appreciation. The Fund seeks to achieve its objective by investing in
investment grade intermediate and long term bonds, including corporate and
governmental fixed income obligations through investment in mortgage-backed
securities, municipal securities and cash equivalents. The Intermediate Bond
Fund may be appropriate for investors who want interest income from a
diversified portfolio of debt securities and capital appreciation.
The Intermediate Bond Fund seeks to achieve its investment objective by
investing all of its investable assets in the securities of a portfolio of
another open-end managed investment company, the Intermediate Bond Master
Portfolio. The Intermediate Bond Master Portfolio has the same investment
objective as the Intermediate Bond Fund. The Fund may withdraw its investment in
the Master Portfolio at any time, if the Board of Directors of the Company
determines that such action is in the best interests of the Fund. Upon any such
withdrawal, the Board of Directors would consider what action might be taken,
including the investment of all of the assets of the Intermediate Bond Fund in
another pooled investment entity having the same investment objective as the
Fund or the hiring of an investment adviser to manage the Fund's assets in
accordance with the investment policies described below with respect to the
Master Portfolio. Because the investment characteristics of the Intermediate
Bond Fund will correspond to those of the Intermediate Bond Master Portfolio,
the discussion of the Intermediate Bond Fund is a discussion of the various
investments of and techniques employed by the Master Portfolio.
THE U.S. GOVERNMENT SECURITIES FUND seeks to provide investors with a high level
of current income, consistent with preservation of principal. The Fund invests
mainly in certificates issued by the U.S. Government, its agencies,
instrumentalities and sponsored enterprises. The U.S. Government Securities Fund
may be appropriate for investors who want: (1) income from U.S. Government
securities to help meet today's expenses and (2) relative stability of
investment but are willing to accept some price and yield variations. The U.S.
Government Securities Fund may be suited for investors who want to participate
in a diversified portfolio of U.S. Government securities and who are willing to
accept some price and yield variations.
THE SHORT-TERM GOVERNMENT FUND seeks high current income consistent with
relative stability of principal. The Fund seeks to achieve its objective through
investing at least 65% of its total assets in securities issued or guaranteed by
the U.S. Government, its agencies, instrumentalities or sponsored enterprises.
The Fund may be appropriate for investors who want (1) income from securities
issued or guaranteed by the U.S. Government, its agencies, instrumentalities or
sponsored enterprises; and (2) relative stability of investment but are willing
to accept some price and yield variations.
Duration and Maturity. Under normal market and interest rate conditions, the
investment adviser expects that the Short-Term Government Fund's average
portfolio duration generally will be approximately the same as a one-year U.S.
Treasury bill (approximately one year). This means that the Short-Term
Government Fund's net asset value fluctuation is expected to be similar to the
price fluctuation of a one-year U.S. Treasury bill. Under normal market and
interest rate conditions, the investment adviser does not expect the Short-Term
Government Fund's average portfolio duration to exceed that of a two-year U.S.
Treasury note (approximately 1.9 years). However, there is no limitation on
duration. Under normal circumstances, it is expected that the average weighted
maturity of the Short-Term Government Fund's investments will not exceed two
years. Unlike maturity which indicates when a security repays principal,
"duration" incorporates the cash flows of all interest and principal payments
and the proceeds from calls and redemptions over the life of a security. These
payments are
26
<PAGE> 356
multiplied by the number of years over which they are received to produce a
value that is expressed in years (i.e., duration).
THE NATIONAL MUNICIPAL BOND FUND seeks as high a level of current interest
income free of Federal income tax as is consistent with prudent investment
management and preservation of capital. The Fund seeks to achieve its investment
objective through investment primarily in a diversified portfolio of investment
grade municipal debt securities. Investment grade debt securities ordinarily
carry lower rates of interest income than lower quality debt securities with
similar maturities. The National Municipal Bond Fund may be appropriate for
investors who want a high level of current interest income free from Federal
income tax.
THE CALIFORNIA MUNICIPAL BOND FUND seeks as high a level of current interest
income free of Federal income tax and California state personal income tax as is
consistent with prudent investment management and preservation of capital. The
Fund seeks to achieve its investment objective through investment primarily in
investment grade municipal obligations issued by the State of California and
other governmental entities. Investment grade debt securities ordinarily carry
lower rates of interest income than lower quality debt securities with similar
maturities. The California Municipal Bond Fund may be appropriate for California
residents and other investors who want monthly income sheltered from both
Federal and California income taxes, greater diversification and liquidity than
could be achieved by an individual purchasing municipal bonds directly, and
relative stability of principal.
WHILE THE FUNDS STRIVE TO ATTAIN THEIR INVESTMENT OBJECTIVES, THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
FLEXIBLE INCOME FUND -- GENERAL INVESTMENTS
The Flexible Income Fund is a diversified portfolio which will invest at least
65% of its total assets in investment grade corporate debt obligations such as
bonds, debentures, notes and securities convertible into, or exchangeable for,
or with rights to purchase, common or preferred stocks. Investment grade debt
securities ordinarily carry lower rates of interest income than lower quality
debt securities with similar maturities. The securities obtained upon conversion
of a convertible security may be retained for a period of time pending their
orderly disposition.
The Flexible Income Fund may invest up to 20% of its total assets (determined at
the time of purchase) in debt obligations of foreign issuers, including Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). The Flexible Income Fund may also hold a portion of its
assets in cash equivalents of the type described under "Other Investment
Practices -- Cash Equivalents."
The Flexible Income Fund will normally invest at least 65% of its total assets
in investment grade corporate securities and securities issued by the U.S.
Government, its agencies or instrumentalities. Investment grade securities are
securities rated at the time of purchase in the four highest ratings categories
by Standard & Poor's Ratings Group Division of McGraw Hill ("S&P"), Moody's
Investors Services, Inc. ("Moody's") or Fitch IBCA, Inc. ("Fitch IBCA") or if
not rated, determined by Bank of America to be of comparable quality to
securities with such ratings. The four highest ratings categories are AAA, AA, A
and BBB by S&P and Fitch IBCA and Aaa, Aa, A and Baa by Moody's. Bonds in the
fourth category are more subject than those in the top three categories to
changes in economic or other conditions that could lead to a weakened capacity
to make payments of interest and principal and may have speculative
characteristics as well. The Flexible Income Fund may invest up to 35% of its
total
27
<PAGE> 357
assets in lower quality, higher yielding securities, often referred to as "junk
bonds," and up to 35% of its total assets in mortgage backed securities. Such
securities are rated below investment grade, carry a higher degree of risk and
are considered to be speculative by S&P, Moody's or Fitch IBCA. Debt securities
will be rated at the time of purchase at least "B" by S&P, Moody's or Fitch
IBCA, or if unrated, will be determined by Bank of America to be of comparable
quality to securities with such ratings. Ratings are described more fully in the
Appendix to this Prospectus.
In the event that the rating of any security held by the Flexible Income Fund
falls below the required rating, the Fund will not be obligated to dispose of
such security and may continue to hold the obligation if, in the opinion of Bank
of America, such investment is considered appropriate under the circumstances.
INTERMEDIATE BOND MASTER PORTFOLIO -- GENERAL INVESTMENTS
The Intermediate Bond Master Portfolio is a diversified portfolio which will
invest at least 65% of its total assets in investment grade intermediate and
longer term bonds, which consist of corporate and governmental fixed income
obligations, mortgage-backed securities, municipal securities and cash
equivalents. For a description of investment grade securities, see "Flexible
Income Fund -- General Investments."
Under normal market and interest rate conditions, the investment adviser expects
that the Master Portfolio's average portfolio duration generally will be
approximately the same as the Lehman Brothers Intermediate Government/Corporate
Bond Index. This means that the Fund's net asset value fluctuation is expected
to be similar to the price fluctuation of the Lehman Brothers Intermediate
Government/ Corporate Bond Index. Unlike maturity which indicates when the
security repays principal, "duration" incorporates the cash flows of all
interest and principal payments and the proceeds from calls and redemptions over
the life of the security. These payments are multiplied by the number of years
over which they are received to produce a value that is expressed in years
(i.e., duration). In addition, under normal market and interest rate conditions,
the investment adviser expects that the Master Portfolio's average portfolio
maturity will be between three and six years.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government or one of its
agencies or instrumentalities. The Master Portfolio will not invest more than
35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if the bond interest rate is
higher than currently prevailing interest rates. Similarly, a risk associated
with mortgage-backed securities is early paydown of principal resulting from the
refinancing of the underlying mortgages. The rate of such prepayments of
principal, and hence the life of the security, will primarily be a function of
current market rates. In periods of falling interest rates, the rate of
prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds will generally be at lower rates than the rates on the
prepaid obligations.
The Intermediate Bond Master Portfolio may also invest, from time to time, in
obligations issued by state and local governmental issuers ("Municipal
Securities"). It is currently expected that investment in Municipal Securities
will not exceed 5% of the Fund's net assets.
Interest income is expected to be the primary basis for investment return from
an investment in the Master Portfolio, and capital appreciation the secondary
basis. The Intermediate Bond Master Portfolio will attempt to achieve capital
appreciation by moderate market timing in response to anticipated interest rate
changes. The Intermediate Bond Master Portfolio will also attempt to take
advantage of undervalued sectors while selling bonds in
28
<PAGE> 358
overvalued sectors. However, since investments will normally consist of bonds
and mortgage-backed securities, the ability to achieve capital appreciation is
limited.
U.S. GOVERNMENT SECURITIES FUND -- GENERAL INVESTMENTS
The U.S. Government Securities Fund will at all times invest at least 65% of its
assets in securities of the U.S. Government (its agencies, instrumentalities and
sponsored enterprises), including, but not limited to, direct obligations of the
U.S. Treasury, such as U.S. Treasury bills, certificates of indebtedness, notes
and bonds, and in repurchase agreements involving such securities. Other types
of U.S. Government obligations that the Fund may hold include obligations of
U.S. Government agencies, instrumentalities or sponsored enterprises including,
but not limited to, Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Tennessee Valley
Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan Marketing Association, or
Federal Home Loan Mortgage Corporation. Obligations of some of these agencies,
instrumentalities or sponsored enterprises, such as the Small Business
Administration or the Maritime Administration, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, like the Federal National Mortgage Association, are backed
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, including the Student Loan Marketing Association,
are supported by the credit of the instrumentality. There is no assurance that
the U.S. Government would support a U.S. Government-sponsored entity if it was
not required to do so by law.
The U.S. Government Securities Fund may invest up to 35% of its total assets in
non-government related fixed income securities rated in the highest rating
category by a nationally recognized statistical rating organization. For a
description of non-government fixed income securities, see "Intermediate Bond
Fund -- General Investments."
SHORT-TERM GOVERNMENT FUND -- GENERAL INVESTMENTS
The Short-Term Government Fund has a policy that it will invest at least 65% of
its total assets in securities issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises, including, but not limited
to, direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
certificates of indebtedness, notes and bonds, and in repurchase agreements
involving such securities. Other types of U.S. Government obligations that the
Fund may hold include obligations of U.S. Government agencies, instrumentalities
or sponsored enterprises including, but not limited to, Federal Home Loan Banks,
Federal National Mortgage Association, Government National Mortgage Association,
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
or Federal Home Loan Mortgage Corporation. See "U.S. Government Securities Fund
- -General Investments," above, for a description of such obligations.
Guarantees of the Short-Term Government Fund's investment securities by the U.S.
Government, its agencies, instrumentalities or sponsored enterprises assure only
the payment of principal and interest on the guaranteed securities, and do not
guarantee the securities' yield or value, or the yield or value of the Fund's
shares. U.S. Government obligations ordinarily carry lower rates of interest
income than debt securities of other issuers with similar maturities.
The Short-Term Government Fund may invest up to at least 35% of its total assets
in investment grade non-government/agency fixed income obligations,
mortgage-backed securities, municipal securities and
29
<PAGE> 359
cash equivalents. See "Flexible Income Fund -- General Investments," above. In
the event that the rating of any security held by the Short-Term Government Fund
falls below the required rating, the Fund will not be obligated to dispose of
such security and may continue to hold the obligation if, in the opinion of Bank
of America, such investment is considered appropriate under the circumstances.
The market value of debt securities, and thus the Short-Term Government Fund's
net asset value per share, is expected to vary with changes in interest rates.
The value of the Short-Term Government Fund's investments will normally fall
when prevailing interest rates rise and rise when interest rates fall. Interest
rate fluctuations can be expected to affect the Short-Term Government Fund's
earnings. In an effort to preserve the capital of the Short-Term Government Fund
when interest rates are generally rising, Bank of America may shorten the
average weighted maturity of the Fund's investments. Because the principal
values of the securities with shorter maturities are less affected by rising
interest rates, a portfolio with a shorter average weighted maturity will
generally diminish less in value during such periods than a portfolio with a
longer average weighted maturity. Because securities with shorter maturities,
however, generally have a lower yield to maturity, the Short-Term Government
Fund's current return based on its net asset value generally will be lower as a
result of such action than it would have been had such action not been taken.
MORTGAGE-RELATED SECURITIES GENERALLY. The Short-Term Government Fund may invest
in U.S. Government securities which are collateralized by or represent interests
in real estate mortgages. The types of mortgage securities in which the
Short-Term Government Fund may invest include the following: (i) adjustable rate
mortgage securities; (ii) collateralized mortgage obligations; (iii) real estate
mortgage investment conduits; and (iv) other securities collateralized by or
representing interests in real estate mortgages whose interest rates reset at
periodic intervals and are issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises.
The Short-Term Government Fund may also invest in mortgage-related securities
which are issued by private entities such as investment banking firms and
companies related to the construction industry. The privately issued
mortgage-related securities in which the Short-Term Government Fund may invest
include, but are not limited to: (i) privately issued securities which are
collateralized by pools of mortgages in which such mortgages are guaranteed as
to payment of principal and interest by an agency, instrumentality or sponsored
enterprise of the U.S. Government; (ii) privately issued securities which are
collateralized by pools of mortgages in which such mortgages are guaranteed as
to the payment of principal and interest by the issuer and such guarantee is
collateralized by U.S. Government securities; and (iii) other privately issued
securities in which the proceeds of the issuance are invested in mortgage-backed
securities and which mortgage-related securities are supported as to the payment
of the principal and interest by the credit of any agency, instrumentality or
sponsored enterprise of the U.S. Government.
The privately issued mortgage-related securities provide for periodic payments
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Short-Term Government Fund as income, and
the principal portion will be reinvested.
NATIONAL MUNICIPAL BOND FUND -- GENERAL INVESTMENTS
The National Municipal Bond Fund's assets will be primarily invested in debt
obligations (at least 65% of the total assets under normal market conditions)
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their respective authorities, agencies,
instrumentalities and political sub-divisions, the interest on which, in the
opinion of bond counsel to the issuer, is exempt from regular Federal income tax
("Municipal Securities"). Under normal market
30
<PAGE> 360
conditions, it is expected that at least 65% of the National Municipal Bond
Fund's total assets will consist of issues rated investment grade or better by
Moody's, S&P, D&P or Fitch IBCA at the time of purchase (that is, rated in one
of the four highest rating categories) or, if unrated, will be deemed by the
National Municipal Bond Fund's investment adviser to be of comparable quality.
While securities rated in the fourth highest rating category (i.e., rated Baa or
BBB) are regarded as having an adequate capacity to pay principal and interest,
such securities lack outstanding investment characteristics and in fact have
speculative characteristics as well. The National Municipal Bond Fund's assets
may be invested in lower quality, higher yielding Municipal Securities which are
rated below investment grade. Such securities carry a higher degree of risk and
are considered to be speculative by the major credit rating agencies. Lower
quality, higher yielding securities are commonly referred to as "junk bonds."
See "High Yield, High Risk Securities" below and "Description of Municipal
Securities Ratings" in the Appendix to this Prospectus. The National Municipal
Bond Fund has no restrictions on the maturity of Municipal Securities in which
it may invest. Accordingly, the National Municipal Bond Fund seeks to invest in
Municipal Securities of such maturities which, in the judgment of the investment
adviser, will provide a high level of current income consistent with prudent
investment management, with consideration given to market conditions. The
National Municipal Bond Fund's average weighted maturity will vary in response
to variations in comparative yields of differing maturities of instruments, in
accordance with the National Municipal Bond Fund's investment objective.
The National Municipal Bond Fund may hold uninvested cash reserves pending
investment, during temporary defensive periods, or if, in the opinion of the
National Municipal Bond Fund's investment adviser, suitable tax-exempt
obligations are unavailable. In accordance with the National Municipal Bond
Fund's investment objective, investments may be made in taxable obligations if,
for example, suitable tax-exempt obligations are unavailable or if acquisition
of U.S. Government or other taxable securities is deemed appropriate for
temporary defensive purposes. Such taxable obligations may include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(some of which may be subject to repurchase agreements), certificates of deposit
and bankers' acceptances of selected banks, and commercial paper rated within
the two highest ratings assigned by a nationally recognized statistical rating
organization. These obligations are described further in the Statement of
Additional Information. To the extent that the National Municipal Bond Fund
invests in such instruments, it will not be invested in accordance with the
investment policies designed for it to realize its investment objective. Income
earned from these instruments is taxable and therefore is not included in the
dividends exempt from federal income tax which the National Municipal Bond Fund
will pay.
The National Municipal Bond Fund may also make other investments as described
more fully below under "Other Investment Practices and Considerations."
CALIFORNIA MUNICIPAL BOND FUND -- GENERAL INVESTMENTS
The California Municipal Bond Fund invests primarily in Municipal Securities (at
least 65% of its total assets under normal circumstances) issued by California
and other states, territories and possessions of the U.S. and the District of
Columbia, and their agencies, authorities, instrumentalities and political sub-
divisions, as long as these instruments are free of Federal income tax.
Under normal market conditions, it is expected that at least 65% of the
California Municipal Bond Fund's total assets will consist of issues rated
investment grade or better by Moody's, S&P, D&P or Fitch IBCA at the time of
purchase (that is, rated in one of the four highest rating categories) or, if
unrated, will be deemed by the California Municipal Bond Fund's investment
adviser to be of comparable
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quality. While securities rated in the fourth highest rating category (i.e.,
rated Baa or BBB) are regarded as having an adequate capacity to pay principal
and interest, such securities lack outstanding investment characteristics and in
fact have speculative characteristics as well. The California Municipal Bond
Fund's assets may be invested in lower quality, higher yielding Municipal
Securities which are rated below investment grade. Such securities carry a
higher degree of risk and are considered to be speculative by the major credit
rating agencies. Lower quality, higher yielding securities are commonly referred
to as "junk bonds." See "High Yield, High Risk Securities" below and
"Description of Municipal Securities Ratings" in the Appendix to this
Prospectus. The California Municipal Bond Fund has no restrictions on the
maturity of Municipal Securities in which it may invest. Accordingly, the
California Municipal Bond Fund seeks to invest in Municipal Securities of such
maturities which, in the judgment of the investment adviser, will provide a high
level of current income consistent with prudent investment management, with
consideration given to market conditions. The California Municipal Bond Fund's
average weighted maturity will vary in response to variations in comparative
yields of differing maturities of instruments, in accordance with the California
Municipal Bond Fund's investment objective.
Under normal circumstances at least 65% of the California Municipal Bond Fund's
assets will be invested in Municipal Securities free from tax under the laws or
Constitution of California ("California Municipal Securities"). In any event, in
an effort to keep the California Municipal Bond Fund's dividends free from
California state personal income tax, the California Municipal Bond Fund will
endeavor to invest at least 50% of its total assets in obligations the interest
on which (if held by an individual) is exempt from taxation by California
("California Exempt Securities," which generally are limited to California
Municipal Securities and certain U.S. Government and U.S. Possession
obligations) as of the end of each fiscal quarter. If the California Municipal
Bond Fund is able to do so, and assuming the California Municipal Bond Fund
otherwise qualifies, the dividends that investors receive from the interest on
those California Exempt Securities will not be subject to that tax. However, if
the California Municipal Bond Fund is not able to achieve the 50% goal, no part
of the California Municipal Bond Fund's dividends will be exempt from California
state personal income tax. Dividends derived from Municipal Securities that are
not California Municipal Securities will be subject to California's state
personal income tax.
Subject to the fundamental policy above, the California Municipal Bond Fund may
also make limited investments in taxable obligations. These taxable obligations
may include obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (and repurchase agreements related to such
obligations), certificates of deposit and bankers' acceptances of select banks
and commercial paper rated within the two highest rating categories by any major
rating service.
The California Municipal Bond Fund might purchase such taxable obligations if,
for example, suitable tax-exempt obligations cannot be found or if deemed
appropriate for temporary defensive purposes. To the extent that the California
Municipal Bond Fund invests in such instruments, it will not be invested in
accordance with the investment policies designed for it to realize its
investment objective. Income earned from these instruments is taxable and
therefore is not included in the dividends exempt from federal and California
income tax which the California Municipal Bond Fund will pay. The California
Municipal Bond Fund may also hold cash for temporary defensive purposes, prior
to making investments or if Bank of America believes suitable tax-exempt
investment opportunities are not available.
FUNDAMENTAL LIMITATIONS
The investment objectives of the Funds and the Master Portfolio are
non-fundamental and may be changed by the Board of Directors without a vote by
the holders of a majority of the outstanding shares of the particular Fund or of
the outstanding interests of the Master Portfolio, respectively. Each Fund is
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subject to other investment limitations which are fundamental, and therefore
which may not be changed without a vote by the holders of a majority of the
outstanding shares of each Fund or of the outstanding interests of the Master
Portfolio, respectively. A complete list of fundamental, and certain non-
fundamental, investment limitations is set out in full in the Statement of
Additional Information.
MORE ABOUT RISK
A Fund's risk profile is largely defined by its primary securities and
investment practices.
The funds are permitted to use -- within limits established by the directors
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of types
of investment risks and certain investment securities and investment practices
of each Fund.
As with any mutual fund, there is no guarantee that a Fund will achieve its
goals or show a positive total return over any period of time -days, months or
years.
TYPES OF INVESTMENT RISK
The following are some of the principal types of investment risks involved with
the securities and investment practices the Fund is permitted to use.
CORRELATION RISK. The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment). Incomplete correlation
can result in unanticipated risks.
CREDIT RISK. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK. The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
DERIVATIVES RISK. When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the fund
also holds, any loss generated by the derivative should be substantially offset
by gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
To the extent that a derivative is not used as a hedge, the fund is
directly exposed to the potential gains and losses of that derivative. Gains or
losses from non-hedging positions in a derivative may be substantially greater
than the derivative's original cost.
EXTENSION RISK. The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INFORMATION RISK. The risk that key information about a security or market is
inaccurate or unavailable.
INTEREST RATE RISK. The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK. Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
LIQUIDITY RISK. The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or
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<PAGE> 363
forego an investment opportunity, any of which could have a negative effect on
fund management or performance.
MANAGEMENT RISK. The risk that a strategy used by a Fund's management may fail
to produce the intended result.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole.
NATURAL EVENT RISK. The risk of losses attributable to natural disasters, crop
failures and similar events.
OPPORTUNITY RISK. The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
POLITICAL RISK. The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK. The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK. The risk that a Fund has valued certain of its securities at a
higher price than for which it can sell them.
HIGHER-RISK SECURITIES AND PRACTICES
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semiannual reports. For more information about
the investments, see "Other Investment Practices and Considerations."
10 Percent of total assets
10 Percent of net assets
No policy limitation on usage; fund may be using currently
o Permitted, but has not typically been used
- -- Not permitted.
<TABLE>
<CAPTION>
NATIONAL CALIFORNIA
FLEXIBLE INTERMEDIATE U.S. GOVERNMENT SHORT-TERM MUNICIPAL MUNICIPAL
INCOME BOND SECURITIES GOVERNMENT BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ------------ --------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE
AGREEMENT. The borrowing of
money from banks or through
reverse repurchase
agreements.................... o o o o o o
REPURCHASE AGREEMENTS(3)
The purchase of a security that
must later be sold back to the
issuer price plus interest.... + + + + + +
</TABLE>
34
<PAGE> 364
<TABLE>
<CAPTION>
LONG-TERM NATIONAL CALIFORNIA
FLEXIBLE INTERMEDIATE U.S. GOVERNMENT GOVERNMENT MUNICIPAL MUNICIPAL
INCOME BOND SECURITIES BOND BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ------------ --------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES LENDING. The lending
of securities to financial
institutions, which provide
cash or securities as
collateral.................... 33.3 33.3 33.3 -- -- --
WHEN-ISSUED SECURITIES, FORWARD
COMMITMENTS AND DELAYED
SETTLEMENTS. The purchase or
sale of securities for
delivery at a future date;
market value may change before
delivery...................... 25 25 25 25 25 25
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities
of foreign issuers............ 20 25 -- 20 -- --
ZERO COUPON DEBT SECURITIES.
Securities offering delayed --
cash payment. Their prices are
typically more volatile than
those of conventional debt
securities.................... -- -- -- -- o o
RESTRICTED AND ILLIQUID
SECURITIES. Securities which
cannot be disposed of in 7
days in the ordinary course of
business at fair value. May
include Rule 144A............. 15 15 15 15 15 15
INVESTMENT COMPANY SECURITIES.
Securities issued by other
investment companies.......... o o o o o o
MUNICIPAL SECURITIES.
Obligations issued by state or
local governments............. -- 5 -- 5 65 65
UNLEVERAGED DERIVATIVE
SECURITIES
ASSET-BACKED SECURITIES.
Securities backed by unsecured
debt, such as credit card
debt; these securities are
often guaranteed or
over-collateralized to enhance
their credit quality.......... o o -- o -- --
MORTGAGE-BACKED SECURITIES.
Securities backed by pools of
mortgages, including
passthrough certificates,
PACs, or classes of
collateralized mortgage
obligations (CMOs)............ 35 35 o o -- --
</TABLE>
35
<PAGE> 365
<TABLE>
<CAPTION>
NATIONAL CALIFORNIA
FLEXIBLE INTERMEDIATE U.S. GOVERNMENT SHORT-TERM MUNICIPAL MUNICIPAL
INCOME BOND SECURITIES GOVERNMENT BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ------------ --------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
CUSTODIAN RECEIPTS AND
PARTICIPATION INTERESTS.
Securities representing an
interest in another loans..... o -- -- -- o o
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS;
SECURITIES AND INDEX OPTIONS.
Contracts involving the right
or obligation to deliver or
receive assets or money
depending on the performance
of one or more assets or an
economic index................
FUTURES AND RELATED OPTIONS..... * * * * * *
OPTIONS ON SECURITIES AND
INDICES....................... * * * * -- --
SWAPS. OTC contracts involving
the right or obligation to
receive or make payments based
on two different income
streams....................... -- -- -- -- --
</TABLE>
* See "Options" and "Futures Contracts and Options on Futures Contracts," for a
description of applicable investment limitations.
ANALYSIS OF FUNDS WITH 25% OR MORE IN JUNK BONDS.(1)
<TABLE>
<CAPTION>
INVESTMENT-GRADE BONDS QUALITY RATING (S&P/MOODY'S FLEXIBLE INCOME FUND
---------------------- ------------------------------- --------------------
<S> <C> <C>
AAA/Aaa 14.4%/14.4%
AA/Aa 8.2%/6.8%
A/A 56.9%/55.4%
BBB/Baa 19.5%/16.1%
Junk Bonds BB/Ba or lower 0%/6.1%
Not Rated 1.2%
Comparable to AAA 0%
to AA 0%
to A 0%
to BBB 0%
to BBB or lower 0%
</TABLE>
- ---------------
(1) Average weighted quality distribution for the most recent fiscal year.
ANALYSIS OF FUNDS WITH 5% OR MORE IN BONDS.(1)
<TABLE>
<CAPTION>
QUALITY RATING NATIONAL MUNICIPAL BOND CALIFORNIA MUNICIPAL
INVESTMENT-GRADE BONDS (S&P/MOODY'S) FUND BOND FUND
---------------------- -------------- ----------------------- --------------------
<S> <C> <C> <C>
AAA/Aaa 43.7%/41.8% 54.3%/53.1%
AA/Aa 20.9%/20.3% 14.6%/11.0%
A/A 18.8%/22.4% 15.5%/14.1%
BBB/Baa 6.5%/8.6% 9.0%/7.4%
Junk Bonds.............. BB/Ba or lower 0%/0% 0%/0%
Not Rated 10.1%/6.9% 6.6%/14.4%
Comparable to AAA/Aaa 0%/0% 0%/0%
Comparable to AA/Aa 0%/0% 0%/0%
Comparable to A/A 0%/0% 0%/0%
Comparable to BBB/Baa 0%/0% 0%/0%
Comparable to BB/Ba 0%/0% 0%/0%
Comparable to BB/Ba or lower 0%/0% 0%/0%
</TABLE>
- ---------------
(1)Average weighted quality distribution for the most recent fiscal year.
* See "Futures and Related Options" for a description of applicable investment
limitations.
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<PAGE> 366
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
CASH EQUIVALENTS. For temporary defensive purposes (for example, when Bank of
America believes such a position is warranted by uncertain or unusual market
conditions, or when liquidity is required to meet unusually high redemption
requests), the Flexible Income Fund, U.S. Government Securities Fund and
Short-Term Government Fund may invest without limitation and the Intermediate
Bond Master Portfolio may invest up to 75% of its net assets in cash equivalents
such as money market instruments (including short-term bank time deposits,
certificates of deposit, bankers' acceptances, obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers and, subject to the investment limitations described below,
shares of money market mutual funds. Commercial paper must be rated at the time
of purchase at least Prime-2 by Moody's, A-2 by S&P or F-1 by Fitch IBCA for the
Flexible Income Fund and Master Portfolio and Prime-1, A-1 or F-1, respectively,
for the U.S. Government Securities Fund and Short-Term Government Fund.
Certificates of deposit, bankers' acceptances and time deposits will be issued
by domestic and foreign banks and foreign branches of U.S. banks that have total
assets of more than $2.5 billion and interest-bearing savings deposits in
commercial banks in amounts not exceeding 5% of its total assets. To the extent
a Fund invests in cash equivalents, it will not be invested in accordance with
the investment policies designed for it to realize its investment objective.
MORTGAGE-RELATED SECURITIES. Each Fund, except for the National Municipal Bond
and California Municipal Bond Funds, may invest in mortgage-related securities.
Purchasable mortgage-related securities are represented by pools of mortgage
loans assembled for sale to investors by various governmental agencies such as
the GNMA and government-related organizations such as the FNMA and FHLMC, as
well as by private issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
are otherwise similarly secured, the market value of the security, which
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<PAGE> 367
may fluctuate, is not so secured. If a Fund purchases a mortgage-related
security at a premium, the portion may be lost if there is a decline in the
market value of the security, whether resulting from increases in interest rates
or prepayment of the underlying mortgage collateral. As with other interest-
bearing securities, the prices of such securities are inversely affected by
changes in interest rates. However, though the value of a mortgage-related
security may decline when interest rates rise, the converse is not necessarily
true because mortgages underlying securities are prone to prepayment in periods
of declining interest rates. For this and other reasons, a mortgage-related
security's maturity may be shortened by unscheduled prepayments on underlying
mortgages and, therefore, it is not possible to accurately predict the
security's return to the Funds. Mortgage-related securities provide regular
payments consisting of interest and principal. No assurance can be given as to
the return a Fund will receive when these amounts are reinvested.
Mortgage-related securities acquired by a Fund may include collateralized
mortgage obligations ("CMOs"), a type of derivative, issued by FNMA, FHLMC or
other U.S. Government agencies, instrumentalities or sponsored enterprises, as
well as by private issuers. CMOs provide an investor with a specified interest
in the cash flow of a pool of underlying mortgage or other mortgage-related
securities. Issuers of CMOs frequently elect to be taxed as pass-through
entities known as real estate mortgage investment conduits ("REMICs"). CMOs are
issued in multiple classes, each with a specified fixed or floating interest
rate and a final distribution date. The relative payment rights of the various
CMO classes may be structured in many ways. Generally, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other
classes having an earlier stated maturity date are paid in full. Sometimes,
however, CMO classes are "parallel pay," i.e. payments of principal are made to
two or more classes concurrently.
CMOs may involve additional risks other than those found in other types of
mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, which are unacceptable to a Fund based on the Fund's analysis
of the market value of the security.
Privately issued mortgage-related securities generally offer a higher yield than
mortgage-related securities issued by governmental agencies, instrumentalities
or sponsored enterprises because of the absence of any direct or indirect
government or agency payment guarantees. However, timely payment of interest and
principal on mortgage loans in these pools may be supported by various forms of
insurance or guarantees, including individual loan, pool and hazard insurance,
subordination and letters of credit. The insurance and guarantees are issued by
government entities, private insurers, banks and mortgage poolers. Although the
market for such securities is becoming increasingly liquid, some mortgage-
related securities issued by private organizations may not be readily
marketable.
ASSET-BACKED SECURITIES. The Flexible Income Fund, Short-Term Government Fund
and Master Portfolio may purchase asset-backed securities. Asset-backed
securities consist of undivided fractional interests in pools of mortgages,
consumer loans or receivables held in a trust. Examples include mortgage-backed
securities, certificates for automobile receivables (CARS) and credit card
receivables (CARDS). Payments of principal and interest on the mortgages, loans
or receivables are passed through to certificate holders. Asset-backed
securities may be issued by either governmental or non-governmental entities.
Payment on asset-backed securities of private issuers is typically supported by
some form of credit enhancement, such as a letter of credit, surety bond,
limited guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed
38
<PAGE> 368
security's par value until exhausted. Ultimately, asset-backed securities are
dependent upon payment of the mortgages, consumer loans or receivables by
individuals, and the certificate holder frequently has no recourse to the entity
that originated the loans or receivables. All asset-backed securities purchased
by the Flexible Income Fund, Short-Term Government Fund and Master Portfolio
will either be issued or guaranteed by a U.S. Government entity or rated AAA by
S&P, Aaa by Moody's or have an equivalent rating from any other rating agency.
FOREIGN SECURITIES. Subject to their investment objectives and the policies
stated above, the Flexible Income Fund, Short-Term Government Fund and
Intermediate Bond Master Portfolio may invest in securities of foreign issuers
that may or may not be publicly traded in the United States, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Flexible Income
Fund, Short-Term Government Fund and Intermediate Bond Master Portfolio to
invest no more than 20%, 20% and 25% of their respective net assets (at the time
of purchase) in foreign securities.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND ASSET-BACKED SECURITIES. The
Flexible Income and Short-Term Government Funds' and the Intermediate Bond
Master Portfolio's investments in foreign securities, whether made directly or
indirectly, involve certain inherent risks, including political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns and changes in foreign currency exchange rates and
the possibility of adverse changes in investment or exchange control
regulations. There is typically less information publicly available about a
foreign company than about a U.S. company. Moreover, these companies may be
subject to less stringent reserve, auditing and reporting requirements than
their U.S. counterparts.
Additionally, foreign markets are generally not as developed or efficient as
those in the U.S., and in most foreign markets volume and liquidity are less
than in the U.S. There is generally less government supervision and regulation
of foreign exchanges, brokers and companies than in the U.S. There is also the
possibility that foreign governments could expropriate assets or levy
confiscatory taxes, set limitations on the removal of assets or suffer adverse
diplomatic developments. Because of these and other factors, foreign securities
acquired by Flexible Income Fund, Short-Term Government Fund and Intermediate
Bond Master Portfolio may be subject to greater price fluctuation than
securities of U.S. companies.
An asset-backed security's underlying assets may be prepaid with the result of
shortening the certificate's weighted average life. Prepayment rates vary widely
and may be affected by changes in market interest rates. It is not possible to
accurately predict the average life of a particular pool of mortgages, loans or
receivables. The proceeds of prepayments received by the Flexible Income Fund,
Short-Term Government Fund and Intermediate Bond Master Portfolio must be
reinvested in securities whose yields reflect interest rates prevailing at the
time. Thus, the Flexible Income and Short-Term Government Funds' and
Intermediate Bond Master Portfolio's ability to maintain a portfolio which
includes high-yielding asset-backed securities will be adversely affected to the
extent reinvestments are in lower yielding securities. The actual maturity and
realized yield will therefore vary based upon the prepayment experience of the
underlying asset pool and prevailing interest rates at the time of prepayment.
Asset-backed securities may be subject to greater risk of default during periods
of economic downturn than other instruments. Also, while the secondary market
for asset-backed securities is ordinarily quite liquid, in times of financial
stress the secondary market may not be as liquid as the market for other types
of securities, which could result in the Flexible Income and Short-Term
Government Funds' and Intermediate Bond Master Portfolio's experiencing
difficulty in valuing or liquidating such securities.
CREDIT RATINGS. S&P, Moody's, D&P and Fitch IBCA evaluate the safety of a
security's principal and interest payments, but do not address market value
risk. Because the ratings of the rating agencies may
39
<PAGE> 369
not always reflect current conditions and events, in addition to using
recognized rating agencies and other sources, Bank of America performs its own
analysis of the issuers whose securities a Fund purchases. Because of this, a
Fund's performance may depend more on the investment adviser's own credit
analysis than is the case for mutual funds investing in higher rated securities.
In selecting securities, Bank of America considers factors such as those
relating to the creditworthiness of issuers, the ratings and performance of the
securities, the protections afforded the securities and the diversity of a
Fund's portfolio. Bank of America continuously monitors the issuers of
securities held in a Fund's portfolio for their ability to make required
principal and interest payments, as well as in an effort to control the
liquidity of a Fund's portfolio so that it can meet redemption requests.
If a portfolio security undergoes a rating revision, a Fund may continue to hold
the security if Bank of America determines such retention is warranted.
The National Municipal Bond Fund will not invest in any security that has lower
than a C rating. The California Municipal Bond Fund may invest in Municipal
Securities rated C by Moody's, D by Standard & Poor's, D by Fitch IBCA or DD by
Duff & Phelps, or in unrated securities determined to be of comparable quality.
The National Municipal Bond Fund may retain a portfolio security whose rating
has been changed if Bank of America deems that retention of such security is
warranted. In general, lower rated debt securities are subject to risks of
market fluctuation or default (due to changes in the credit rating or financial
condition of the issuer) that are significantly greater than for securities in
the higher rating categories of S&P's, Moody's, Duff & Phelps or Fitch IBCA.
Please refer to the description of municipal bond ratings in the Appendix to the
Prospectus.
MORE ON MUNICIPAL SECURITIES. The two main types of Municipal Securities are
"general obligation" securities (which are secured by the issuer's full faith,
credit and taxing power) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or other specific
revenue source). A third type of Municipal Security, normally issued by special
purpose public authorities, is known as a "moral obligation" security because if
the issuer cannot meet its repayment obligations it then draws on a reserve
fund, the restoration of which is a moral, but not a legal requirement. Private
activity bonds which the National Municipal Bond Fund and California Municipal
Bond Fund may hold are usually revenue securities that are not payable from the
unrestricted revenues of the issuer. The quality of these bonds therefore is
often directly related to the credit of the corporate user of the facility being
financed.
Municipal Securities purchased by the National Municipal Bond Fund and
California Municipal Bond Fund may include both rated and unrated variable and
floating rate instruments. Although particular variable or floating rate
obligations often do not have an active secondary market, the periodic
readjustment of interest rates that these instruments undergo tends to assure
that their value to a Fund approximates their actual par value.
Opinions with respect to Municipal Securities regarding their validity and
exemption from Federal income tax (and California personal income tax where
applicable) are given by the issuer. The National Municipal Bond Fund and
California Municipal Bond Fund and Bank of America will rely on these opinions
and do not intend to review the basis for them.
RISK FACTORS AND SPECIAL CONSIDERATIONS. In seeking to achieve its investment
objectives the National Municipal Bond Fund and California Municipal Bond Fund
may invest, without limitation, in industrial development bonds, which, although
issued by industrial development authorities, may be backed only by the assets
and revenues of the non-governmental users. In addition, although the Funds do
not presently intend to do so on a regular basis, each may invest more than 25%
of its assets in Municipal
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<PAGE> 370
Securities the interest on which comes solely from revenues of similar projects.
When a Fund's assets are concentrated in obligations payable from revenues of
similar projects, the Fund will be subject to the particular risks (including
economic, business and political risks) related to such projects to a greater
extent than if its assets were not so concentrated. The value of a Fund's
securities will generally vary inversely with changes in prevailing interest
rates. Such values will also change in response to changes in the interest rates
payable on new issues of Municipal Securities. Should such interest rates rise,
the values of outstanding bonds, including those held by a Fund will decline. If
interest rates fall, the values of outstanding bonds will generally increase.
Changes in the value of a Fund's securities arising from these or other factors
will cause changes in the net asset value per share of the Fund.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities acquired by the
National Municipal Bond Fund and California Municipal Bond Fund may be in the
form of custodial receipts evidencing rights to receive a specific future
interest payment, principal payment or both on certain Municipal Securities.
Such obligations are held in custody by a bank on behalf of holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The National
Municipal Bond Fund and California Municipal Bond Fund may also purchase from
time to time participation interests in debt securities held by trusts or
financial institutions. A participation interest gives a Fund an undivided
interest in the security or securities involved. Participation interests may
have fixed, floating or variable rates of interest (although the securities held
by the issuer may have longer maturities). If a participation interest is
unrated, the investment adviser will have determined that the interest is of
comparable quality to those instruments in which the National Municipal Bond
Fund and California Municipal Bond Fund may invest pursuant to guidelines
approved by such Funds' Board of Directors. For certain participation interests,
the National Municipal Bond Fund and California Municipal Bond Fund will have
the right to demand payment, for all or any part of the Funds' participation
interest, plus accrued interest. As to these instruments, each Fund intends to
exercise its right to demand payment as needed to provide liquidity, to maintain
or improve the quality of its investment portfolio or upon a default (if
permitted under the terms of the instrument).
The Flexible Income Fund may purchase from domestic financial institutions
participation interests in high quality debt securities. Participation interests
in which the Flexible Income Fund may invest may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the Securities and Exchange Commission). The
Flexible Income Fund intends only to purchase participations from an entity or
syndicate, and does not intend to serve as a co-lender in any participation. For
certain participation interests, the Flexible Income Fund will have the right to
demand payment, on not more than 30 days' notice, for all or any part of that
Fund's participation interest in the security, plus accrued interest. As to
these instruments, the Flexible Income Fund intends to exercise its right to
demand payment only upon a default under the terms of the security, as needed to
provide liquidity, or to maintain or improve the quality of its investment
portfolio. It is possible that a participation interest might be deemed to be an
extension of credit by the Flexible Income Fund to the issuing financial
institution that is not a direct interest in the credit of the obligor of the
underlying security and is not directly entitled to the protection of any
collateral security provided by such obligor. In such event, the ability of the
Flexible Income Fund to obtain repayment might depend on the issuing financial
institution.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Each Fund
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, each Fund, except for the Master
Portfolio, may purchase or sell securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
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a Fund to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit a Fund
to lock in a price or yield on a security 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
Funds will set aside in a segregated account cash or liquid securities equal to
the amount of any when-issued forward commitment or delayed settlement
transaction. When-issued purchases, forward commitments and delayed settlements
are not expected to exceed 25% of the value of a Fund's total assets under
normal circumstances. These transactions will not be entered into for
speculative purposes, but primarily in order to hedge against anticipated
changes in interest rates or in furtherance of its investment objectives. The
market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of each Fund starting on the day the Fund agrees to purchase the
securities. A fund does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
Stand-by Commitments. In addition, the National Municipal Bond Fund and
California Municipal Bond Fund may acquire "stand-by commitments" with respect
to Municipal Securities held in their respective portfolios. Under a stand-by
commitment, a dealer agrees to purchase at a Fund's option specified Municipal
Securities at a specified price. The Funds will acquire stand-by commitments
solely to facilitate portfolio liquidity and do not intend to exercise their
respective rights thereunder for trading purposes. The National Municipal Bond
Fund and California Municipal Bond Fund expect that "stand-by commitments" will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the National Municipal Bond
Fund and California Municipal Bond Fund may pay for a "stand-by commitment'
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities).
Callable Securities. The National Municipal Bond Fund and California Municipal
Bond Fund may invest in callable municipal bonds. Callable municipal bonds are
municipal bonds which contain a provision in the indenture permitting the issuer
to redeem the bonds prior to their maturity dates at a specified price which
typically reflects a premium over the bonds' original issue price. These bonds
generally have call-protection (that is, a period of time during which the bonds
may not be called) which usually lasts for 7 to 10 years, after which time such
bonds may be called away. An issuer may generally be expected to call its bonds,
or a portion of them, during periods of relatively declining interest rates,
when borrowings may be replaced at lower rates than those obtained in prior
years. If the proceeds of a bond called under such circumstances are reinvested,
the result may be a lower overall yield due to lower current interest rates. If
bonds are purchased at a premium, some or all of that premium may not be
recovered by bondholders, such as the Funds, upon redemption, depending on the
redemption price.
Zero Coupon Securities. The National Municipal Bond Fund and California
Municipal Bond Fund may invest in zero coupon securities. Zero coupon securities
are debt obligations which do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities begin paying
current interest (the "cash payment date") and therefore are issued and traded
at a discount from their face amounts or par value. Such bonds carry an
additional risk in that, unlike bonds which pay interest throughout the period
to maturity, a Fund will realize no cash until the cash payment date and, if the
issuer defaults, the Fund may obtain no return at all on its respective
investments. The National Municipal Bond Fund and California Municipal Bond Fund
will be required to include in income (or, with respect to Municipal Securities,
in exempt-interest income) daily portions of original
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issue discount accrued which will cause the Funds to be required to make
distributions of such amounts to shareholders annually, even if no payment is
received before the distribution date.
RISKS RELATED TO INTEREST RATE CHANGES. Mutual funds that invest solely in fixed
income securities are subject to interest rate risk. In general, bond prices
vary inversely with changes in interest rates. As a result, bond prices tend to
rise when interest rates fall and conversely, decrease during periods of rising
interest rates. Thus, a Fund's net asset value per share is expected to vary
with changes in interest rates. A Fund's investments will normally fall when
prevailing interest rates rise and rise when interest rates fall. Interest rate
fluctuations can be expected to affect earnings. In an effort to preserve the
capital of a Fund when interest rates are generally rising, Bank of America may
shorten the average weighted maturity of the securities in a Fund's investments.
Because the principal values of the securities with shorter maturities are less
affected by rising interest rates, a portfolio with a shorter average weighted
maturity will generally diminish less in value during such periods than a
portfolio with a longer average weighted maturity. Because securities with
shorter maturities, however, generally have a lower yield to maturity, a Fund's
current return based on its net asset value will generally be lower as a result
of such action than it would have been had such action not been taken.
HIGH YIELD, HIGH RISK SECURITIES. Up to 35% of the total assets each of the
Flexible Income, National Municipal Bond Fund and California Municipal Bond Fund
may be invested in Municipal Securities rated below investment grade ("high
yield, high risk securities"), or in the case of the California Municipal Bond
Fund, in unrated securities determined to be of comparable quality.
RISKS RELATED TO HIGH YIELD, HIGH RISK SECURITIES. While any investment carries
some risk, some of the risks associated with high yield, high risk, or
lower-rated, securities are different from the risks associated with investment
grade securities. The risk of loss through default is greater because high
yield, high risk securities are usually unsecured and are often subordinate to
an issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities, and the net asset
value of each Fund's shares, may be quite volatile. Because the market
for high yield, high risk, or lower rated, securities, at least in its present
size and form, is relatively new, there remains some uncertainty about its
performance level under adverse market and economic environments. An economic
downturn or increase in interest rates could have a negative impact on both the
market for high yield, high risk securities (resulting in a greater number of
bond defaults) and the value of high yield, high risk securities held in a
Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect lower-rated securities differently than other securities. For
example, the prices of lower-rated securities are more sensitive to adverse
economic changes or individual corporate developments than are the prices of
higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
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If the issuer of a security defaults, a Fund may incur additional expenses to
seek recovery. In addition, periods of economic uncertainty would likely result
in increased volatility for the market prices of lower-rated securities as well
as a Fund's net asset value. In general, both the prices and yields of
lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, a Fund's
valuation of a security and the price it is actually able to obtain when it
sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by a Fund, especially in a thinly traded market. Illiquid or restricted
securities held by a Fund may involve special registration responsibilities,
liabilities and costs, and could involve other liquidity and valuation
difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for high yield, high risk, or lower-rated,
securities.
OPTIONS. The Flexible Income Fund and U.S. Government Securities Fund may write
covered put and call options and purchase put and call options on U.S.
securities that are traded on United States exchanges and in over-the-counter
markets. The Intermediate Bond Master Portfolio may purchase put and call
options on listed securities and may write fully covered call options. The U.S.
Government Securities Fund may write covered call options and purchase put
options. Put options may be purchased in order to protect a Fund's securities in
expectation of a declining market, and call options may be purchased to benefit
from anticipated price increases in the underlying securities or index. A Fund
may write fully covered call options in order to realize current income from the
premiums received as long as a Fund remains fully covered throughout the life of
the option, either by owning the optioned securities or possessing a call issued
by another writer that is identical in all respects to the call written by the
Fund.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Although the Funds' risk when purchasing options is
limited to the amount of the original premiums paid plus transaction costs,
options may be more volatile than the underlying instruments, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuations than an investment in the underlying security. When writing covered
call options, the Funds give up the opportunity to profit from a price increase
in the underlying security above the option's exercise price in return for the
premium but retains the risk of loss should the price of the underlying security
fall. In addition, there are significant differences between the securities and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives, and there is
no guarantee that a liquid secondary market for particular options will exist.
For additional information relating to options transactions, please refer to the
Statement of Additional Information.
Options transactions will be limited as follows: (a) not more than 5% of the
total assets of the Flexible Income Fund may be invested in options; and (b) not
more than 25% of the value of the Intermediate Bond Master Portfolio's net
assets may be subject to options. In addition, (a) obligations of the Flexible
Income Fund under put options it writes may not exceed 50% of its net assets;
(b) aggregate premiums on all options purchased by the Flexible Income Fund and
Master Portfolio may not exceed 25% and 2%, respectively, of their net assets;
(c) options written by the U.S. Government Securities Fund may not exceed 25% of
its total assets (taken at market value on the date written) and (d) options
purchased by the U.S. Government Securities Fund may not exceed 5% of its total
assets.
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Call options written by a Fund gives 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 a Fund is "covered"
if the particular 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 a
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian.
Put options written by the Flexible Income 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 Flexible Income Fund is "covered" if that Fund maintains
cash or high grade debt obligations with a value equal to the exercise price in
a segregated account with its custodian, or holds a put on the same security and
in the same principal amount as the put written and the exercise price of the
put held is equal to or greater than the exercise price of the put written.
The restrictions discussed in this section do not apply to options on futures
contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Flexible Income Fund may
enter into contracts for the purchase or sale for future delivery of
fixed-income securities, or contracts based on financial indices and may
purchase and write put and call options to buy or sell futures contracts.
The Intermediate Bond Master Portfolio may purchase and sell interest rate
futures contracts (and purchase related options) as a hedge against changes
resulting from market conditions in the values of the securities held by the
Fund or which it intends to purchase and where the transactions are economically
appropriate for the reduction of risks inherent in the ongoing management of the
Fund.
The U.S. Government Securities Fund may enter into financial futures contracts
or purchase or sell options on such futures as a hedge against anticipated
interest rate fluctuations.
The Short-Term Government Fund may enter into contracts for the purchase or sale
for future delivery of U.S. Government securities, mortgage-related securities
or Eurodollar securities or may purchase put and call options to buy or sell
futures contracts. The Short-Term Government Fund will engage in futures and
related options transactions only for bona fide hedging purposes.
The National Municipal Bond Fund and California Municipal Bond Fund may invest
in futures contracts and related options relating to indices on municipal bonds
and/or treasury securities as a hedge against changes in its other assets'
market values ("Municipal Bond Index Futures" or "Futures").
A "sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the incurring of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date.
If the investment adviser expects interest rates to rise, a Fund may sell a
futures contract or may sell a call option or purchase a put option on such
futures contract, as a hedge against a decrease in the value of the Fund. If the
investment adviser expects interest rates to decline, a Fund may purchase a
futures contract, or may purchase a call option or sell a put option on such
futures contract, to protect against an increase in the price of securities
which the Fund intends to purchase.
The Funds may be subject to additional risks associated with futures contract,
such as the possibility that Bank of America's forecasts of market values and
other factors are not correct, imperfect correlation between a Fund's hedging
instrument and the asset or liability being hedged, default by the other party
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to the transaction, and inability to close out a position because of the lack of
a liquid market. In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in a futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. As a result of these factors, a correct forecast of general market
trends or interest rate movements by Bank of America may still not result in a
successful hedging transaction.
These investment techniques would be used to hedge against anticipated future
changes in interest or exchange rates which otherwise might either adversely
affect the value of the Fund's portfolio securities. A 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 margin deposits on its
existing futures positions and the amount of premiums paid for related options
does not exceed 5% of that Fund's total assets (after taking into account
certain technical adjustments). In order to prevent leverage in connection with
the purchase of futures contracts or call options thereon by a 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, a Fund's ability to engage in options and futures transactions may
be limited by tax considerations. More information about futures contracts and
related options may be found in Appendix B to the Statement of Additional
Information.
INTEREST RATE AND CURRENCY SWAPS. The Flexible Income Fund may enter into
interest rate and currency swaps for hedging purposes. The Flexible Income Fund
will typically use interest rate swaps to shorten the effective duration of its
portfolio. An interest rate swap involves the exchange of a Fund with another
party of their respective rights to receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Flexible Income
Fund holds an interest-paying security whose interest rate is reset once a year,
it may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset daily. Such a swap position would
offset changes in the value of the underlying security because of subsequent
changes in interest rates. It is designed to protect the Flexible Income Fund
from a decline in the value of the underlying security due to rising rates, but
would also limit its ability to benefit from falling interest rates. Currency
swaps involve the exchange of their respective rights to make or receive
payments in specified currencies.
The Flexible Income Fund will only enter into interest rate swaps on a net
basis, which means that the two payment streams are netted out, with the
Flexible Income Fund receiving or paying, as the case may be, only the net
amount of the two payments. Interest rate swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that the Flexible Income Fund is contractually obligated to make. If
the other party to an interest rate swap defaults, the Flexible Income Fund's
risk of loss consists of the net amount of interest payments that the Flexible
Income Fund is contractually entitled to receive. In contrast, currency swaps
usually involve the delivery of the entire principal value of one designated
currency in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations.
POTENTIAL RISKS OF OPTIONS, FUTURES AND SWAPS. The use of options, futures and
swaps are highly specialized activities which involve investment techniques and
risks different from those associated with customary investments. If Bank of
America should be incorrect in its forecasts of market values, interest rates or
currency exchange rates, a Fund may not achieve the anticipated benefits of the
techniques or may realize losses, and its investment performance may be less
favorable than if these strategies had not
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been used. Because perfect correlation between a futures position and portfolio
position that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and a Fund may be exposed to risk of loss. The
loss incurred by a Fund in entering into futures contracts and in writing call
options on futures contracts is potentially unlimited and may exceed the amount
of the premium received. Futures markets are highly volatile and the use of
futures may increase the volatility of a Fund's net asset value. In addition,
because of the low margin deposits normally required in futures trading, a
relatively small price movement in a futures contract may result in substantial
losses to a Fund. A Fund's ability to dispose of its positions in futures
contracts and options will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to a number of
securities are relatively new and still developing. If a secondary market does
not exist with respect to an option purchased or written by a Fund
over-the-counter, it might not be possible to effect a closing transaction in
the option (i.e., dispose of the option) with the result that (i) an option
purchased by a Fund would have to be exercised in order for that Fund to realize
any profit and (ii) a Fund may not be able to sell portfolio securities covering
an option written by it until the option expires or it delivers the underlying
futures contract upon exercise. Therefore, no assurance can be given that a Fund
will be able to utilize these instruments effectively for the purposes set forth
above.
VARIABLE RATE INSTRUMENTS. The Intermediate Bond Fund may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Master Portfolio or the Funds, master demand notes may
not be marketable. Consequently, the ability to redeem such notes may depend on
the borrower's ability to pay which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or the
equivalent by another nationally recognized statistical rating organization, (c)
are backed by a bank letter of credit or (d) are determined by Bank of America
to be of a quality comparable to securities described in either clause (a)
or (b).
INVESTMENT COMPANY SECURITIES. Each Fund may invest in securities issued by
other investment companies whose objectives are consistent with such Fund
(including money market funds advised by Bank of America) to the extent
permitted by the 1940 Act except that with respect to the investment in a money
market mutual fund advised by Bank of America, each of the Funds is permitted to
invest the greater of 5% of its respective net assets or $2.5 million.
REPURCHASE AGREEMENTS. The Funds and the Intermediate Bond Master Portfolio 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
Funds and the Master Portfolio will enter into repurchase agreements only with
financial institutions (such as banks and broker-dealers) deemed creditworthy by
Bank of America under guidelines approved by the Fund's Board of Directors or
Trustees. During the term of any repurchase agreement the seller must maintain
the value of the securities subject to the agreement in an amount that is
greater than the repurchase price. Bank of America then continually monitors
that value. Nonetheless, should the seller default on its obligations under the
agreement, the Funds would be exposed to possible loss due to adverse market
activity or delays connected with the disposition of the
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underlying obligations. The Master Portfolio will only enter into repurchase
agreements for debt obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, certificates of deposit, bankers' acceptances or
commercial paper.
REVERSE REPURCHASE AGREEMENTS. Each Fund, except for the Short-Term Government
Fund, may borrow money for temporary purposes by entering into transactions
called reverse repurchase agreements. Under these agreements a Fund sells
portfolio securities to financial institutions (such as banks and
broker-dealers) and agrees to buy them back later at an agreed upon time and
price. When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by Bank of America to make sure that an
appropriate value is maintained. Reverse repurchase agreements involve the risk
that the value of portfolio securities a 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 Funds under the 1940 Act.
Borrowings may magnify the potential for gain or loss on amounts invested
resulting in an increase in the speculative character of a Fund's outstanding
shares. A Fund will only enter into reverse repurchase agreements to avoid the
need to sell portfolio securities to meet redemption requests during unfavorable
market conditions.
The Intermediate Bond Master Portfolio will only enter into reverse repurchase
agreements with a bank if it has a commercial paper rating of A-2 or better by
S&P or Prime-2 or better by Moody's, or the equivalent from another NRSRO.
SECURITIES LENDING. In order to earn additional income, the Flexible Income
Fund, U.S. Government Securities Fund and Master Portfolio may lend their
portfolio securities to financial institutions (such as banks and brokers) that
Bank of America considers to be of good standing. If the financial institution
should become bankrupt, however, the particular Fund could experience delays in
recovering its securities. A securities loan will only be made when, in the
judgment of Bank of America, the possible reward from the loan justifies the
possible risks. In addition, such loans will not be made by the particular Fund
if, as a result, the value of securities loaned by the Flexible Income Fund, the
U.S. Government Securities Fund or the Master Portfolio exceeds 33 1/3% of
their respective total assets. Securities loans will be fully collateralized.
ILLIQUID SECURITIES. The Funds will not invest more than 15% of the value of
their respective net assets (determined at the time of acquisition) in
securities that are illiquid. If, after the time of acquisition, events cause
this limit to be exceeded, the Funds will take steps to reduce the aggregate
amount of illiquid securities as soon as is reasonably practicable. The Flexible
Income Fund intends that investments in securities that are not registered under
the Securities Act of 1933 but may be purchased by institutional buyers under
Rule 144A and for which a liquid trading market exists as determined by the
Board of Trustees of that Fund or Bank of America (pursuant to guidelines
adopted by the Board), will not be subject to the Flexible Income Fund's 15%
limitation on illiquid securities. This investment practice could have the
effect of increasing the level of illiquidity in the Flexible Income Fund during
any period that institutional buyers under Rule 144A became uninterested in
purchasing these restricted securities.
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YEAR 2000 RISKS. An issue has emerged in the investment services industry and
for the economy overall regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. The Fund has been informed by Bank of America that it has a
team in place working on year 2000 systems compliance and that Bank of America
expects to have its systems ready by the year 2000. Certain other service
providers have provided similar information to the Fund. Nevertheless, the
inability of Bank of America and the other service providers to successfully
address year 2000 issues could results in interruptions in the Fund's business
and have a material adverse impact on the Fund's operations.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Funds. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Funds and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by a Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds' distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to a Fund are not less favorable than what they would
be with any other qualified firm.
PORTFOLIO TURNOVER. The Funds' investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs than would otherwise be the case. Turnover may require payment of
brokerage commissions, impose other transaction costs and could increase
substantially the amount of income received by the 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 Master Portfolio's annual portfolio turnover is not expected
to exceed 300%, although the Funds' annual portfolio turnover rates will not be
a limiting factor in making investment decisions. See "Financial Highlights" for
a Fund's portfolio turnover rate for the period ended February 28, 1998.
MASTER FEEDER STRUCTURE. The Intermediate Bond Fund is an open-end investment
portfolio that seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio which has the same investment
objective. The Intermediate Bond Fund may withdraw its investment in the Master
Portfolio at any time if the Board of Directors of the Company determines that
it is in the best interest of the Fund to do so. Upon such withdrawal, the Board
of Directors would consider what action might be taken, including the investment
of all of the assets of the Fund in another pooled investment entity having the
same investment objective as the Fund or the hiring of an investment adviser to
manage the Fund's assets in accordance with the investment policies described
above with respect to the Master Portfolio. See "Expense Summary," "Fund
Investments" and "Fund Management" for a description of this investment
objective and the investment policies, restrictions, management and expenses of
the Intermediate Bond Fund and the Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Intermediate Bond Fund and
49
<PAGE> 379
other entities that may invest in the Master Portfolio from time to time (e.g.,
other investment companies and commingled trust funds) will each be liable for
all obligations of the Master Portfolio. However, the risk of the Fund's
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and a Portfolio itself
is unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Fund nor its shareholders will be adversely affected
by reason of the Fund's investing in the Master Portfolio. As with any mutual
fund, other investors in the Master Portfolio could control the results of
voting at the Master Portfolio level in certain instances (e.g. a change in
fundamental policies by the Master Portfolio which was not approved by the
Fund's shareholders). This could result in the Intermediate Bond Fund's
withdrawal of the Fund. Further, the withdrawal of other entities that may from
time to time invest in the Master Portfolio could have an adverse effect on the
performance of the Master Portfolio and the Fund, such as decreased economies of
scale, and increased per share operating expenses. In addition, the total
withdrawal by another investment company as an investor in the Master Portfolio
will cause the Master Portfolio to terminate automatically in 120 days unless a
Fund and any other investors in the Master Portfolio unanimously agree to
continue the business of the Master Portfolio. If unanimous agreement is not
reached to continue the Master Portfolio, the Board of Directors of the Company
would need to consider alternative arrangements for the Fund, such as those
described above. When the Fund is required to vote as a shareholder of the
Master Portfolio, current regulations provide that in those circumstances the
Fund may either seek instructions from its security holders with regard to
voting such proxies and vote such proxies in accordance with such instructions
or the Fund may vote its shares in the Master Portfolio in the same proportion
of all other security holders in the Master Portfolio. The policy of the Fund,
and other similar investment companies to invest their investable assets in
trusts such as the Master Portfolio is a relatively recent development in the
mutual fund industry and, consequently, there is a lack of substantial
experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Master Portfolio which may have higher or lower fees and expense than those of
its corresponding Fund and which may therefore have different performance
results than that Fund. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by call 800-346-2087.
CALIFORNIA MUNICIPAL BOND FUND CONSIDERATIONS. The California Municipal Bond
Fund's concentration in California Municipal Securities raises additional
considerations. Payment of the interest and principal of these obligations
depends on the continuing ability of their issuers to meet their obligations
thereunder. Investors should consider the greater risk inherent in the
California Municipal Bond Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio,
and should compare the yield available on a portfolio of California issues with
the yield of a more diversified portfolio including non-California issues before
making an investment decision.
Many of the California Municipal Bond Fund's Municipal Securities are likely to
be obligations of California governmental issuers that rely to one extent or
another on real property taxes as a source of revenue. "Proposition Thirteen"
and similar California constitutional and statutory amendments and initiatives
in recent years have restricted the ability of California taxing entities to
increase real property tax revenues. Other initiatives approved by California
voters in recent years, through limiting various other taxes, have resulted in a
substantial reduction in state revenues. Decreased state revenues may result in
reductions in allocations of state revenues to local governments. Because of the
complex nature of the various initiatives mentioned above and certain possible
ambiguities and inconsistencies in their terms and the scope of various
exemptions and exceptions, as well as the impossibility of
50
<PAGE> 380
predicting the level of future appropriations for state and local governmental
entities, the impact of these initiatives and related measures on the ability of
California governmental issuers to pay interest or repay principal on their
obligations is difficult to determine. There have, however, been certain adverse
developments with respect to Municipal Securities of California governmental
issuers over the past several years.
Although economic factors such as the reduction in defense spending and a
decline in tourism had an adverse impact on the economy in California in the
early 1990's, California's economy has recently outperformed that of the nation,
with employment growth, unemployment decline and increases in personal income as
well as in anticipated budget surplus for the state in fiscal year 1997-1998.
With approximately half of California's exports being sold in Asia, financial
problems in the region have had a slight dampening effect on the California
economy. However, strong export growth to Mexico has offset some of the weakness
in Asia.
A more detailed description of the special factors affecting investments in
California Municipal Securities is set forth in the Statement of Additional
Information.
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<PAGE> 381
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUNDS' SHARES AND
REGARDING THE FUNDS' DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUNDS?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at any time
in the sole discretion of the Company.
<TABLE>
<CAPTION>
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
-------------------------------
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------------- --------------
<S> <C> <C>
Regular Account....................................... $ 500* $ 50
Automatic Investment Plan............................. $ 50 $ 50
IRAs, SEP-IRAs (one participant)...................... $ 500 No minimum
Spousal IRAs**........................................ $ 250 No minimum
SEP-IRAs (more than one participant).................. $2,500 No minimum
</TABLE>
- ---------------
* The minimum investment is $100 for purchases made through Bank of America or
its affiliates' trust and agency accounts or a Service Organization (defined
below) whose clients have made aggregate minimum purchases of $1,000,000.
The minimum investment is $200 for BankAmericard holders with an appropriate
award certificate.
** A regular IRA must be opened in conjunction with this account.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds generally issue three classes of shares. Except for A Shares of the
Short-Term Government Fund which are sold without a sales load, A Shares are
sold to investors choosing the front-end sales charge alternative unless an
exemption to the sales charge is otherwise available. B Shares are sold to
investors choosing the contingent deferred sales charge alternative. K Shares,
which are not available to investors in the Short-Term Government Fund, 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 Provident Distributors, Inc. and Bank of America,
respectively, or their affiliates; (c) accounts opened for IRA rollovers from a
401(k) plan in which the assets were held in any Pacific Horizon or Time Horizon
Fund and subsequent purchases into an IRA rollover account opened as described
above, so long as the original IRA rollover account remains open on the
Company's books (d) accounts under Section 403(b)(7) of the Code; (e) deferred
compensation plans under Section 457 of the Code; and (f) certain other
retirement plans. The three classes of shares in each Fund represent interests
in the same portfolio of investments of the particular Fund, have the same
rights and are identical in all respects except as discussed below.
A Shares (other than the Short-Term Government Fund which is sold without a
sales load) are sold with a front-end sales charge, bear the expenses of a
Shareholder Services Plan and have exclusive voting rights with respect to that
Plan. B Shares bear the expenses of a Distribution and
52
<PAGE> 382
Services Plan and have exclusive voting rights with respect to the Distribution
and Services Plan. B Shares also bear the expenses of the contingent deferred
sales charge arrangements and any expenses resulting from such arrangements. 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 three classes also have different exchange privileges, as described
below. The net income attributable to A, B and K Shares and the dividends
payable on A, B and K Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to A Shares, (b) Distribution and
Services Plan fees attributable to B Shares, (c) Distribution Plan fees and/or
Administrative and Shareholder Services Plan fees attributable to K Shares,
respectively, and (d) the incremental expenses associated with such Plans.
Lastly, B Shares of the Fund held for 8 years will automatically convert to A
Shares of the Fund.
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 (except
the Short-Term Government Fund). Each class calculates its net asset value
("NAV") as follows:
<TABLE>
<S> <C> <C>
(Value of Assets Attributable to the Class)
- (Liabilities Attributable to the Class)
NAV =
---------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
A Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the Fund
(or the Intermediate Bond Master Portfolio, as appropriate), pursuant to
procedures adopted by the Board of Directors (or the Intermediate Bond Master
Portfolio's Board of Trustees). Short-term debt securities are valued at
amortized cost, which approximates market value. For further information about
valuing securities, see the Statement of Additional Information. For price and
yield information, call (800) 346-2087.
The per share net asset values of A, B and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 5.50% 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 $50,000................................... 5.50 5.82 5.00
$50,000 but less than $100,000...................... 4.50 4.71 4.00
$100,000 but less than $250,000..................... 3.50 3.63 3.00
$250,000 but less than $500,000..................... 2.50 2.56 2.00
$500,000 but less than $1,000,000................... 2.00 2.04 1.75
$1,000,000 or more**................................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Dealer's reallowance may be changed periodically.
53
<PAGE> 383
There is no initial sales charge on purchases of Class A shares of $1 million or
more. However, unless you participated in the Bank of America Daily
Advantage(TM)or Advantage Plus(TM) programs, a contingent deferred sales charge
of 1% will be imposed on redemptions made within 18 months after purchase. The
Distributor will pay dealers of record commissions on purchases above $1 million
in an amount equal to (i) 1.00% on sales up to $5 million (ii) 0.50% on the next
$45 million; and (iii) 0.25% on sales over $50 million.
From time to time, the Funds' distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Funds.
To the extent that no other A Share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon Fund or Time Horizon
Fund equals or exceeds $1,000,000.
B SHARES CONTINGENT DEFERRED SALES CHARGE. B Shares may be purchased at net
asset value per share without the imposition of a sales charge at the time of
purchase. The Fund's distributor compensates broker-dealers that have entered
into a selling agreement with the distributor from its own funds at the time the
shares are purchased. The proceeds of the contingent deferred sales charges and
the ongoing distribution and services plan fees described below are used to
reimburse Bank of America for its expenses, including the compensation of
broker-dealers.
B Shares that are redeemed within 5 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. B Shares will convert to A Shares at the end of the month in
which the ninth anniversary of the date of purchase occurs unless the B Shares
have been exchanged for Y Shares of the Pacific Horizon Prime Fund.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
NUMBER OF YEARS (AS A PERCENTAGE OF DOLLAR
ELAPSED SINCE PURCHASE* AMOUNT SUBJECT TO THE CHARGE)
----------------------- -----------------------------
<S> <C>
Less than one.......................................... 4.0%
More than one, but less than or equal to two........... 3.0%
More than two, but less than or equal to three......... 3.0%
More than three, but less than or equal to four........ 2.0%
More than four, but less than or equal to five......... 1.0%
After five years....................................... 0.00%
</TABLE>
- ---------------
* The time period during which Y Shares of the Pacific Horizon Prime Fund
acquired through an exchange are held is not included when the amount of the
contingent deferred sales charge is calculated.
In determining whether a contingent deferred sales charge is applicable to a
redemption of B 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 B Shares acquired pursuant to the reinvestment of
dividends and distributions; then of amounts representing the increase in net
asset value of your holdings of B Shares above the total amount of payments for
the purchase of B Shares during the preceding 5 years; then of amounts
representing the cost of B Shares held beyond the applicable contingent deferred
sales charge period; and finally, of amounts representing the number of the B
Shares held for the longest period of time.
54
<PAGE> 384
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that you have not exchanged for Y Shares of the Pacific Horizon
Prime Fund, that in the third year after purchase the net asset value per share
is $12, and that during the three-year period you had acquired 10 additional
shares through dividend reinvestment. If at such time you make your first
redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the
charge because of dividend reinvestment. With respect to the remaining 40
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 3.00% (the applicable rate in
the third year after purchase).
WHEN NO FRONT-END SALES LOAD IS APPLIED.
X You pay no front-end sales load on the following types of transactions:
X reinvestment of dividends or distributions;
X any purchase by an investor who is a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
X 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;
X any purchase through FundAdvisor(TM) or FundManager(TM), from BA Investment
Services, Inc. (However, existing clients who purchased the Funds load-waived
through Fund Selections(TM) will be able to make additional purchases without
paying the front-end sales charge until June 30, 1998. Clients who have
Automatic Investment Programs may continue to invest no-load after June 30,
1998.);
X 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;
X any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest Division
or by or on behalf of agency accounts administered by any bank or trust
company affiliate of Bank of America;
X any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific Horizon
Family of Funds) prior to July 1, 1992, so long as your account remains open
on the Company's books;
X 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;
X any purchase of shares pursuant to the Reinstatement Privilege described
below; and
X any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
X members of the Company's Board of Directors and their spouses;
X 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;
55
<PAGE> 385
X registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
X holders of the BankAmericard with an appropriate award certificate;
X former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
X Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which shares of the Fund may be purchased without
a front-end sales load pursuant to the Program.)
X Investors who during periodic retail merchandising campaigns of Bank of
America request information and subsequently purchase shares. (Promotional
material will delineate the beginning and ending date during which information
must be requested and Fund shares purchased.)
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES
The CDSC will be waived on redemptions of B-shares (i) following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended (the
"Code")) of a shareholder (including a registered joint owner), (ii) in
connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified corporate or self-employed retirement plan
following retirement (or in the case of a "key employee" of a "top heavy" plan,
following attainment of age 59 1/2); (b) distributions from an IRA or Custodial
Account under Section 403(b)(7) of the Code following attainment of age 59 1/2;
(c) a tax-free return of an excess contribution to an IRA; and (d)
distributions from a qualified retirement plan that are not subject to 10%
additional Federal withdrawal tax pursuant to Section 72(t)(2) of the Code,
(iii) payments made to pay medical expenses which exceed 7.5% of income and
distributions to pay for insurance by an individual who has separated from
employment and who has received unemployment compensation under a federal or
state program for at least 12 weeks, (iv) effected pursuant to the Funds' right
to liquidate a shareholder's account, including instances where the aggregate
net asset value of the B-shares held in the account is less than the minimum
account size, (v) effected pursuant to the Automatic Withdrawal Plan discussed
below, provided that such redemptions do not exceed, on an annual basis, 12% of
the net asset value of the B-Shares in the account, and (vi) in connection with
the combination of the Funds, with any other registered investment company by a
merger, acquisition of assets or by any other transaction. Shareholders are
responsible for providing evidence sufficient to establish that they are
eligible for any waiver of the CDSC.
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
56
<PAGE> 386
that carry no sales load but were obtained through an exchange and can be traced
back to shares that were acquired with a sales load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
EXAMPLE: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Municipal Bond Fund, the Pacific Horizon
Aggressive Growth Fund, the Pacific Horizon Capital Income Fund and shares of
the Company's money market funds that can be traced back to the purchase of
shares carrying a sales load (or any combination thereof) with an aggregate
current value of $90,000. If you subsequently purchase additional A Shares of a
Fund carrying a sales load with a current value of $10,000, the sales load
applicable to the subsequent purchase would be reduced to 3.50% 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 $50,000 or more in shares of any Pacific Horizon or
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. A Shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
57
<PAGE> 387
HOW DO I DECIDE WHETHER TO BUY A, B OR K SHARES?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A, B or K shares, you should consider all
relevant factors, including the dollar amount of your purchase, the length of
time you expect to hold the shares, the amount of any applicable front-end sales
charge or contingent deferred sales charge, the amount of any applicable
distribution, administrative or service fee that may be incurred while you own
the shares, whether or not you will be reinvesting income or capital gain
distributions in additional shares, whether or not you meet applicable
eligibility requirements or qualify for a sales charge waiver or reduction in
the case of A shares, whether to have the entire initial purchase price invested
in the Fund with the investment thereafter being subject to a contingent
deferred sales charge in the case of B Shares, whether you are eligible to
purchase K shares, and the relative level of services that are provided to
different classes.
When you purchase A shares, you will normally pay a front-end sales charge
(except for the Short-Term Government Fund). As a result, you will have less
money invested initially and you will own fewer A shares than you would in the
absence of a front-end sales charge. A Shares also bear the expense of a
shareholder service plan. As an illustration, investors who qualify for a
significantly reduced sales load, as described above, might elect the front-end
sales charge alternative (A Shares) because similar sales charge reductions are
not available for purchases under the contingent deferred sales charge
alternative (B Shares). Moreover, A Shares would not be subject to ongoing
distribution and services plan fees, as described below. However, because
front-end sales charges are deducted at the time of purchase, such investors who
pay a front-end sales charge would not have all their funds invested initially.
The Company will not accept any order for B Shares from an investor who is
eligible to purchase A Shares without a sales load or from an investor eligible
to purchase K Shares.
Investors not qualifying for a reduced front-end sales charge who expect to
maintain their investment in a Fund for an extended period of time might also
elect the front-end sales charge alternative because over time the accumulated
continuing Distribution and Services Plan fees related to B Shares may exceed
the front-end sales charge and ongoing Shareholder Services Plan fees related to
A Shares. However, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
distribution and services plan fees may be offset to the extent any return is
realized on the additional funds initially invested under the contingent
deferred sales charge alternative.
Certain investors might determine it to be more advantageous to have all their
funds invested initially in B Shares, although subject to continuing
distribution and services plan fees and to a contingent deferred sales charge
for a 5-year period of time. Alternatively, when you purchase K shares, you will
not pay a front-end sales charge and all of your monies will be fully invested
at the time of purchase. However, K shares are subject to annual distribution
and/or administrative and shareholder service fees. K Shares are only available
to certain types of investors, and are not available to investors in the
Short-Term Government Fund. See "What Alternative Sales Arrangements are
Available?"
58
<PAGE> 388
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
TO BUY SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE
ORGANIZATION (ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY
THE FUNDS' TRANSFER AGENT)
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR (IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL: Complete an Account Application and Mail all subsequent investments to:
mail it with a check (payable to the Pacific Horizon Funds, Inc.
appropriate Fund) to the address on P.O. Box 8984
the Account Application. The Company Wilmington, DE 19899-8984
will not accept third party checks
for investment
IN PERSON
Pacific Horizon Deliver an Account Application and Deliver your payment directly to the
Funds, Inc. your payment directly to the address address on the left.
c/o PFPC, Inc. on the left.
400 Bellevue Parkway,
Suite 108
Wilmington, DE 19809
BY WIRE Initial purchases of shares into a Contact the Fund's transfer agent at
new account may not be made by wire 800-346-2087 for 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>
59
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<TABLE>
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OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not be used Purchases may be made in the minimum
(a service permitting transfers of to make an initial purchase. amount of $500 and the maximum amount
money from your checking, savings or of $50,000 per transaction as soon as
bank 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.
</TABLE>
You should refer to the "Shareholder Services' section for additional important
information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS AND
EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (currently 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' Transfer Agent.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Funds are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
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WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a fee
may be imposed by the Transfer Agent. All payments should be in U.S. dollars
and, to avoid fees and delays, should be drawn only on U.S. banks. The Company
will not accept third party checks for investment. Please remember that the
Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by a Fund. If you purchase or redeem
shares directly from a Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
a Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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TO SELL SHARES
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)
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BY MAIL Send a signed, written request (each owner,
Pacific Horizon including each joint owner, must sign) to the
[Name of Fund] Transfer Agent.
P.O. Box 8968
Wilmington, DE 19899-8968 If you hold stock certificates for the shares
being redeemed, make sure to endorse them for
transfer, have your signature on them
guaranteed by your bank or another guarantor
institution (as described in the section
entitled "What Kind Of Paperwork Is Involved
In Selling Shares?") and include them with
your request.
IN PERSON Deliver your signed, written request (each
Pacific Horizon Funds, Inc. owner, including each joint owner, must sign)
c/o PFPC, Inc. and any certificates (endorsed for transfer
400 Belleview Parkway, Suite 108 and signature guaranteed as described in the
Wilmington, DE 19809 section entitled "What Kind Of Paperwork Is
Involved In Selling Shares?") to the address
on the left.
BY WIRE As soon as appropriate information regarding
your bank account has been established on your
Fund account, you may write, telephone or
telegraph redemption requests to the Transfer
Agent, and redemption proceeds will be wired
in federal funds to the commercial bank you
have specified. Information regarding your
bank account may be provided on the Account
Application or in a signature guaranteed
letter of instruction to the Transfer Agent.
Signature guarantee requirements are discussed
in the section entitled "What Kind Of
Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the
business day after your request and any other
necessary documents have been received by the
Transfer Agent.
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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.
BY CHECK You may write Redemption Checks ("Checks") payable to any
payee from your Fund account in the amount of $500 or
more. The Transfer Agent (as your agent) will redeem the
necessary number of shares to cover the Check when it is
presented for payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s) and a set
of Checks will then be sent to the registered owner(s) at
the address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by
Check.
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting transfers of money to your checking, $50,000 per transaction) by telephone after appropriate
Savings or bank money market account) information regarding your bank account has been
established on your Fund account. This information may be
provided on the Account Application or in a signature
guaranteed letter of instruction to the Transfer Agent.
Signature guarantee requirements are discussed in the
section entitled "What Kind of Paperwork Is Involved in
Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
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<TABLE>
<S> <C>
TeleTrade Privileges apply automatically
unless you indicate on the Account Application
or in a subsequent written notice to the
Transfer Agent that you do not wish to have
them.
You should refer to the "Shareholder Services"
section for additional important information
about the TeleTrade Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE
ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent. Although the
Funds impose no charge when A Shares are redeemed, if you purchase shares
through Bank of America or a Service Organization they may charge a fee for
providing certain services in connection with investments in Fund shares.
When you redeem your B Shares within 5 years of purchase (or longer if your
shares have been exchanged for Y Shares of the Pacific Horizon Prime Fund) you
may be subject to a contingent deferred sales charge as described above.
The Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance. 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, B
or K Shares. If you own either A and K as well as B Shares of the Fund, A or K
Shares will be redeemed first unless you request otherwise. Certain types of
redemption requests as well as all endorsed share certificates will need to
include a signature guarantee. Signature guarantees must accompany redemption
requests for (i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of record on
the Company's books, or (iii) an amount of $50,000 or less if the address of
record has not been on the Company's books for sixty days.
A signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association who are participants in a
Medallion Program recognized by the Securities Transfer Association. The three
recognized Medallion Programs are Securities Transfer Agent Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Program (MSP). Signature Guarantees which are not a part of these
programs will not be accepted. Please note that a notary public stamp or seal is
not acceptable.
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
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<PAGE> 394
of the purchase check or TeleTrade payment, mail the redemption proceeds within
seven business days. This does not apply to situations where a Fund receives
payment in cash or immediately available funds for the purchase of shares. The
Company may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 120 days of your
redemption trade date without paying a sales load. Upon such reinvestment, the
Funds' distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed B Shares or any Y 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 Intermediate Bond Fund are entitled to dividends and
distributions arising from the net investment income and net realized gains, if
any, earned on investments in the Master Portfolio which are allocable to the
Fund. Net realized gains (after reduction for capital loss carryforwards, if
any) from the other Funds described in this Prospectus are distributed at least
annually. Dividends from each Fund, except the Intermediate Bond Fund, are
declared daily and paid within five business days after the end of each month.
Dividends from the Intermediate Bond Fund's net investment income are declared
monthly and paid within five days after the end of each month. Fund shares begin
earning dividends the day after payment in federal funds is received for such
shares through the business day such shares are redeemed.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
Other Funds?" If you elect to receive distributions in cash, and if your checks
(1) are returned and marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Fund at per
share net asset value determined as of the date of payment of the distribution.
In addition, any undeliverable checks or checks that remain uncashed for six
months will be cancelled and will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation.
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To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, PFPC, Inc., at P.O. Box 8968, Wilmington,
Delaware 19899-8968. The election or revocation will become effective with
respect to dividends paid after it is received and processed by the Transfer
Agent.
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO
MAKE MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
The contingent deferred sales charge with respect to B Shares 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
Funds' distributor at 800-332-3863. Investors should also read the IRA
Disclosure Statement and the Bank Custodial Agreement for further details on
eligibility, service fees and tax implications, and should consult their tax
advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
accounts under Section 403(b)(7) of the Code, deferred compensation plans under
Section 457 of the Code, to Qualified IRA Rollovers and certain other retirement
plans.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares may be legally sold in your state of residence.
Specifically, A Shares may be exchanged for other A Shares, B Shares may be
exchanged for other B 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. B Shares may be exchanged for other B Shares or for Y Shares of
the Pacific Horizon Prime Fund without the payment of any contingent deferred
sales charge at the time the exchange is made. In addition, Y Shares of the
Pacific Horizon Prime Fund that were acquired through an exchange of B Shares
may be exchanged for B Shares without the payment of any contingent deferred
sales charge at the time the exchange is made. In determining the holding period
for calculating the contingent deferred sales charge payable upon redemption of
B Shares, the holding period of the shares originally held will be added to the
holding period of the shares acquired through the exchange unless the shares
acquired through the exchange are Y Shares of the Pacific Horizon Prime Fund.
The time period during which Y Shares of the Pacific Horizon Prime Fund acquired
through an exchange are held is not included when the amount of the contingent
deferred sales charge is calculated.
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An investment in a Fund automatically entitles you to use this Privilege, unless
you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is Teletrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How To Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, savings 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.
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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,
savings or bank money market account designated by you will be debited in the
specified amount, and Fund shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days. Only accounts maintained
at a domestic financial institution which permits automatic withdrawals and is
an Automated Clearing House member are eligible. The Automatic Investment
Program is one means by which you may use Dollar Cost Averaging in making
investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
Use of this Plan may also be disadvantageous for B Shares due to a potential
need to pay a contingent deferred sales charge.
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CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Funds. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and NationsBank
Corporation ("NationsBank") announced a definitive agreement to merge and form a
new holding company to be named BankAmerica Corporation (the "Merger"). The
Merger is anticipated to close by the end of 1998, however it is subject to a
number of approvals including shareholder and regulatory approvals.
In separate advisory agreements with the Master Trust and Company (collectively,
the "Advisory Agreements"), Bank of America has agreed to manage the Funds'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Fund's
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securities. The Advisory Agreements also provide that Bank of America may: 1) in
its discretion, provide advisory services through its own employees or employees
of one or more of its affiliates that are under the common control of Bank of
America's parent, BankAmerica Corporation, provided such employees are under the
management of Bank of America and 2) employ a sub-adviser provided that Bank of
America remains fully responsible the Company and Master Trust for the acts and
omissions of the sub-adviser.
Since March 1996, portfolio management services for the Flexible Income, U.S.
Government Securities and Short-Term Government Funds and the Master Portfolio
have been conducted by an investment committee of the Fixed Income Division of
the Investment Management Services Group of Bank of America and its affiliates,
and no one person is primarily responsible for making recommendations to that
committee.
Stephen P. Scharre is the person primarily responsible for the day-to-day
investment management of the National Municipal Bond Fund and the California
Municipal Bond Fund. Mr. Scharre has been associated with Bank of America (and
Security Pacific National Bank before its merger with Bank of America) since
1984. Mr. Scharre is a Chartered Financial Analyst and member of the Los Angeles
Society of Financial Analysts. Mr. Scharre manages tax-exempt and tax-advantaged
portfolios, including common trust funds and several large institutional and
high net worth accounts.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the effective annual rate of
0.45%, 0.30%, 0.35%, 0.25%, 0.35% and 0.30% of the Flexible Income Fund's,
Master Portfolio's, U.S. Government Securities Fund's, Short-Term Government
Fund's, National Municipal Bond Fund's and California Municipal Bond Fund's
respective average daily net assets. These amounts may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers.") For the year ended February 28, 1998, the Master Portfolio paid Bank
of America advisory fees at an effective annual rate of 0.16% and Bank of
America waived a portion of its fee with respect to the Master Portfolio at the
effective annual rate of 0.19% of its average daily net assets. Bank of America
waived its entire advisory fee with respect to the Corporate Bond Fund,
Short-Term Government Fund and the National Municipal Bond Fund for the year
ended February 28, 1998. For the year ended February 28, 1998, the U.S.
Government Securities Fund and California Municipal Bond Fund paid Bank of
America advisory fees at effective annual rates of 0.06% and 0.29%,
respectively, of such Fund's average daily net assets, and Bank of America
waived a portion of its fee with respect to such Funds at effective annual rates
of 0.29% and 0.09%, respectively, of its average daily net assets. For the same
period, Bank of America reimbursed a portion of the Short-Term Government Fund's
operating expenses.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
Bank of America serves as Administrator of the Funds. Bank of America's
principal office is located at 555 California Street, San Francisco, California
94104. For the period from March 1, 1997 through September 15, 1997, the BISYS
Group, Inc., through its wholly-owned subsidiary BISYS Fund Services L.P.
(collectively, "BISYS"), served as administrator to the Funds. For the period
September 15, 1997 through February 28, 1998, Bank of America served as the
Funds' administrator. PFPC International, Ltd, an indirect wholly-owned
subsidiary of PNC Bank, serves as administrator and accounting services agent to
the Master Portfolio.
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<PAGE> 400
Under its administration agreement with the Company, Bank of America has agreed
to: pay the costs of maintaining the offices of the Company; provide a facility
to receive purchase and redemption orders; provide statistical and research
data, data processing services and clerical services; coordinate the preparation
of reports to shareholders of the Funds and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds; calculate the net asset value of the Funds; calculate the
dividends and capital gains distributions paid to shareholders; and generally
assist in all aspects of the operations of the Funds.
For its services as administrator, Bank of America is entitled to receive an
administration fee from the Flexible Income Fund, U.S. Government Securities
Fund, Short-Term Government Fund, National Municipal Bond Fund and California
Municipal Bond Fund at the annual rate of 0.20% of such Funds' respective
average daily net assets and .15% of the Master Portfolio's average daily net
assets. PFPC International, Ltd. is entitled to receive an administration fee
from the Master Portfolio's net assets computed daily and payable monthly at an
annual rate of .05% of the Master Portfolio's average daily net assets. These
amounts may be reduced pursuant to undertakings by Bank of America (or, in the
case of the Master Portfolio, by PFPC International, Ltd.). (See the information
below under "Fee Waivers.") During the period March 1, 1997 through September
15, 1997, the U.S. Government Securities, Intermediate Bond and California
Municipal Bond Funds paid BISYS administration fees at the effective annual
rates of 0.02%, 0.02%, and 0.16%, and BISYS waived a portion of its fees at the
effective annual rates of 0.08%, 0.10% and 0.05% of such Funds' respective
average daily net assets. During the period September 15, 1997 through February
28, 1998 the U.S. Government Securities, Intermediate Bond and California
Municipal Bond Funds paid Bank of America administration fees at the effective
annual rates of 0.03%, 0.14%, and 0.11% of such Funds' respective average daily
net assets, and Bank of America waived a portion of its fees at the effective
annual rates of 0.07%, 0.01% and 0.02% of such Funds' average daily net assets.
During the period March 1, 1997 through September 15, 1997, the Master Portfolio
paid BISYS administration fees at an effective annual rate of 0.02%, and BISYS
waived a portion of its fees at an effective annual rate of 0.01% of such
Portfolio's average daily net assets. During the period September 15, 1997
through February 28, 1998 the Master Portfolio paid Bank of America
administration fees at an effective annual rate of 0.02% of such Portfolio's
average daily net assets, and Bank of America waived a portion of its fees at an
effective annual rate of 0.10% of such Portfolio's average daily net assets.
During the year ended February 28, 1998, BISYS and Bank of America waived all
administration fees with respect to the Flexible Income, Short-Term Government
and National Municipal Bond Funds.
Bank of America has entered into an agreement with PFPC Inc. ("PFPC"), an
indirect, wholly-owned subsidiary of PNC Bank Corp., pursuant to which PFPC has
agreed to provide certain sub-administration services to the Funds, including,
among other things, assisting in the developing and monitoring of compliance
procedures, participating in periodic updating of Funds' prospectuses and
statements of additional information, providing periodic reports to the
Company's Board and providing certain record-keeping services. Bank of America
will bear all fees and expenses charged by PFPC for these services.
Pursuant to the authority granted in its administration agreements, Bank of
America has entered into agreements with PFPC (with respect to the Flexible
Income Fund, Master Portfolio and Short-Term Government Fund) and The Bank of
New York ("BONY") (with respect to the U.S. Government Securities Fund, National
Municipal Bond Fund and California Municipal Bond Fund) under which PFPC (and an
offshore affiliate of PFPC) and BONY provide certain accounting, bookkeeping,
pricing and dividend and distribution calculation services to the Funds and the
Master Portfolio. The Funds and Master Portfolio bear all fees and expenses
charged by PFPC or BONY.
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<PAGE> 401
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Provident Distributors,
Inc. ("PDI" or the "Distributor"). The Distributor is located at Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Flexible Income Fund, Master
Portfolio and Short-Term Government Fund. The Bank of New York, 90 Washington
Street, New York, New York 10286, serves as Custodian of the U.S. Government
Securities Fund, National Municipal Bond Fund and California Municipal Bond
Fund. PFPC is the transfer and dividend disbursing agent for each of the Funds
and its address as transfer agent is P.O. Box 8968, Wilmington, Delaware
19899-8968.
FEE WAIVERS
Except as noted in this Prospectus and the Statement of Additional Information,
the service contractors bear all expenses in connection with the performance of
their services and the Funds and Master Portfolio bear the expenses incurred in
their operations. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Bank of America and other service providers. Periodically,
during the course of each Fund's fiscal year, Bank of America and other service
providers may prospectively choose not to receive fee payments and/or may assume
certain expenses of the Funds or the Master Portfolio as a result of competitive
pressures and in order to preserve and protect the business and reputation of
these entities. However, the service providers retain the ability to discontinue
such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time each Fund held the relevant assets). You will be subject to
income tax on these distributions regardless whether they are paid in cash or
reinvested in additional shares.
You should note that if you purchase shares just prior to a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of your
capital. This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for
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<PAGE> 402
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends that were received with respect to the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
For more information regarding the taxation of the Funds, consult the Statement
of Additional Information under the heading "Additional Information Concerning
Taxes." You should also consult your tax adviser for information regarding the
federal, state and local tax consequences with respect to your specific
situation.
NATIONAL MUNICIPAL BOND FUND AND CALIFORNIA MUNICIPAL BOND FUND.
Dividends derived from interest on Municipal Securities ("exempt-interest
dividends") typically will not be subject to regular federal income tax. To the
extent, if any, that dividends paid to you are derived from taxable interest,
futures transactions, gain attributable to market discount or the excess of net
short-term capital gain over net long-term capital loss, such dividends will be
subject to regular federal income tax and California state personal income tax,
whether or not the dividends are reinvested. Any distributions you receive
comprised of the excess of net long-term capital gain over net short-term
capital loss ("capital gain dividend") will be taxable to you as a long-term
capital gain regardless of how long you have held Fund shares. Such dividends
are not eligible for the dividends received deduction allowed to corporations.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the California Municipal Bond Fund's total assets consists of California
Exempt Securities, the California Municipal Bond Fund will be qualified to pay
dividends exempt from California state personal income tax to its shareholders.
The dividends exempt from that tax will be those that come from interest
attributable to California Municipal Securities and certain specified federal
obligations. (Such exemption may not apply, however, to investors who are
"substantial users" or "related persons" with respect to facilities financed by
portfolio securities held by the California Municipal Bond Fund. Additional tax
information regarding "substantial users" and "related persons" can be found in
the Statement of Additional Information). If you are subject to California state
franchise tax or California state corporate income tax, your dividends may still
be taxed as ordinary or capital gain dividends, despite the personal income tax
exemption.
Distributions of net investment income from the California Municipal Bond Fund
may be subject to state or local taxes other than the California state personal
income tax under state or local law, even though all or a part of those
distributions may come from interest on tax-exempt obligations that, if you had
received them directly, would be exempt from such taxes. Consult your tax
adviser with special reference to your own tax situation.
The portion of dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included by you as an item of tax
preference for purposes of determining liability (if any) for the federal
alternative minimum tax applicable to individuals and corporations. Corporate
shareholders also must take exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum tax purposes.
Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the
taxability of such benefits.
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<PAGE> 403
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN, YIELD AND, WITH RESPECT TO THE NATIONAL MUNICIPAL BOND
AND CALIFORNIA MUNICIPAL BOND FUNDS, TAX-EQUIVALENT YIELD. PERFORMANCE
INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30-day
period. Tax-equivalent yield demonstrates the level of taxable yield that would
be necessary to produce an after-tax equivalent to a tax-free yield.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), yield and
tax-exempt yield may be quoted in advertisements or in communications to
shareholders. Both methods of calculating total return assume dividends and
capital gains distributions made by a Fund during the period are reinvested in
Fund shares and include the maximum front-end sales charge for A Shares and the
applicable contingent deferred sales charge for B Shares. Each Fund may also
advertise total return data without reflecting the sales load imposed on the
purchase of Fund shares in accordance with the rules of the Securities and
Exchange Commission. Quotations that do not reflect the sales load will, of
course, be higher than quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
The National Municipal Fund and California Municipal Fund each calculates its
"tax equivalent yield" by increasing its yield (calculated as described above)
by the amount necessary to reflect the payment of federal income taxes at a
stated rate. The tax-equivalent yield will always be higher than a Fund's yield.
An investor in the National Municipal Fund and California Municipal Fund may
find it particularly useful to compare a Fund's tax-exempt yield and the
equivalent yield from taxable investments. For an investor in a low tax bracket,
it may not be beneficial to invest in a tax-exempt investment if a higher yield
after taxes could be received from taxable investment.
THE FOLLOWING TABLE ILLUSTRATES FOR THE CALIFORNIA MUNICIPAL BOND FUND THE
DIFFERENCES BETWEEN HYPOTHETICAL TAX-FREE YIELDS AND TAX-EQUIVALENT YIELDS FOR
DIFFERENT TAX BRACKETS. YOU SHOULD BE AWARE, HOWEVER, THAT TAX BRACKETS CAN
CHANGE OVER TIME AND THAT YOUR TAX ADVISER SHOULD BE CONSULTED FOR SPECIFIC
YIELD CALCULATIONS. (THE FEDERAL TAX RATES USED BELOW ARE THOSE CURRENTLY
AVAILABLE FOR 1998, WHILE THE CALIFORNIA TAX RATES USED BELOW ARE THOSE
APPLICABLE FOR 1997.) THESE YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY. THE
FEDERAL TAX BRACKETS USED UNDER "COMBINED CALIFORNIA & FEDERAL TAX BRACKET" TAKE
INTO EFFECT THE FULL DEDUCTION OF CALIFORNIA STATE TAXES FOR THE CALIFORNIA
MUNICIPAL BOND FUND BUT DO NOT TAKE INTO ACCOUNT THE EFFECT OF REDUCING THE
DEDUCTIBILITY OF ITEMIZED DEDUCTIONS FOR TAXPAYERS WITH ADJUSTED GROSS INCOME
OVER $114,700 OR THE POSSIBLE EFFECT OF THE FEDERAL ALTERNATIVE MINIMUM TAX.
ADDITIONALLY, EFFECTIVE TAX BRACKETS AND EQUIVALENT TAXABLE YIELDS MAY BE HIGHER
THAN THOSE SHOWN.
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<PAGE> 404
MARRIED FILING JOINTLY
<TABLE>
<CAPTION>
COMBINED
CALIFORNIA
&
FEDERAL TAX-FREE YIELD
TAX ------------------------------------------------------------------
INCOME BRACKET 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
------ ---------- ---- ---- ----- ----- ----- ----- ----- -----
TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-10,032........................... 15.85% 5.35% 5.94% 6.54% 7.13% 7.72% 8.32% 8.91% 9.51%
10,033-23,776....................... 16.70% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00% 9.60%
23,777-37,522....................... 18.40% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58% 9.19% 9.80%
37,522-42,350....................... 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76% 9.39% 10.01%
42,351-52,090....................... 32.32% 6.65% 7.39% 6.13% 8.87% 9.60% 10.34% 11.08% 11.82%
52,091-65,832....................... 33.76% 6.79% 7.55% 8.30% 9.06% 9.81% 10.57% 11.32% 12.08%
65,833-102,300...................... 34.70% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72% 11.49% 12.25%
102,301-155,950..................... 37.42% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19% 11.98% 12.78%
155,951-278,450..................... 41.95% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06% 12.92% 13.78%
278,451- ..................... 45.22% 8.21% 9.13% 10.04% 10.95% 11.87% 12.78% 13.69% 14.60%
</TABLE>
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland Corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class E Common Stock, 100 million shares of Class E -- Special Series 3 Common
Stock and 100 million shares of Class E -- Special Series 5 Common Stock,
representing interests in the U.S. Government Securities Fund; 100 million
shares of Class M Common Stock, 100 million shares of Class M -- Special Series
3 Common
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<PAGE> 405
Stock, 100 million shares of Class M -- Special Series 5 Common Stock, and 100
million shares of Class M -- Special Series 7 Common Stock, representing
interests in the Intermediate Bond Fund; 100 million shares of Class W Common
Stock, 100 million shares of Class W -- Special Series 3 Common Stock and 100
million shares of Class W -- Special Series 5 Common Stock, representing
interests in the Flexible Income Fund; 100 million shares of Class U Common
Stock, 100 million shares of Class U -- Special Series 3 Common Stock and 100
million shares of Class U -- Special Series 5 Common Stock, representing
interests in the Short-Term Government Fund; 100 million shares of Class G
Common Stock, 100 million shares of Class G-Special Series 3 Common Stock and
100 million shares of Class G -- Special Series 5 Common Stock, representing
interests in the California Municipal Bond Fund, and 100 million shares of Class
Q Common Stock, 100 million shares of Class Q -- Special Series 3 Common Stock
and 100 million shares of Class Q -- Special Series 5 Common Stock, representing
interests in the National Municipal Bond Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class E,
M, W, U, G and Q Common Stock are the "A" Shares, Class E -- Special Series 3,
M -- Special Series 3, W -- Special Series 3, U -- Special Series 3,
G -- Special Series 3 and Q -- Special Series 3 Common Stock are the "B" Shares,
Class E -- Special Series 5, M -- Special Series 5, W -- Special Series 5,
U -- Special Series 5, G -- Special Series 5 and Q -- Special Series 5 Common
Stock are the "K" Shares and Class M -- Special Series 7 Common Stock are the
"SRF" Shares. The Board of Directors may similarly classify or reclassify any
class of shares (including unissued Class E Common Stock, Class E -- Special
Series 3 Common Stock, Class E -- Special Series 5 Common Stock, Class M Common
Stock, Class M -- Special Series 3 Common Stock, Class M -- Special Series 5
Common Stock, Class M -- Special Series 7 Common Stock, Class W Common Stock,
Class W -- Special Series 3 Common Stock, Class W -- Special Series 5 Common
Stock, Class U Common Stock, Class U -- Special Series 3 Common Stock, Class
U -- Special Series 5 Common Stock, Class G, Class G -- Special Series 3 Common
Stock, Class G -- Special Series 5 Common Stock, Class Q Common Stock, Class
Q -- Special Series 3 Common Stock and Class Q -- Special Series 5 Common Stock)
into one or more series. This Prospectus relates primarily to the Funds' A, B
and K Shares. As of September 15, 1997, K Shares of the National Municipal Bond
and California Municipal Bond Funds have ceased operations and are no longer
being offered to public investors. As of the date of this Prospectus, K Shares
of the Short-Term Government Fund have not been offered to the Public. For more
information about the Intermediate Bond Fund's SRF Shares or about the Company's
other portfolios, contact the Company at the telephone number listed on the
cover page of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on June 23, 2000, the
reorganization date of the Seafirst Retirement Funds into the Company. A Shares
are sold to investors choosing the front-end sales charge alternative unless an
exemption to the sales charge is otherwise available, which is the case for
eligible retirement accounts. A Shares may be purchased directly by the public,
by clients of Bank of America through their qualified trust and agency accounts,
or by clients of securities dealers, financial institutions (including banks)
and other industry professionals, such as investment advisers, accountants and
estate planning firms that have entered into service and/or selling agreements
with the Distributor. B Shares are sold without a front-end sales charge but are
subject to a contingent deferred sales charge. K Shares are neither subject to a
front-end sales charge nor a contingent deferred sales charge. See "Shareholder
Guide -- What Alternative Sales Arrangements Are Available?" for a description
of eligible purchasers of K Shares.
A Shares, B Shares, K Shares and SRF Shares each have certain purchase,
redemption and exchange privileges. Additionally, A, B and K Shares have certain
shareholder services, such as TeleTrade, an
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<PAGE> 406
automatic investment program, an automatic withdrawal plan, a directed
distribution plan and a direct deposit program.
The four classes of shares in the Intermediate Bond Fund, the three classes of
shares in the Flexible Income and U.S. Government Securities, and the two
classes of shares in the Short-Term Government Fund and National Municipal Bond
and California Municipal Bond Funds which are publicly offered represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except (a) SRF Shares and A Shares
bear the expenses of their respective Shareholder Services Plans; (b) B Shares
bear the expenses of a Distribution and Services Plan; and (c) K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A, B and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution and Services Plan fees attributable to B Shares,
(c) Distribution Plan fees and/or Administrative and Shareholder Services Plan
fees attributable to K Shares, and (d) the incremental expenses associated with
such Plans. SRF, A, B and K Shares may have different performance results due to
sales charges and other expenses attributable to distribution, administrative
service and/or shareholder servicing plans applicable with respect to a
particular share class. Fund shares have no preemptive rights and only such
conversion and exchange rights as the Board may grant in its discretion. When
issued for payment as described in this Prospectus, Fund shares will be fully
paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). Only holders of A Shares will be
entitled to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to A Shares, only holders of B Shares
will be entitled to vote on matters submitted to a vote of shareholders relating
to the Distribution and Services Plan attributable to B Shares; only holders of
K Shares will be entitled to vote on matters submitted to a vote of shareholders
relating to the Distribution Plan and Administrative and Shareholder Services
Plan attributable to K Shares, and only holders of SRF Shares will be entitled
to vote on matters submitted to a vote of shareholders relating to the
Shareholder Services Plan attributable to SRF Shares. The Funds do not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office have been elected by the shareholders. At that time, the
directors then in office will call a shareholders' meeting for the election of
directors. Under certain circumstances, however, shareholders have the right to
call a shareholder meeting to consider the removal of one or more directors.
Such meetings will be held when requested by the shareholders of 10% or more of
the Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
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<PAGE> 407
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES, A
DISTRIBUTION AND SERVICES PLAN FOR B SHARES, AND A DISTRIBUTION PLAN AND AN
ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution and Services Plan pursuant to Rule 12b-1 under the 1940 Act, under
which the B Shares of each Fund reimburse Bank of America for costs incurred in
connection with distribution of the B Shares and for shareholder servicing fees
to Service Organizations. The Company has adopted a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act under which the K Shares of a Fund reimburse
the Distributor for services rendered and costs incurred in connection with
distribution of the K Shares. The Company has also adopted an Administrative and
Shareholder Services Plan for K Shares, under which K Shares of a Fund reimburse
the Distributor for administrative and shareholder servicing fees the
Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. For the
fiscal year ended February 28, 1998 the Flexible Income Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Short-Term Government Fund, National
Municipal Bond Fund and California Municipal Bond Fund made payments under the
Plan at effective annual rates of 0.20%, 0.17%, 0.20%, 0.00%, 0.02% and 0.25%
of the average daily net assets with respect to A Shares of such Funds,
respectively. For the fiscal year ended February 28, 1998, PDI and the former
Distributor waived effective annual rates of 0.05%, 0.08%, 0.05%, 0.25% and
0.02%, respectively, of the average daily net assets with respect to A Shares or
the Flexible Income, Intermediate Bond, U.S. Government Securities, Short-Term
Government and National Municipal Bond Funds.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail
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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 AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund (with the exception of the Short-Term
Government Fund, which does not offer K Shares, but which does offer B Shares)
pays the Distributor, respectively, for distribution expenses primarily intended
to result in the sale of such Fund's K Shares. Under the Distribution and
Services Plan, each Fund reimburses Bank of America for distribution expenses
primarily intended to result in the sale of B Shares and for shareholder
servicing expenses. Such distribution expenses include expenses incurred in
connection with advertising and marketing each Fund's B and K Shares; payments
to Service Organizations for assistance in connection with the distribution of B
and K Shares; and expenses incurred in connection with preparing, printing and
distributing prospectuses for the Funds (except those used for regulatory
purposes, for solicitation or distribution to existing or potential A
shareholders, or for distribution to existing B and K shareholders of the Funds)
and in implementing and operating the Distribution and Services Plan and
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 B and K Shares, such as assisting clients in processing
exchange and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Funds
necessary for accounting or sub-accounting, and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution and Services Plan and the Distribution Plan, payments by
a Fund for distribution expenses may not exceed 0.75% (annualized), of the
average daily net assets of such Fund's B and K Shares. Under the Distribution
and Services Plan and the Administrative and Shareholder Services Plans,
payments for shareholder servicing expenses may not exceed 0.25% (annualized) of
the average daily net assets of such Fund's B and K Shares. Under the
Administrative and Shareholder Services Plan, payments for administrative
servicing expenses may not exceed 0.75% (annualized) of the average daily net
assets of a Fund's K Shares. The total of all 12b-1 fees, administrative
services fees and shareholder services fees may not exceed, in the aggregate,
the annual rate of 1.00% of the average daily net assets of a Fund's K Shares.
These amounts may be reduced pursuant to undertakings by the Distributor or Bank
of America. Payments for distribution expenses under the Distribution and
Services Plan and the Distribution Plan are subject to Rule 12b-1 under the 1940
Act.
For the fiscal year ended February 28, 1998, the Flexible Income, Intermediate
Bond and U.S. Government Securities Funds made payments under the Distribution,
Administrative and Shareholder Services Plans at the effective annual rates of
0.75%, 0.66% and 0.67%, respectively, of the average daily net assets with
respect to such Funds' K Shares, and PDI and the former Distributor waived fees
under the Distribution, Administrative and Shareholder
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<PAGE> 409
Services Plans at the effective annual rates of 0.25%, 0.09% and 0.33%,
respectively, of the average daily net assets with respect to such Funds' K
shares. During the fiscal year ended February 28, 1998, no B Shares were offered
by the Company.
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa -- judged to be of high quality by all
standards; A -- deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa -- considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default. Moody's
applies numerical modifiers 1, 2 and 3 in each generic rating classification
from Aa to B. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks at the lower end of its
generic rating category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and to repay principal for
debt in this category than for higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of speculation and
"C" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "CI" is
reserved for income bonds on which no interest is being paid. Debt rated "D" is
in default. This rating is used when interest payments or principal payments are
not made on the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized. The ratings from "AA" to
"CCC" may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Excerpts from Fitch IBCA's description of its corporate bond ratings:
"AAA" -- considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA" -- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A" -- deemed investment grade and of high credit quality,
although the capacity to pay interest and repay principal may be more
susceptible to the adverse changes in economic conditions
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<PAGE> 410
and circumstances than bonds with higher ratings; "BBB" is considered to be
investment grade and is regarded as having satisfactory credit quality with an
adequate capacity to pay interest and repay principal although adverse changes
in economic conditions and circumstances are more likely to impair timely
payment than for higher rated categories; "BB," "B," "CCC," "CC," "C," " DDD,"
"DD," and "D" -- regarded as speculative investments.
The ratings "BB" to "C" represent the likelihood of timely payment of principal
and interest in accordance with the terms of obligation for bond issues not in
default. For defaulted bonds, the rating "DDD" to "D" is an assessment of the
ultimate recovery value through reorganization or liquidation. The ratings from
"AA" to "BBB" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Excerpts from Moody's description of its municipal debt ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa -- judged to be of high quality by all
standards, A -- possess many favorable investment attributes and are considered
as upper medium-grade obligations; Baa -- considered medium grade obligations,
i.e. they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C -- protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B indicates a general lack of characteristics of
desirable investment, Caa represents bonds which are in poor standing, Ca
represents a high degree of speculation and C represents the lowest rated class
of bonds); Caa, Ca and C bonds may be in default.
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from "AAA" issues only in small degree. Debt rated "A" is
considered to have a strong capacity to pay interest and repay principal
although such issues are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of speculation and "C"
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Debt rated "CI" is reserved for
income bonds on which no interest is being paid. Debt rated "D" is in default.
The "D" rating is used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories. The rating "r" may be
attached to highlight derivative, hybrid and certain other obligations that S&P
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only mortgage
securities.
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<PAGE> 411
The following summarizes the ratings used by D&P for municipal debt. Debt rated
"AAA" is of the highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt. Debt rated "AA" is of
high credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions. Debt rated "A" has
protection factors which are average but adequate. However, risk factors are
more variable and greater in periods of economic stress. Debt rated "BBB"
possess below average protection factors but such protection factors are still
considered sufficient for prudent investment. Considerable variability in risk
is present during economic cycles. Debt rated below "BBB" is considered to be
below investment grade. Although below investment grade, debt rated "BB" is
deemed likely to meet obligations when due. Debt rated "B" possesses the risk
that obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely payment of
principal, interest or preferred dividends. Debt rated "DD" represents defaulted
obligations. To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus or
minus sign to show relative standing within these major categories.
The following summarizes the four highest ratings used by Fitch IBCA for
municipal debt:
"AAA" -- Debt considered to be investment grade and of then highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA" -- Debt considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as debt rated "AAA." Because debt
rated in the "AAA" and "AA" categories is not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1(+)."
"A" -- Debt considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt with higher ratings.
"BBB" -- Debt considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on this
debt, and therefore, impair timely payment. The likelihood that the ratings
of this debt will fall below investment grade is higher than for debt with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -- Debt that
possesses one of these ratings is considered by Fitch IBCA to be a
speculative investment. The ratings "BB" to "C" represent Fitch IBCA's
assessment of the likelihood of timely payment of principal and interest in
accordance with the terms of obligation for Debt issues not in default. For
defaulted Debt, the rating "DDD" to "D" is an assessment of the ultimate
recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "C" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's for short-term notes:
MIG-1/VMIG-1 -- deemed to be of the best quality, enjoying strong protection by
established cash flows, superior
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<PAGE> 412
liquidity support or demonstrated broad-based access to the market for
refinancing; MIG-2/VMIG-2 -- judged to be of high quality, with margins of
protection ample although not so large as in the preceding group;
MIG-3/VMIG-3 -- deemed to be of favorable quality, with all security elements
accounted for but lacking the undeniable strength of the preceding grades.
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established; MIG-4/VMIG-4 -- considered to
be of adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative. Loans bearing the designation "SG" are of speculative
quality and lack margins of protection.
Standard & Poor's ratings for municipal notes are as follows: SP-1 -- very
strong or strong capacity to pay principal and interest; those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation;
SP-2 -- satisfactory capacity to pay principal and interest; and SP-3 --
speculative capacity to pay principal and interest.
The three highest rating categories of D&P for short-term municipal debt are
"D-1," "D-2" and "D-3." D&P employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. "D-1+" indicates highest certainty
of timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations. "D-1" indicates very
high certainty of timely payment. Liquidity factors are excellent and supported
by good fundamental protection factors. Risk factors are minor. "D-1-" indicates
high certainty of timely payment. Liquidity factors are strong and supported by
good fundamental protection factors. Risk factors are very small. "D-2'
indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. "D-3" indicates satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected. D&P may also rate
short-term municipal debt as "D-4" or "D-5." "D-4" indicates speculative
investment characteristics. "D-5" indicates that the issuer has failed to meet
scheduled principal and/or interest payments.
The following summarizes the rating categories used by Fitch IBCA for short-term
municipal obligations:
"F-1(+)" securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
"F-2" securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
Issues assigned a "D" rating are in actual or imminent payment
default.
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Fitch IBCA may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch short-term ratings apply to debt obligations that are payable on demand or
have original maturities of generally up to three years. The designation "F-1'
indicates that the securities possess very strong credit quality. Those
securities determined to possess exceptionally strong credit quality are denoted
with a plus (+) sign designation. Securities rated "F-2" are considered to
possess good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
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PACIFIC HORIZON MUTUAL FUNDS
FLEXIBLE INCOME FUND
INTERMEDIATE BOND FUND
U.S. GOVERNMENT
SECURITIES FUND
SHORT-TERM GOVERNMENT FUND
NATIONAL MUNICIPAL BOND FUND
CALIFORNIA MUNICIPAL BOND FUND
PROSPECTUS
JULY 1, 1998
NOT FDIC INSURED
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<PAGE> 415
PROSPECTUS PACIFIC HORIZON
JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
This prospectus provides vital information about PACIFIC HORIZON INTERMEDIATE BOND FUND
these funds. For your own benefit and protection, -- a diversified portfolio seeking interest income
please read it before you invest, and keep it on and capital appreciation
hand for future reference. -- primarily invests in investment grade,
Please note that these funds: intermediate and longer term bonds
- - are not bank deposits PACIFIC HORIZON BLUE CHIP FUND
- - are not federally insured -- a diversified portfolio seeking long-term
- - are not endorsed by any bank or government agency capital appreciation
- - are not guaranteed to achieve their goals -- primarily invests in blue chip stocks
- - involve investment risk, including possible loss PACIFIC HORIZON ASSET ALLOCATION FUND
of principal -- a diversified portfolio seeking long-term
More detailed information is available in a growth from capital appreciation and dividend and
Statement of Additional Information dated July 1, interest income
1998. You may obtain a free copy by calling -- actively allocates investments among the three
800-346-2087. major asset categories: bonds, equity
The Statement of Additional Information has been securities and cash equivalents
incorporated by reference into this prospectus (is
legally a part of this prospectus) and has been
filed with the Securities and Exchange Commission.
You may visit the Securities and Exchange
Commission's Internet web site (http://www.sec.gov)
to view the Statement of Additional Information,
material incorporated by reference and other
information.
Like all mutual fund shares, 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.
</TABLE>
Investment Portfolio Offered by
Pacific Horizon Funds, Inc.
<PAGE> 416
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 3
FINANCIAL HIGHLIGHTS 7
FUND INVESTMENTS 14 INVESTMENT OBJECTIVES AND POLICIES
00 SPECIAL CONSIDERATIONS
18 MORE ABOUT RISK
21 OTHER INVESTMENT PRACTICES
25 FUNDAMENTAL LIMITATIONS
HOW TO INVEST IN SRF SHARES 25 ELIGIBILITY FOR ADMISSION
26 ADDITIONAL CONTRIBUTIONS OR TRANSFERS INTO ELIGIBLE
RETIREMENT ACCOUNTS
26 DIVIDEND AND DISTRIBUTION POLICIES
REDEMPTION OF SRF SHARES 27
EXCHANGE PRIVILEGES 27
AUTOMATIC CONVERSION 28
VALUATION OF SRF SHARES 29
THE BUSINESS OF THE FUNDS 29 FUND MANAGEMENT
29 SERVICE PROVIDERS
TAX INFORMATION 32
MEASURING PERFORMANCE 33
DESCRIPTION OF SHARES 34
PLAN PAYMENTS 36
APPENDIX A A-1
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings and Trust Association
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
<PAGE> 417
INTERMEDIATE BOND FUND, BLUE CHIP FUND
AND ASSET ALLOCATION FUND
GOAL, STRATEGY AND PORTFOLIO SECURITIES
The INTERMEDIATE BOND FUND seeks to provide investors with interest income and
capital appreciation. To pursue this goal, the fund invests primarily in a
diversified portfolio of investment grade intermediate and longer term bonds.
Under normal circumstances, the Intermediate Bond Fund invests at least 65% of
net assets in investment grade bonds. The Intermediate Bond Fund may invest up
to 35% of its net assets in mortgage-backed securities. The fund also may
invest, from time to time, in obligations issued by state and local government
issuers (municipal securities).
The BLUE CHIP FUND seeks to provide investors with long-term capital
appreciation. To pursue this goal, the fund invests primarily in a diversified
portfolio of blue chip stocks. Such securities are generally included in either
the Dow Jones Industrial Average or the Standard & Poor's 500 Index. Under
normal circumstances, the Blue Chip Fund invests at least 65% of total assets in
blue chip stocks. The Blue Chip fund may invest up to 15% of its total assets in
securities that are not included in these indices.
The ASSET ALLOCATION FUND seeks to provide investors with long-term growth from
capital appreciation and dividend and interest income. To pursue this goal, the
fund actively allocates its investments among the three major asset categories:
bonds, equity securities and cash equivalents. Under normal circumstances, the
equity portion of the Asset Allocation Fund will invest primarily in Blue Chip
Stocks and the fixed income portion will invest in investment grade bonds.
PORTFOLIO SECURITIES
Unlike most other investment companies which invest directly in portfolio
securities, the Intermediate Bond and Blue Chip Funds seek to achieve their
respective investment objectives by investing all their investable assets in
funds of an open-end, management investment company (the "Intermediate Bond
Master Portfolio" and the "Blue Chip Master Portfolio," respectively;
collectively, the "Master Portfolios" and, together with the Asset Allocation
Fund, the "Portfolios") having the same investment objective as that of each of
the Intermediate Bond and Blue Chip Funds, respectively. The Intermediate Bond
and Blue Chip Funds will purchase shares of the respective Master Portfolios at
net asset value. The net asset values of the Intermediate Bond and Blue Chip
Funds will respond to increases and decreases in the value of each respective
Master Portfolio's securities. Investors should carefully consider this
investment approach. See "Fund Investments--Investment Objectives and
Policies -- Special Considerations--Master-Feeder Structure" on page 16 for
additional information regarding this structure.
RISK FACTORS
As with most funds that invest in stocks the value of your investment in the
Asset Allocation and Blue Chip Funds will fluctuate in response to stock market
movements. As with most funds that invest in fixed income securities or
convertible securities, the value of your investment in the Asset Allocation and
Intermediate Bond Fund will fluctuate with changes in interest rates. Typically,
a rise in interest rates causes a decline in the market value of debt
securities.
PORTFOLIO MANAGEMENT
Bank of America National Savings and Trust Association ("Bank of America")
serves as the Fund's investment adviser. Based in San Francisco, California,
Bank of America and its affiliates have over
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<PAGE> 418
$77 billion under management, including over $22 billion in mutual funds.
Portfolio management services for the Intermediate Bond Fund are conducted by an
investment committee of the Fixed Income Division of the Investment Management
Group of Bank of America. The investment management team of the Blue Chip Fund
is headed by James Miller. Portfolio management services for the equity portion
of the Asset Allocation Fund are conducted by an investment management team
headed by James Miller and for the fixed income portion are conducted by Steven
L. Vielhaber.
EXPENSE SUMMARY
SRF Shares of the Funds are offered through this Prospectus. SRF Shares of a
Fund will automatically convert to A Shares of the same Fund on the third
anniversary of the Reorganization Date. Because of this conversion feature,
certain information is provided in the Prospectus as to A Shares of the Funds.
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. SRF Shares are offered at net asset value without the
payment of any sales charge (see page 29 of the Prospectus for an explanation of
net asset value per share). SRF Shares of a Fund will automatically convert to A
Shares of the same Fund on the third anniversary of the Reorganization Date. A
Shares of the Funds are offered at net asset value plus a front-end sales charge
and are subject to a shareholder servicing fee. However, the front-end sales
charge is not applicable to A Shares purchased by Eligible Retirement Accounts.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
respective Master Portfolios which are allocable to the Intermediate Bond Fund
and Blue Chip Fund. Operating expenses include fees for portfolio management,
maintenance of shareholder accounts, general administration, shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for SRF Shares and A Shares and the estimated operating expenses (including the
operating expenses of the respective Master Portfolios which are allocable to
the Intermediate Bond Fund and Blue Chip Fund) expected to
3
<PAGE> 419
be incurred by SRF Shares and A Shares of each Fund during the current fiscal
year. Actual expenses may vary. A hypothetical example based on the summary is
also shown.
<TABLE>
<CAPTION>
INTERMEDIATE BOND FUND SRF SHARES A SHARES
- ---------------------- ---------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... None 5.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends.......... None None
Maximum Contingent Deferred Sales Load (as a percentage of
offering price)........................................... None None
Redemption Fees............................................. None None
Exchange Fee................................................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)(2)...................... 0.16% 0.16%
Shareholder Services Fee
(After Fee Waivers)(2).................................... 0.15% 0.17%
Other Expenses.............................................. 0.64% 0.57%
---- ----
Total Fund Operating Expenses
(After Fee Waivers)(2)(3)....................... 0.95% 0.90%
==== ====
</TABLE>
- ---------------
(1) There will be no sales load imposed on conversion of SRF Shares to A Shares,
and there is no sales load imposed on subsequent purchases of A Shares in an
Eligible Retirement Account.
(2) Absent fee waivers, Management Fees for each class of shares of the Fund
would be 0.50% of the average daily net assets (annualized) and Total
Operating Expenses for the Fund's SRF and A Shares would be 1.39% and 1.32%,
respectively, of average net assets (annualized). Absent fee waivers,
Shareholder Services Fees for SRF Shares and A Shares would be 0.25% and
0.25% (annualized), respectively, of average daily net assets.
(3) Bank of America and PFPC, Inc. ("PFPC") have agreed to waive fees and
reimburse expenses in such amounts as are necessary to limit the expenses of
the SRF Shares (including the pro rata share of the expenses incurred by the
Master Portfolio in which the Intermediate Bond Fund invests) for the first
two years and the third year after the Reorganization Date to .95% and
1.05%, respectively, of the average daily net assets of the Fund. This
limitation on expenses of the SRF Shares will continue until such shares
convert into A Shares. Expense ratios for A Shares of the Fund are market
driven, and may be higher than those of SRF Shares.
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
SRF Shares.................................................. $10 $30(1) N/A N/A
A Shares(2)................................................. $64 $82 $102 $160
</TABLE>
4
<PAGE> 420
- ---------------
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge which does not apply to Eligible Retirement Accounts. Such amounts
would be $9, $29, $50 and $111 without deducting the front-end sales charge.
<TABLE>
<CAPTION>
BLUE CHIP FUND SRF SHARES A SHARES
-------------- ---------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... None 5.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends.......... None None
Maximum Contingent Deferred Sales Load (as a percentage of
offering price)........................................... None None
Redemption Fees............................................. None None
Exchange Fee................................................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.70% 0.70%
Shareholder Services Fees
(After Fee Waivers)....................................... 0.04% 0.25%
Other Expenses.............................................. 0.21% 0.23%
---- ----
Total Fund Operating Expenses(After Fee
Waivers)(2)(3).................................. 0.95% 1.18%
==== ====
</TABLE>
- ---------------
(1) There will be no sales load imposed on conversion of SRF Shares to A Shares
and there is no sales load imposed on subsequent purchases of A Shares in an
Eligible Retirement Account.
(2) Absent fee waivers, Total Operating Expenses for the Fund's SRF Shares would
be 1.16% of its average net assets (annualized). Absent fee waivers,
Shareholder Services Fees for SRF Shares would be 0.25% (annualized) of
average daily net assets.
(3) Bank of America and PFPC have agreed to waive fees and reimburse expenses in
such amounts as are necessary to limit the expenses of the SRF Shares
(including the pro rata share of the expenses incurred by the Master
Portfolio in which the Blue Chip Fund invests) for the first two years and
the third year after the Reorganization Date to 0.95% and 1.05%,
respectively, of the average daily net assets of the Fund. This limitation
on expenses of the SRF Shares will continue until such shares convert into A
Shares. Expense ratios for A Shares of the Fund are market driven, and may
be higher than those of SRF Shares.
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
SRF Shares.................................................. $10 $30(1) N/A N/A
A Shares(2)................................................. $66 $90 $116 $190
</TABLE>
5
<PAGE> 421
- ---------------
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge which does not apply to Eligible Retirement Accounts. Such amounts
would be $12, $37, $65 and $143 without deducting the front-end sales
charge.
<TABLE>
<CAPTION>
ASSET ALLOCATION FUND SRF SHARES A SHARES
- --------------------- ---------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... None 5.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends.......... None None
Maximum Contingent Deferred Sales Load
(as a percentage of offering price)....................... None None
Redemption Fees............................................. None None
Exchange Fee................................................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.55% 0.55%
Shareholder Services Fee.................................... 0.25% 0.25%
Other Expenses.............................................. 0.10% 0.10%
---- ----
Total Fund Operating Expenses(2).................. 0.90% 0.90%
==== ====
</TABLE>
- ---------------
(1) There will be no sales load imposed on conversion of SRF Shares to A Shares
and there is no sales load imposed on subsequent purchases of A Shares in an
Eligible Retirement Account.
(2)Bank of America and PFPC have agreed to waive fees and reimburse expenses in
such amounts as are necessary to limit the expenses of the SRF Shares for the
first two years and the third year after the Reorganization Date to 0.95% and
1.05%, respectively, of the average daily net assets of the Fund. This
limitation on expenses of the SRF Shares will continue until such shares
convert into A Shares. Expense ratios for A Shares of the Fund are market
driven, and may be higher than those of SRF Shares.
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
SRF Shares.................................................. $10 $30(1) N/A N/A
A Shares(2)................................................. $64 $82 $102 $160
</TABLE>
- ---------------
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge which does not apply to Eligible Retirement Accounts. Such amounts
would be $9, $29, $50 and $111 without deducting the front-end sales charge.
6
<PAGE> 422
Note: The preceding operating expenses and examples should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.45%, 0.50% and
0.40% of the Intermediate Bond Master Portfolio's, Blue Chip Master
Portfolio's and Asset Allocation Fund's respective average daily net assets;
and
- - an administration fee payable at the annual rate of 0.15% and 0.05% of the
Intermediate Bond Fund's and the Intermediate Bond Master Portfolio's
respective average daily net assets, 0.15% of the Blue Chip Fund's average
daily net assets, and 0.15% and 0.05%, of the Asset Allocation Fund's average
daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Intermediate Bond and Blue Chip Funds and the respective Master
Portfolios in which each Fund's assets are invested will be approximately the
same as the expenses which the particular Fund would incur if the Company
retained the services of an investment adviser for that Fund and the assets of
that Fund were invested directly in the type of securities held by its Master
Portfolio. Further, the Directors believe that the shareholders of the
Intermediate Bond and Blue Chip Funds may participate in the ownership of a
larger portfolio of securities than could be achieved directly by the
Intermediate Bond and Blue Chip Funds. There can be no assurance, however, that
such will be the case or that any economies of scale that might occur if other
investors acquire shares of the Intermediate Bond and Blue Chip Master
Portfolios will be realized.
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results of
SRF Shares and A Shares of the Funds for the years and periods indicated. The
information for the years and periods indicated was audited by Price Waterhouse
LLP, the independent accountants for the Funds, whose unqualified reports on the
financial statements containing such information are incorporated by reference
into the Statement of Additional Information.
Prior to June 23, 1997, the Asset Allocation Fund operated as a part of a
master- feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company called the
Asset Allocation Portfolio of Master Investment Trust, Series I (the "Asset
Allocation Master Portfolio") which had an identical investment objective as
that of the Asset Allocation Fund. On the Reorganization Date, the Asset
Allocation Fund withdrew its investment in the Asset Allocation Master Portfolio
and began investing its assets directly in portfolio securities.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual reports to shareholders. The Statement of Additional
Information and the annual reports to shareholders may be obtained free of
charge by calling 800-346-2087.
7
<PAGE> 423
INTERMEDIATE BOND FUND
Selected data for an SRF Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 23, 1997
THROUGH
FEBRUARY 28, 1998
-----------------
<S> <C>
Net asset value per share, beginning of period.............. $ 10.72
-------
Income from Investment Operations:
Net investment income..................................... 0.40
Net realized and unrealized gains (losses) on investment
transactions........................................... 0.13
-------
Total income (loss) from investment operations.... 0.53
-------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.38)
Distributions to shareholders from net realized gains on
investment transactions................................ --
-------
Total dividends and distributions................. (0.38)
-------
Net change in net asset value per share..................... 0.15
-------
Net asset value per share, end of period.................... $ 10.87
=======
Total Return*..................................... 4.86%
Ratios/Supplemental Data:
Net assets, end of period (000)........................... $35,161
Ratio of expenses to average net assets................... 0.95%+
Ratio of net investment income to average net assets...... 5.45%+
Ratio of expenses to average net assets**................. 1.07%+
Ratio of net investment income (loss) to average net
assets**............................................... 5.33%+
</TABLE>
- ---------------
* The total return listed is not annualized.
** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
8
<PAGE> 424
INTERMEDIATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
years and period indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 24,
1994
FOR THE FOR THE FOR THE YEAR FOR THE YEAR (INCEPTION
YEAR ENDED YEAR ENDED ENDED ENDED DATE) THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997* 1996 1995 1994
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning
of period........................... $ 9.54 $ 9.75 $ 9.44 $ 9.81 $ 10.00
------- ------- ------- ------ ---------
Income from Investment Operations:
Net investment income............... 0.49 0.52 0.59 0.59 0.08
Net realized and unrealized gains
(losses) on investment
transactions..................... 0.20 (0.15) 0.33 (0.37) (0.19)
------- ------- ------- ------ ---------
Total income (loss) from
investment operations..... 0.69 0.37 0.92 0.22 (0.11)
------- ------- ------- ------ ---------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................ (0.51) (0.52) (0.59) (0.59) (0.08)
Distributions to shareholders from
net realized gains on investment
transactions..................... (0.03) (0.06) (0.02) -- --
------- ------- ------- ------ ---------
Total dividends and
distributions............. (0.54) (0.58) (0.61) (0.59) (0.08)
------- ------- ------- ------ ---------
Net change in net asset value per
share............................... 0.15 (0.21) 0.31 (0.37) (0.19)
------- ------- ------- ------ ---------
Net asset value per share, end of
period.............................. $ 9.69 $ 9.54 $ 9.75 $ 9.44 $ 9.81
======= ======= ======= ====== =========
Total Return**.............. 7.40% 3.92% 10.45% 2.27% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000)..... $41,875 $22,937 $13,179 $1,964 $ 356
Ratio of expenses to average net
assets........................... 0.90% 0.75% 0.27% 0.00% 0.00%+
Ratio of net investment income to
average net assets............... 5.50% 5.45% 6.13% 6.43% 5.70%+
Ratio of expenses to average net
assets***........................ 1.21% 2.26% 5.00% 17.95% 160.20%+
Ratio of net investment income
(loss) to average net
assets***........................ 5.19% 3.94% 1.40% (11.52%) (154.50%)+
</TABLE>
- ---------------
* As of July 22, 1996, the Fund designated the existing series of shares as
"A" shares.
** The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
9
<PAGE> 425
BLUE CHIP FUND
Selected data for an SRF Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 23, 1997
THROUGH
FEBRUARY 28, 1998
-----------------
<S> <C>
Net asset value per share, beginning of period.............. $ 24.02
-------
Income from Investment Operations:
Net investment income.................................. 0.14
Net realized and unrealized gains (losses) on
investment transactions............................... 3.99
-------
Total gain (loss) from investment operations...... 4.13
-------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.12)
Distributions to shareholders from net realized gains
on investment transactions............................ (1.50)
-------
Total dividends and distributions................. (1.62)
-------
Net change in net asset value per share..................... 2.51
-------
Net asset value per share, end of period.................... $ 26.53
=======
Total Return*..................................... 19.30%
Ratios/Supplemental Data:
Net assets, end of period (000)........................... $ 370
Ratio of expenses to average net assets................... 0.95%+
Ratio of net investment income to average net assets...... 0.81%+
Ratio of expenses to average net assets**................. 1.15%+
Ratio of net investment income to average net assets**.... 0.61%+
</TABLE>
- ---------------
* The total return listed is not annualized.
** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
10
<PAGE> 426
BLUE CHIP FUND
Selected data for an A Share of common stock outstanding throughout each of the
years and period indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 13,
1994
FOR THE FOR THE FOR THE YEAR FOR THE YEAR (INCEPTION
YEAR ENDED YEAR ENDED ENDED ENDED DATE) THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY FEBRUARY FEBRUARY 28,
1998 1997* 29, 1996 28, 1995 1994
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning,
of period........................... $25.22 $ 20.53 $ 15.81 $14.97 $15.00
------ -------- ------- ------ ------
Income from Investment Operations:
Net investment income............ 0.16 0.23 0.26 0.31 0.02
Net realized and unrealized gains
(losses) on investment
transactions................... 7.91 5.21 4.96 0.80 (0.05)
------ -------- ------- ------ ------
Total gain (loss) from
investment operations..... 8.07 5.44 5.22 1.11 (0.03)
------ -------- ------- ------ ------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................ (0.15) (0.22) (0.28) (0.27) --
Distributions to shareholders
from net realized gains on
investment transactions........ (3.24) (0.53) (0.22) -- --
------ -------- ------- ------ ------
Total dividends and
distributions............. (3.39) (0.75) (0.50) (0.27) --
------ -------- ------- ------ ------
Net change in net asset value per
share............................... 4.68 4.69 4.72 0.84 (0.03)
------ -------- ------- ------ ------
Net asset value per share, end of
period.............................. $29.90 $ 25.22 $ 20.53 $15.81 $14.97
====== ======== ======= ====== ======
Total Return**.............. 33.96% 27.01% 33.39% 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period (000)..... $ 288 $ 153 $ 67 $ 6 $ 1
Ratio of expenses to average net
assets........................... 1.18% 1.28% 0.83% 0.00% 0.00%+
Ratio of net investment income to
average net assets............... 0.63% 0.99% 1.63% 2.46% 2.92%+
Ratio of expenses to average net
assets***........................ 1.22% 1.71% 2.28% 6.32% 55.00%+
Ratio of net investment income to
average net assets***............ 0.59% 0.56% 0.18% (3.86%) (52.08%)+
</TABLE>
- ---------------
* As of July 22, 1996, the Fund designated the existing series of shares as
"A" shares.
** The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
11
<PAGE> 427
ASSET ALLOCATION FUND
Selected data for an SRF Share of common stock outstanding throughout the period
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 23, 1997
THROUGH
FEBRUARY 28, 1998
-----------------
<S> <C>
Net asset value per share, beginning of period.............. $ 15.79
--------
Income from Investment Operations:
Net investment income..................................... 0.30
Net realized and unrealized gains (losses) on investment
transactions........................................... 1.65
--------
Total gain (loss) from investment operations...... 1.95
--------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.24)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.87)
--------
Total dividends and distributions................. (1.11)
--------
Net change in net asset value per share..................... 0.84
--------
Net asset value per share, end of period.................... $ 16.63
========
Total Return*..................................... 13.56%
Ratios/supplemental data:
Net assets, end of period (000)........................... $196,892
Ratio of expenses to average net assets................... 0.95%+
Ratio of net investment income to average net assets...... 2.73%+
Ratio of expenses to average net assets**................. 0.97%+
Ratio of net investment income to average net assets**.... 2.71%+
--------
</TABLE>
- ---------------
* The total return listed is not annualized.
** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
12
<PAGE> 428
ASSET ALLOCATION FUND
Selected data for an A Share of common stock outstanding throughout each of the
years and period indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 18,
1994
FOR THE FOR THE FOR THE YEAR FOR THE YEAR (INCEPTION
YEAR ENDED YEAR ENDED ENDED ENDED DATE) THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997* 1996 1995 1994
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning
of period........................... $ 19.40 $ 17.52 $ 15.15 $14.84 $ 15.00
------- ------- ------- ------ -------
Income from Investment Operations:
Net investment income............... 0.52 0.48 0.52 0.48 0.03
Net realized and unrealized gains
(losses) on investment
transactions..................... 3.72 2.50 2.86 0.24 (0.19)
------- ------- ------- ------ -------
Total gain (loss) from
investment operations..... 4.24 2.98 3.38 0.72 (0.16)
------- ------- ------- ------ -------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income................ (0.47) (0.46) (0.53) (0.41) --
Distributions to shareholders from
net realized gains on investment
transactions..................... (1.76) (0.64) (0.48) -- --
------- ------- ------- ------ -------
Total dividends and
distribu-tions............ (2.23) (1.10) (1.01) (0.41) --
------- ------- ------- ------ -------
Net change in net asset value per
share............................... 2.01 1.88 2.37 0.31 (0.16)
------- ------- ------- ------ -------
Net asset value per share, end of
period.............................. $ 21.41 $ 19.40 $ 17.52 $15.15 $ 14.84
======= ======= ======= ====== =======
Total Return**.............. 23.07% 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000)..... $49,240 $34,838 $22,355 $5,694 $ 666
Ratio of expenses to average net
assets........................... 1.03% 1.25% 0.62% 0.00% 0.00%+
Ratio of net investment income to
average net assets............... 2.67% 2.59% 3.49% 4.25% 4.20%+
Ratio of expenses to average net
assets***........................ 1.09% 1.94% 2.92% 7.89% 83.95%+
Ratio of net investment income to
average net assets***............ 2.61% 1.90% 1.19% (3.64)% (79.75)%+
</TABLE>
- ---------------
* As of July 22, 1996, the Fund designated the existing series of shares as
"A" shares.
** The total returns listed are not annualized for the period ended February
28, 1994, and do not include the effect of the maximum 4.50% sales charge on
A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
13
<PAGE> 429
FUND INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Intermediate Bond and Blue Chip Funds seek to achieve their respective
investment objectives by investing substantially all of their investable assets
in their respective Master Portfolios.
Because the investment characteristics of the Intermediate Bond and Blue Chip
Funds will correspond to those of the respective Intermediate Bond and Blue Chip
Master Portfolios, the following is a discussion of the various investments of
and techniques employed by the Intermediate Bond and Blue Chip Master Portfolios
and the Asset Allocation Fund.
While each Master Portfolio and the Asset Allocation Fund strives to attain its
respective investment objective, there can be no assurance that it will be able
to do so.
THE INTERMEDIATE BOND FUND
The investment objective of the Intermediate Bond Fund is to obtain interest
income and capital appreciation. The Fund seeks its objective by investing at
least 65% of its total assets in investment grade intermediate and longer-term
bonds, including corporate and governmental fixed-income obligations,
mortgage-backed securities, municipal securities and cash equivalents. Assets of
the Intermediate Bond Fund are invested in the Intermediate Bond Master
Portfolio, which has the same objective as the Intermediate Bond Fund. Under
normal circumstances, at least 65% of the Intermediate Bond Master Portfolio's
net assets will be invested in bonds.
Investment grade bonds are bonds that are rated within the four highest ratings
categories by a nationally recognized statistical rating organization, i.e., BBB
or better by Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Fitch IBCA, Inc. ("IBCA") or Duff & Phelps Credit Rating Co. ("Duff & Phelps")
or Baa or better by Moody's Investors Service, Inc. ("Moody's"). (A description
of applicable ratings is attached to the Statement of Additional Information as
Appendix A.) While bonds rated BBB or Baa are regarded as having adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay interest and
repay principal. Bonds with the lowest investment grade rating (i.e., BBB or
Baa) do not have outstanding investment characteristics and may have speculative
characteristics as well. Unrated securities will be purchased only if Bank of
America determines that they are of comparable quality to the rated securities
in which the Intermediate Bond Master Portfolio may invest. Corporate bonds will
be diversified by investment in bonds issued by different companies in different
industries.
Under normal market and interest rate conditions, the investment adviser expects
that the Intermediate Bond Master Portfolio's average portfolio duration
generally will be approximately the same as the Lehman Brothers Intermediate
Government/Corporate Bond Index. This means that the Intermediate Bond Fund's
net asset value fluctuation is expected to be similar to the price fluctuation
of the Lehman Brothers Intermediate Government/Corporate Bond Index. Unlike
maturity, which indicates when the security repays principal, "duration'
incorporates the cash flows of all interest and principal payments and the
proceeds from calls and redemptions over the life of the security. These
payments are multiplied by the number of years over which they are received to
produce a value that is expressed in years (i.e., duration). In addition, under
normal market and interest rate conditions, the investment adviser expects that
the Fund's average portfolio maturity will be between three and six years.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") securities, will be guaranteed as to principal
and interest, but not market value, by the U.S. Government
14
<PAGE> 430
or one of its agencies or instrumentalities. The Intermediate Bond Fund will not
invest more than 35% of its net assets in mortgage-backed securities. There is
the risk that corporate bonds might be called by the issuer if the bond interest
rate is higher than currently prevailing interest rates. Similarly, a risk
associated with mortgage-backed securities is early paydown of principal
resulting from refinancing of the underlying mortgages. The rate of such
prepayments, and hence the life of the security, will primarily be a function of
current market rates. In periods of falling interest rates, the rate of
prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds will generally be at lower rates than the rates on the
prepaid obligations.
As opposed to bonds, where principal is normally returned in a lump sum at
maturity, the principal underlying a GNMA Certificate is paid back over the life
of the loan. The Intermediate Bond Master Portfolio will purchase GNMA
Certificates known as "modified pass-through" certificates, on which timely
payment of principal and interest is guaranteed. The Intermediate Bond Master
Portfolio may also purchase "variable rate" GNMA Certificates, which are backed
by pools of variable rate mortgages, as well as other types of Certificates that
are backed by GNMA's guarantee.
The Intermediate Bond Master Portfolio may also invest, from time to time, in
obligations issued by state and local governmental issuers ("Municipal
Securities"). The purchase of such securities may be advantageous when, as a
result of prevailing economic, regulatory or other circumstances, the
performance of such securities, on a pre-tax basis, is comparable to that of
corporate or U.S. Government obligations. Dividends received by shareholders
which are attributable to interest income received from Municipal Securities
generally will be subject to Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Intermediate Bond Master Portfolio are "general obligation' securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds held by the
Intermediate Bond Master Portfolio are in most cases revenue securities and are
not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of such private activity bonds is usually directly related to the
credit standing of the corporate user of the facility involved.
The Intermediate Bond Master Portfolio may also include "moral obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Interest income is expected to be the primary basis for investment return from
an investment in the Intermediate Bond Master Portfolio and capital appreciation
the secondary basis. The Intermediate Bond Master Portfolio will attempt to
achieve capital appreciation by moderate market timing in response to
anticipated interest rate changes. The Intermediate Bond Master Portfolio will
also attempt to take advantage of undervalued sectors while selling bonds in
overvalued sectors. However, since investments will normally consist of bonds
and mortgage-backed securities, the ability to achieve capital appreciation is
limited.
The value of the securities held in the Intermediate Bond Master Portfolio will
tend to vary inversely with changes in prevailing interest rates. When, in the
evaluation of Bank of America, there is a high probability that there will be a
decline in the bond market, up to 75% of the net assets of the Intermediate Bond
Master Portfolio may be held in cash equivalents as a temporary defensive
strategy.
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To the extent that the Intermediate Bond Master Portfolio invests in cash
equivalents, it will not be invested in accordance with the investment policies
designed for it to realize its investment objective. Cash equivalents include
the following short-term, interest-bearing instruments: obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
certificates of deposit, bankers' acceptances, time deposits and other
interest-bearing deposits issued by domestic and foreign banks and foreign
branches of U.S. banks, asset-backed securities, foreign government securities
and commercial paper issued by U.S. and foreign issuers which is rated at the
time of purchase at least Prime-2 by Moody's or A-2 by S&P.
THE BLUE CHIP FUND
The investment objective of the Blue Chip Fund is long-term capital appreciation
through investment in blue chip stocks. Assets of the Blue Chip Fund are
invested in the Blue Chip Master Portfolio, which has the same investment
objective as the Blue Chip Fund. A blue chip stock is one of a well established,
nationally known company that has a long record of profitability and a
reputation for quality management, products and services. The Blue Chip Master
Portfolio invests substantially all of its assets in stocks included in either
the Dow Jones Industrial Average or the Standard & Poor's 500 Index; however, up
to 15% of its total assets may be invested in stocks that are not included in
these indices. The Blue Chip Master Portfolio will hold approximately 100
stocks. Under normal market conditions, up to 20% of the Master Portfolio's
total assets may be invested in cash equivalent securities of the type permitted
to be held by the Intermediate Bond Master Portfolio (other than asset-backed
securities).
THE ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to obtain long-term
growth from capital appreciation and dividend and interest income. The Asset
Allocation Fund seeks to achieve its objective by actively allocating
investments among the three major asset categories: bonds, equity securities and
cash equivalents.
Investments in equity securities will generally be limited to common stocks of
the same type in which the Blue Chip Master Portfolio invests. Bonds acquired by
the Asset Allocation Fund will be the same type of investment grade corporate
and governmental obligations, mortgage-backed securities and Municipal
Securities acquired by the Intermediate Bond Master Portfolio. Unrated
securities will be purchased only if Bank of America determines they are of
comparable quality to the rated securities in which the Asset Allocation Fund
may invest. Cash equivalents are short-term, interest-bearing instruments of the
type permitted to be held by the Intermediate Bond Master Portfolio. Under
normal market conditions at least 25% of the Asset Allocation Fund's total
assets will be invested in fixed-income senior securities and no more than 35%
of the Asset Allocation Fund's net assets will be invested in mortgaged-backed
securities. The Asset Allocation Fund may make other investments as described
more fully below under "Other Investment Practices."
MASTER-FEEDER STRUCTURE. The Intermediate Bond and Blue Chip Funds are open-end
investment portfolios that seek to achieve their respective investment
objectives by investing all of their investable assets in each Fund's respective
Master Portfolio which has the same investment objective. Such Funds may
withdraw their investment in the particular Master Portfolio at any time if the
Board of Directors of the Company determines that it is in the best interest of
a Fund to do so. Upon such withdrawal, the Board of Directors would consider
what action might be taken, including the investment of all of the assets of
that Fund in another pooled investment entity having the same investment
objective as the Fund or the hiring of an investment adviser to manage the
Fund's assets in accordance with the investment policies described above with
respect to its Master Portfolio. See "Expense Summary,"
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"Fund Investments" and "The Business of Funds Fund-Management" for a description
of this investment objective and the investment policies, restrictions,
management and expenses of the Intermediate Bond and Blue Chip Funds and their
respective Master Portfolios.
The Master Portfolios are separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Intermediate Bond and Blue Chip Funds and other entities that may
invest in the Master Portfolios from time to time (e.g., other investment
companies and commingled trust funds) will each be liable for all obligations of
their respective Master Portfolios. However, the risk of a Fund's incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and a Master Portfolio itself is unable to meet
its obligations. Accordingly, the Company's Board of Directors believes that
neither a Fund nor its shareholders will be adversely affected by reason of that
Fund's investing in the corresponding Master Portfolio. As stated below, the
investment objective of a Fund and the corresponding Master Portfolio is a
fundamental policy and may not be changed, in the case of a Fund, without the
vote of its shareholders or, in the case of the Master Portfolio, without the
vote of its interestholders. As with any mutual fund, other investors in the
Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g., a change in fundamental policies by the Master
Portfolio which was not approved by the Fund's shareholders). This could result
in a Fund's withdrawal of its investment in the Master Portfolio, and in
increased costs and expenses for the Fund. Further, the withdrawal of other
entities that may from time to time invest in the Master Portfolio could have an
adverse effect on the performance of the Master Portfolio and its corresponding
Fund, such as decreased economies of scale and increased per share operating
expenses. In addition, the total withdrawal by another investment company as an
investor in a Master Portfolio will cause the Master Portfolio to terminate
automatically in 120 days unless a Fund and any other investors in that Master
Portfolio unanimously agree to continue the business of the Master Portfolio. If
unanimous agreement is not reached to continue the Master Portfolio, the Board
of Directors of the Company would need to consider alternative arrangements for
that Fund, such as those described above. When a Fund is required to vote as a
shareholder of a Master Portfolio, current regulations provide that in those
circumstances a Fund may either seek instructions from its security holders with
regard to the voting of such proxies and vote such proxies in accordance with
such instructions, or the Fund may vote its shares in the Master Portfolio in
the same proportion of all other security holders in the Master Portfolio. The
policy of the Intermediate Bond and Blue Chip Funds, and other similar
investment companies, to invest their investable assets in trusts such as the
Master Portfolios is a relatively recent development in the mutual fund industry
and, consequently, there is a lack of substantial experience with the operation
of this policy.
There may also be other investment companies through which you can invest in a
Master Portfolio which may have higher or lower fees and expenses than those of
its corresponding Fund and which may therefore have different performance
results than that Fund. Information concerning whether an investment in a Master
Portfolio may be available through another entity investing in a Master
Portfolio may be obtained by calling 800-346-2087.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment
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procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of shares of the Funds by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds' distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Fund are not less favorable than
what they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Intermediate Bond Master Portfolio's and the Asset
Allocation Fund's investment practices may result in portfolio turnover greater
than that of other mutual fund portfolios. Although no commissions are paid on
bond transactions, purchases and sales are at net prices which reflect dealers'
mark-ups and mark-downs, and a higher portfolio turnover rate for bond
investments will result in payment of more dealer mark-ups and mark-downs than
would otherwise be the case. Higher portfolio turnover rates can also result in
corresponding increases in brokerage commissions and other transaction costs.
The investment adviser will not consider portfolio turnover a limiting factor in
making investment decisions for the Funds consistent with its investment
objective and policies. For further information concerning portfolio turnover,
see the Statement of Additional Information.
Since all SRF shareholders are tax exempt, no significant tax consequences
result from portfolio turnover.
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices.
The funds are permitted to use -- within limits established by the
directors -- certain other securities and investment practices that have higher
risks and opportunities associated with them. To the extent that a fund utilizes
these securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of types
of investment risks and certain investment securities and investment practices
of each Fund.
As with any mutual fund, there is no guarantee that a Pacific Horizon fund will
achieve its goals or show a positive total return over any period of time -
days, months or years.
TYPES OF INVESTMENT RISK
The following are some of the principal types of investment risks involved with
the securities and investment practices the Fund is permitted to use.
CORRELATION RISK. The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment). Incomplete correlation
can result in unanticipated risks.
CREDIT RISK. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK. The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK. The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
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INFORMATION RISK. The risk that key information about a security or market is
inaccurate or unavailable.
INTEREST RATE RISK. The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK. Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
- - HEDGED. When a derivative (a security whose value is based on another security
or index) is used as a hedge against an opposite position that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
- - SPECULATIVE. To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
LIQUIDITY RISK. The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole.
NATURAL EVENT RISK. The risk of losses attributable to natural disasters, crop
failures and similar events.
OPPORTUNITY RISK. The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
POLITICAL RISK. The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK. The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK. The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
HIGHER-RISK SECURITIES AND PRACTICES
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semiannual reports. For more information about
these investments, see "Other Investment Practices."
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<TABLE>
<CAPTION>
INTERMEDIATE BLUE CHIP ASSET ALLOCATION
BOND FUND FUND FUND
------------ --------- ----------------
<S> <C> <C> <C> <C>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
X No policy limitation on usage; fund may be using
currently
o Permitted, but has not typically been used
- Not permitted
-------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing
of money from banks or though reverse repurchase
agreements........................................... X 33.3 33.3
REPURCHASE AGREEMENTS. The purchase of a security that
must later be sold back to the issuer at the same
price plus interest.................................. X X X
SECURITIES LENDING. The lending of securities to
financial institutions, which provide cash or
government securities as collateral.................. 33.3 10 33.3
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED
SETTLEMENTS. The purchase or sale of securities for
delivery at a future date; market value may change
before delivery...................................... 25 25 25
-------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities issued by foreign
governments or companies as well as American
Depository Receipts which are dollar denominated
securities typically issued by banks and are based on
ownership of securities issued by foreign
companies............................................ 25 o 25
RESTRICTED AND ILLIQUID SECURITIES., Securities not
traded on the open market. Liquidity, valuation and
marked risks. 15 15
INVESTMENT COMPANY SECURITIES. Securities issued by
other investment companies marked risk............... o o o
-------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES. Securities backed by unsecured
debt, such as credit card debt; these securities are
often guaranteed or over-collateralized to enhance
their credit quality................................. X -- X
MORTGAGE-BACKED SECURITIES. Securities backed by pools
of mortgages, including passthrough certificates,
PACs, TACs and other senior classes of collateralized
mortgage obligations (CMOs).......................... 35 -- 35
-------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
INTERMEDIATE BLUE CHIP ASSET ALLOCATION
BOND FUND FUND FUND
------------ --------- ----------------
<S> <C> <C> <C> <C>
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX
OPTIONS. Contracts involving the right or obligation
to deliver or receive assets or money depending on
the performance of one or more assets or an economic
index.
X Futures and related options....................... * * *
X Options on securities and indices................. * * *
(*) See "Options" and "Futures" for a description of applicable investment limitations
</TABLE>
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
MORTGAGE-RELATED SECURITIES. The Intermediate Bond Master Portfolio and Asset
Allocation Fund may invest in mortgage-related securities. Purchasable
mortgage-related securities are represented by pools of mortgage loans assembled
for sale to investors by various governmental agencies such as the Government
National Mortgage Association ("GNMA") and government-related organizations such
as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as by private issuers such as commercial
banks, savings and loan institutions, mortgage bankers and private mortgage
insurance companies. Although certain mortgage-related securities are guaranteed
by a third party or are otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If a Fund purchases a
mortgage-related security at a premium, the portion may be lost if there is a
decline in the market value of the security, whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because mortgages underlying securities are prone to
prepayment in periods of declining interest rates. For this and other reasons, a
mortgage-related security's maturity may be shortened by unscheduled prepayments
on underlying mortgages and, therefore, it is not possible to accurately predict
the security's return to a Fund. Mortgage-related securities provide regular
payments consisting of interest and principal. No assurance can be given as to
the return the Fund will receive when these amounts are reinvested.
Mortgage-related securities acquired by the Intermediate Bond Master Portfolio
and Asset Allocation Fund may include collateralized mortgage obligations
("CMOs"), a type of derivative, issued by FNMA, FHLMC or other U.S. Government
agencies, instrumentalities or sponsored enterprises, as well as by private
issuers. CMOs provide an investor with a specified interest in the cash flow of
a pool of underlying mortgage or other mortgage-related securities. Issuers of
CMOs frequently elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in many ways. Generally, payments of principal are applied to the CMO classes in
the order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. Sometimes, however, CMO classes are "parallel
pay," i.e. payments of principal are made to two or more classes concurrently.
CMOs may involve additional risks other than those found in other types of
mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-
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<PAGE> 437
related obligations. During periods of rising interest rates, CMOs may lose
their liquidity as CMO market makers may choose not to repurchase, or may offer
prices, based on current market conditions, which are unacceptable to a Fund
based on the Fund's analysis of the market value of the security.
Privately issued mortgage-related securities generally offer a higher yield than
mortgage-related securities issued by governmental agencies, instrumentalities
or sponsored enterprises because of the absence of any direct or indirect
government or agency payment guarantees. However, timely payment of interest and
principal on mortgage loans in these pools may be supported by various forms of
insurance or guarantees, including individual loan, pool and hazard insurance,
subordination and letters of credit. The insurance and guarantees are issued by
government entities, private insurers, banks and mortgage poolers. Although the
market for such securities is becoming increasingly liquid, some
mortgage-related securities issued by private organizations may not be readily
marketable.
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. A Fund may not invest in
instruments or securities issued by Bank of America or any of its affiliates.
OPTIONS. A Fund may purchase put and call options on listed securities and stock
indexes so long as the aggregate premiums paid for options does not exceed 2% of
the net assets of the Fund (this restriction does not apply to options on
futures contracts). Put options may be purchased in order to protect a Fund's
securities in expectation of a declining market and call options may be
purchased to benefit from anticipated price increases in the underlying
securities or index. A Fund may not write put options but may write fully
covered call options as long as the Fund remains fully covered throughout the
life of the option, either by owning the optioned securities or possessing a
call issued by another writer that is identical in all respects to the call
written by the Fund.
FUTURES. The Asset Allocation Fund may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options) as a hedge
against anticipated fluctuations or changes resulting from relevant market
conditions in the values of the securities held by the Fund or which it intends
to purchase and where the transactions are economically appropriate for the
reduction of risks inherent in the ongoing management of the Fund. Similarly,
the Intermediate Bond Master Portfolio may purchase and sell interest rate
futures contracts (as well as purchase related options) and the Blue Chip Master
Portfolio may purchase and sell stock index futures contracts (as well as
purchase related options).
A futures contract is a bilateral agreement pursuant to which two parties agree
to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the value of a specified obligation or stock index
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities is normally made. A Fund may not purchase or sell a futures contract
and purchase related option unless immediately after any such transaction the
aggregate amount of margin deposits on its existing futures positions and the
amount of premiums paid for related options does not exceed 5% of the Fund's
total assets (after taking into account certain technical adjustments). For a
more detailed description of futures contracts and options and the costs and
risks related to such instruments, see the Statements of Additional Information.
VARIABLE RATE INSTRUMENTS. A Fund may invest in variable and floating rate
instruments, which may include master demand notes. Although payable on demand
of the investing Fund, master demand notes may not be marketable. Consequently,
the ability to redeem such notes may depend on the borrower's ability to pay,
which will be continuously monitored by Bank of America. Such notes will be
purchased only from domestic corporations that either: (a) are rated Aa or
better by Moody's or AA or
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<PAGE> 438
better by S&P; (b) have commercial paper rated at least Prime-2 by Moody's or
A-2 by S&P or the equivalent by another nationally recognized statistical rating
organization ("NRSRO"); (c) are backed by a bank letter of credit; or (d) are
determined by Bank of America to be of a quality comparable to securities
described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. The Fund may invest in securities issued by other
investment companies (including money market funds advised by Bank of America,)
to the extent permitted by the 1940 Act, except that, with respect to the
investment in a money market mutual fund advised by Bank of America, a Fund is
permitted to invest the greater of 5% of its net assets or $2.5 million. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees.
REPURCHASE AGREEMENTS. The Funds may also enter into repurchase agreements.
Under these agreements, the Funds will enter into repurchase agreements only
with financial institutions (such as banks and broker-dealers) deemed
creditworthy by Bank of America (or Wellington Management, as applicable), under
guidelines approved by the Company's Board of Directors. Repurchase agreements
are considered to be loans under the 1940 Act. Repurchase agreements will be
entered into only for debt obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of deposit, bankers'
acceptances or commercial paper, and either the Fund's custodian or its agent
will have physical possession of the securities or the securities will be
transferred to the Fund's custodian, by appropriate entry in the Federal Reserve
Bank's records and, in either case, will be maintained in a segregated account.
Bank of America (or Wellington Management, as appropriate) will monitor the
value of securities acquired under repurchase agreements to ensure that the
value of such securities will always equal or exceed the repurchase price under
the repurchase agreement. If the other party to a repurchase agreement defaults,
a Fund might incur a loss if the value of the securities securing the repurchase
agreement declines, and might incur disposition costs in connection with
liquidating the securities. In addition, if bankruptcy proceedings are commenced
with respect to the seller, realization upon the securities by a Fund may be
delayed or denied.
REVERSE REPURCHASE AGREEMENTS. A Fund may enter into reverse repurchase
agreements. Under these arrangements, the Fund will sell a security held by the
Fund to either a bank which has a commercial paper rating of A-2 or better by
S&P or Prime-2 or better by Moody's, or the equivalent by another NRSRO, or a
registered broker-dealer, with an agreement to repurchase the security at an
agreed date, price and interest payment. Reverse repurchase agreements involve
the possible risk that the value of portfolio securities a Fund relinquishes may
decline below the price the Fund must pay when the transaction closes. Reverse
repurchase agreements are considered to be borrowings under the 1940 Act.
Borrowings may magnify the potential for gain or loss on amounts invested
resulting in an increase in the speculative character of a Fund's outstanding
shares.
SECURITIES LENDING. In order to earn additional income, a Fund may lend its
portfolio securities to broker-dealers that Bank of America considers to be of
good standing. Borrowers of portfolio securities may not be affiliated directly
or indirectly with the Company or the particular Fund. If the broker-dealer
should become bankrupt, however, the Fund could experience delays in recovering
its securities. A securities loan will be made only when, in Bank of America's
judgment, the possible reward from the loan justifies the possible risks. In
addition, such loans will not be made if, as a result, the value of securities
loaned by a Fund exceeds 33 1/3% of its total assets. Securities loans will be
fully collateralized.
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<PAGE> 439
ASSET-BACKED SECURITIES. The Intermediate Bond Master Portfolio and the Asset
Allocation Fund may purchase asset-backed securities. Asset-backed securities
consist of undivided fractional interests in pools of consumer loans (unrelated
to mortgage loans) or receivables held in a trust. Examples include certificates
for automobile receivables (CARS) and credit card receivables (CARDS). Payments
of principal and interest on the loans or receivables are passed through to
certificate holders. Asset-backed securities may be issued by either
governmental or non-governmental entities. Payment on asset-backed securities of
private issuers is typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guaranty, or subordination. The
extent of credit enhancement varies, but usually amounts to only a fraction of
the asset-backed security's par value until exhausted. Ultimately, asset-backed
securities are dependent upon payment of consumer loans or receivables by
individuals, and the certificate holder generally has no recourse to the entity
that originated the loan or receivables. The underlying loans or receivables may
be prepaid with the result of shortening the certificates' weighted average
life. Prepayment rates vary widely and may be affected by changes in market
interest rates. It is not possible to accurately predict the average life of a
particular pool of loans or receivables. The proceeds of prepayments received by
a Fund must be reinvested in securities whose yields reflect interest rates
prevailing at the time. Thus, the Fund's ability to maintain a portfolio which
includes high-yielding asset-backed securities will be adversely affected to the
extent reinvestments are in lower yielding securities. The actual maturity and
realized yield will therefore vary based upon the prepayment experience of the
underlying pool of loans or receivables and prevailing interest rates at the
time of prepayment. Asset-backed securities may be subject to greater risk of
default during periods of economic downturn than other instruments. Also, while
the secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress the secondary market may not be as liquid as the
market for other types of securities, which could result in a Fund experiencing
difficulty in valuing or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Intermediate Bond Master
Portfolio and Asset Allocation Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk that the price or yield
obtained may be less favorable than the price or yield available when the
delivery takes place. The Intermediate Bond Master Portfolio and Asset
Allocation Fund will set aside in a segregated account cash or liquid securities
equal to the purchase price of any when-issued or forward commitment
transactions. A Fund's when-issued purchases and forward commitments will not
exceed 25% of the value of such Fund's total assets absent unusual market
conditions. The Intermediate Bond Master Portfolio and Asset Allocation Fund
intend to engage in when-issued purchases and forward commitments only in
furtherance of their respective investment objectives and not for speculative
purposes.
FOREIGN SECURITIES. Subject to its investment objective and policies, a Fund may
invest up to 25% of its net assets (at the time of purchase) in securities of
foreign issuers that may or may not be publicly traded in the United States,
such as Yankee bonds (dollar-denominated bonds sold in the United States by
non-U.S. issuers) and Eurobonds (bonds issued in a country and sometimes a
currency other than the country of the issuer). The Funds purchasing these
securities may be subjected to additional risks associated with the holding of
property abroad, such as future political and economic developments, currency
fluctuations, possible withholding of tax payments, possible seizure or
nationalization of foreign assets, possible establishment of currency exchange
control regulations or the adoption of other foreign
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government restrictions that might adversely affect the payment of principal or
interest on foreign securities in a Fund. In addition, securities of some
foreign companies are less liquid, and their prices more volatile than domestic
companies, there may be less publicly available information about foreign
companies, and foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies.
YEAR 2000 RISKS. An issue has emerged in the investment services industry and
for the economy overall regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. The Fund has been informed by Bank of America that it has a
team in place working on year 2000 systems compliance and that Bank of America
expects to have its systems ready by the year 2000. Certain other service
providers have provided similar information to the Fund. Nevertheless, the
inability of Bank of America and the other service providers to successfully
address year 2000 issues could result in interruptions in the Fund's business
and have a material adverse impact on the Fund's operations.
FUNDAMENTAL LIMITATIONS
The investment objectives of the Funds and the Master Portfolios are not
fundamental and may be changed by the Board of Directors without a vote by the
holders of a majority of the outstanding shares of a particular Fund or of the
outstanding interests of the Master Portfolio. Each Fund is subject to
investment limitations which are fundamental, and therefore which may not be
changed without a vote by the holders of a majority of the outstanding shares of
a particular Fund or of the outstanding interests of the Master Portfolio. A
complete list of fundamental, and certain non-fundamental, investment
limitations is set out in full in the Statement of Additional Information.
HOW TO INVEST IN SRF SHARES
ELIGIBILITY FOR ADMISSION
Only Eligible Retirement Accounts are qualified to invest in SRF Shares.
Eligible Retirement Accounts are accounts which were open prior to the
Reorganization Date, have remained open continuously since that date and meet
one of the following descriptions:
X Individual Retirement Accounts ("IRAs") that are exempt under Section
408(e) and are maintained in conformity with Section 408(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), including a)
rollover accounts and Simplified Employee Pension Plans ("SEP Plans")
for which the Northwest Division of Bank of America or one of its
affiliates, serves as custodian, b) IRAs opened after the
Reorganization Date under a SEP Plan that was open as of the
Reorganization Date and has remained open continuously since that date
("Eligible IRAs") or c) IRAs opened prior to the Reorganization Date
via a signed transfer or rollover notification indicating a pending
purchase of SRF Shares of the Intermediate Bond, Blue Chip or Asset
Allocation Fund of the Company, and
X Qualified pension or profit sharing trusts that are exempt under
Section 501(a) and that are maintained in conformity with Section
401(a) of the Code, including a) corporate pension or profit-sharing
trusts, b) pension or profit sharing trusts benefiting one or more
self-employed
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individuals (generally referred to as H.R. 10 or Keogh plans), or c)
accounts opened for new participants in a qualified pension or
profit-sharing trust that was open as of the Reorganization Date and
has remained open continuously since that date ("Eligible Pension or
Profit Sharing Trusts").
Maintenance of Eligible Retirement Account status is a prerequisite to all
transactions with the Company described below with respect to SRF Shares.
Individual Retirement Accounts which were open prior to the reorganization of
the Intermediate Bond, Blue Chip and Asset Allocation Funds of the Seafirst
Retirement Funds into SRF shares of the Pacific Horizon Funds, Inc. and have
remained open continuously since the reorganization may be rolled over into Roth
IRAs under Section 408(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), or other IRAs which become available as a result of changes in the
Code.
ADDITIONAL CONTRIBUTIONS OR TRANSFERS INTO ELIGIBLE RETIREMENT ACCOUNTS
Additional contributions or transfers into an Eligible Retirement Account can be
made by using a form available from any Bank of America or Bank of America,
Northwest Division branch or by calling 1-800-323-9919 in Washington and Alaska
or 1-800-441-8379 in Idaho. The completed form can be returned in person at any
branch or be mailed in Washington to Retirement Services, P.O. Box 84248,
Seattle, Washington 98124, in Idaho to Retirement Services, P.O. Box 6900, Coeur
d'Alene, Idaho 83814-2002, or in Alaska to Retirement Services, P.O. Box 107007,
Anchorage, Alaska 99510-7007.
There is no minimum requirement for additional contributions or transfers. All
assets will be invested in full and fractional SRF Shares at a purchase price
equal to the net asset value per share determined at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently, 4:00 p.m.
Eastern time) following receipt by the Company of a shareholder's satisfactorily
completed investment instructions and payment. See "Valuation of Shares."
Investments are subject to determination by the Company that the investment
instruction form has been properly completed.
Certificates representing shares will not be issued. All SRF Shares purchased
are confirmed by mail to the shareholder and are credited to the account of the
shareholder on the Company's books. The Company reserves the right in its sole
discretion to (i) suspend the availability of its SRF Shares and (ii) reject
investment instructions when, in the judgment of the Board of Directors, such
suspension or rejection is in the best interest of the Company.
Each Fund's SRF Shares are sold on a continuous basis by the Distributor. The
Distributor is Provident Distributors, Inc., and is located at Four Falls
Corporate Center, 6th Floor, West Conshohocken, PA 19428.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Intermediate Bond Fund and Blue Chip Fund are entitled to
dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments in the corresponding Master
Portfolio that are allocable to each Fund. Dividends from the Intermediate Bond
Fund's net investment income are declared monthly and paid within five business
days after the end of each month. Dividends from the Blue Chip Fund's and Asset
Allocation Fund's net investment income are declared quarterly and paid within
five business days after the quarter end. A Fund's net realized capital gains
(if any) are distributed at least annually. Dividends and capital gain
distributions are automatically reinvested in additional SRF Shares of the Fund
for which the dividend or distribution was declared.
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REDEMPTION OF SRF SHARES
All or a portion of the SRF Shares held in a Fund can be redeemed (sold) at any
time. Redemptions may be effected by writing in Washington to Retirement
Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to Retirement
Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002 or in Alaska to
Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007.
The redemption price will be the net asset value per share next determined
following receipt by the Company of a shareholder's satisfactorily completed
instructions. See "Valuation of SRF Shares." The value of an SRF Share upon
redemption may be more or less than the value when purchased, depending upon the
net asset value of an SRF Share of the Fund at the time of the redemption.
Redemptions are subject to determination by the Company that the investment
instruction form or the redemption request and other distribution documents, if
any, are complete. While payment for SRF Shares redeemed normally will be made
in cash, if conditions exist making payment in cash undesirable, the Company may
make payment for the SRF Shares redeemed wholly or partly in securities or other
property of the Fund.
Payment for SRF Shares redeemed will normally be made to the custodian of the
shareholder within one business day of receipt by the Company of redemption
instructions, but in no event will payment be made more than seven days after
receipt of redemption instructions except in the circumstances described below.
The payment may be delayed or the right of redemption suspended at a time when
(a) trading on the Exchange is restricted or the Exchange is closed, for other
than customary weekends and holidays, (b) an emergency, as defined by rules of
the Securities and Exchange Commission, exists making disposal of portfolio
securities or determination of the value of the net assets of the Fund not
reasonably practicable, or (c) the Securities and Exchange Commission has by
order permitted such suspension.
EXCHANGE PRIVILEGES
The following exchange privileges are available for Eligible Retirement
Accounts:
1. SRF Shares held in any Fund may be exchanged for SRF Shares of any
other Fund;
2.SRF Shares held in any Fund may be exchanged for A Shares in any
other taxable, non-money market fund offered by the Company or a
Time Horizon Fund without incurring the front-end sales charge
otherwise applicable on sales of A Shares ("Eligible Exchange
Shares");
3. SRF Shares or Eligible Exchange Shares may be exchanged for Pacific
Horizon Shares of the Pacific Horizon Prime Fund;
4. Eligible Exchange Shares may be further exchanged for A Shares in
any taxable, non-money market fund offered by the Company or a Time
Horizon Fund without incurring the front-end sales charges
otherwise applicable, or for SRF Shares offered by a Fund; and
5. SRF Shares or Eligible Exchange Shares held in an IRA account for
which a Participant's surviving spouse is the beneficiary may
continue to be exchanged for SRF Shares or A Shares as described
above.
The following transactions are examples of transactions that will interrupt the
maintenance of Eligible Retirement Account status for a Participant's account
and will terminate the account's ability to engage in the exchange privileges
described above.
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<PAGE> 443
1. SRF Shares or Eligible Exchange Shares held in an Eligible Pension
or Profit Sharing Trust or a SEP IRA, which are transferred by the
Participant into a personal rollover IRA, will no longer be
eligible to exchange such shares for A Shares without incurring the
front-end sales load applicable to A Shares;
2. SRF Shares or Eligible Exchange Shares held in an IRA account for
which a Participant's surviving beneficiary upon transfer out of
the decedent's account is other than the Participant's spouse will
no longer be eligible to exchange such shares for A Shares without
incurring the front-end sales load applicable to A Shares; and
3. SRF Shares or Eligible Exchange Shares which are liquidated in
their entirety by the Participant into a Certificate of Deposit
will no longer be eligible to exchange such shares for A Shares
without incurring the front-end sales load applicable to A Shares.
Exchanges may be effected by phone or by writing in Washington to Retirement
Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to Retirement
Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002, or in Alaska to
Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007. To make an
exchange by phone, call 1-800-323-9919 in Washington and Alaska, or 1-800-441-
8379 in Idaho.
The Company may act upon the instruction of any person, by telephone,
representing himself or herself to be a shareholder and reasonably believed by
the Company to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If a
Shareholder should experience difficulty in contacting the Company to place
telephone exchanges, for example, because of unusual market activity,
shareholders are urged to consider sending exchange requests in writing. Calls
may be recorded for the shareholder's protection. As a result of this telephone
exchange policy, the shareholder will bear the risk of loss, if any, resulting
from telephone instructions of a person reasonably believed to be a shareholder.
During times of severe market or economic changes, telephone exchanges may be
difficult to implement. Therefore, it is recommended that you send your exchange
requests in writing.
Any exchange will be based on the respective net asset values of the shares
involved next determined after receipt by the Company of a shareholder's
instructions for an exchange, subject to any applicable front-end sales load as
discussed above.
The Company reserves the right to reject any exchange request, and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
AUTOMATIC CONVERSION
SRF shares of a Fund will automatically convert to A Shares of the same Fund on
the third anniversary of the Reorganization Date. The conversion from SRF Shares
to A Shares will take place at net asset value, as a result of which a
shareholder will receive the same value of A Shares of a Fund as the shareholder
had of SRF Shares.
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<PAGE> 444
VALUATION OF SRF SHARES
Net asset value per share is determined separately for each class of shares of a
Fund by dividing the total value of the assets of the Fund attributable to a
particular class of shares, less any liabilities of the Fund attributable to
such class, by the number of outstanding shares of the class. Net asset value is
determined as of the end of regular trading hours on the Exchange (currently
4:00 p.m., Eastern time) on days the Exchange is open, or at such other time as
may be determined by the Board of Directors each day on which such value must be
determined in accordance with the 1940 Act.
The Master Portfolios' and the Asset Allocation Fund's investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined in good faith by the Master Portfolios or Asset Allocation
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolio's
Board of Trustees or the Asset Allocation Fund's Board of Directors. Short-term
debt securities are valued at amortized cost, which approximates market value.
For further information about valuing securities, see the Statement of
Additional Information.
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as the Funds' Investment Adviser. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and NationsBank
Corporation ("NationsBank") announced a definitive agreement to merge and form a
new holding company to be named BankAmerica Corporation (the "Merger"). The
Merger is anticipated to close by the end of 1998, however, it is subject to a
number of approvals including shareholder and regulatory approvals.
In separate advisory agreements with the Master Trust and the Company
(collectively, the "Advisory Agreements"), Bank of America has agreed to manage
the Funds' investments and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Funds' securities. The
Advisory Agreements also provide that Bank of America may: 1) in its discretion,
provide advisory services through its own employees or employees of one or more
of its affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation, provided such employees are under the management of
Bank of America and 2) employ a sub-adviser provided that Bank of America
remains fully responsible to the Funds for the acts and omissions of the
sub-adviser.
Since March 1996, portfolio management services for the Intermediate Bond Master
Portfolio have been conducted by an investment committee of the Fixed Income
Division of the Investment Management Services Group of Bank of America, and no
one person is primarily responsible for making recommendations to that
committee.
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<PAGE> 445
Bank of America's Illinois Investment Advisors Division is responsible for the
day-to-day investment activities of the Blue Chip Master Portfolio Fund. The
investment management team is headed by James Miller, Executive Vice President
and Chief Investment Officer of BofA Illinois (a wholly owned subsidiary of
BankAmerica Corporation). Mr. Miller has been the Blue Chip Master Portfolio's
manager since May 1995 and has been associated with BofA Illinois Investment
Management (and its predecessor Continental Bank) since 1988. Mr. Miller is a
Chartered Financial Analyst, a member of the Association of Investment
Management and Research, and a former Director of the Investment Analysts
Society of Chicago.
Steven L. Vielhaber is primarily responsible for the selection of particular
securities for the fixed-income portions of the Asset Allocation Fund. Mr.
Vielhaber has been the Asset Allocation Fund's manager since April 1994 and has
been employed by the Investment Adviser and its affiliates since 1993. Prior
thereto, Mr. Vielhaber had been Director of Fixed Income Marketing at
Dimensional Fund Advisers since 1990, and Vice President and Manager of
Investments at Gibraltar Savings from 1986 to 1990.
For the services provided and expenses assumed under the Advisory Agreement Bank
of America is entitled to receive a fee at the annual rate of 0.45%, 0.50% and
0.40% of each of the Intermediate Bond Master Portfolio's, Blue Chip Master
Portfolio's and Asset Allocation Fund's respective average daily net assets.
These amounts may be reduced pursuant to undertakings by Bank of America. (See
the information below under "Fee Waivers.") During the fiscal year ended
February 28, 1998 (or, in the case of Asset Allocation Fund, during the period
ended June 23, 1997) Bank of America was entitled to receive an investment
advisory fee at the annual rate of 0.45%, 0.75% and 0.55% of the Intermediate
Bond Master Portfolio's, Blue Chip Master Portfolio's and Asset Allocation
Master Portfolio's respective average daily net assets. During the fiscal year
ended February 28, 1998, the Intermediate Bond Master Portfolio and Blue Chip
Master Portfolio paid Bank of America advisory fees at the effective annual
rates of 0.16% and 0.53% of such Master Portfolios' average daily net assets,
and Bank of America waived a portion of its fees at the effective annual rates
of 0.19% and 0.04% of such Master Portfolios' average daily net assets,
respectively. During the period June 24, 1997 through February 28, 1998, the
Asset Allocation Fund paid Bank of America an advisory fee at an effective
annual rate of 0.28% and Bank of America waived a portion of its fee at the
effective annual rate of 0.00%.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, as described under "Plan Payments," and may
receive fees charged directly to their accounts in connection with investments
in shares of the Funds.
ADMINISTRATOR
Bank of America serves as Administrator of the Funds. Its principal office is
located at 555 California Street, San Francisco, California 94104. For the
period from March 1, 1997 through September 15, 1997, the BISYS Group, Inc.,
through its wholly-owned subsidiary BISYS Fund Services, L.P. (collectively,
"BISYS"), served as administrator of the Funds. For the period September 15,
1997 through February 28, 1998 Bank of America served as the Funds'
administrator. On June 23, 1997, the Asset Allocation Fund withdrew its
investments from the Asset Allocation Master Portfolio of Master Investment
Trust, Series I and began investing in portfolio securities directly. From March
1, 1997 to September 15, 1997, BISYS served as administrator to the Asset
Allocation, Blue Chip and Investment Grade Bond Master Portfolios. From
September 15, 1997 to February 28, 1998 PFPC International Ltd., an indirect
wholly-owned subsidiary of PNC Bank, served as administrator and asset services
agent of the Blue Chip and Investment Grade Bond Master Portfolios.
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<PAGE> 446
Under its administration agreements with the Company, Bank of America has agreed
to: pay the costs of maintaining the offices of the Company; provide a facility
to receive purchase and redemption orders; provide statistical and research
data, data processing services and clerical services; coordinate the preparation
of reports to shareholders of the Funds and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds; calculate the net asset value of the Funds; calculate the
dividends and capital gains distributions paid to shareholders; and generally
assist in all aspects of the operations of the Funds.
For its services as administrator, Bank of America is entitled to receive
administration fees at the annual rate of 0.15% of each of the Intermediate
Bond, Blue Chip and Asset Allocation Fund's respective average daily net assets.
Bank of America is entitled to receive an administration fee from the
Intermediate Bond Master Portfolio's and Blue Chip Master Portfolio's net assets
at an annual rate of 0.05% of each such Master Portfolio's average daily net
assets. These amounts may be reduced pursuant to undertakings by Bank of
America. (See the information below under "Fee Waivers.") During the period from
March 1, 1997 through June 23, 1997, the Asset Allocation Master Portfolio paid
BISYS administration fees at an effective annual rate of 0.01% of such Master
Portfolio's average daily net assets, and BISYS waived a portion of its fee at
an effective annual rate of 0.01% of such Master Portfolio's average daily net
assets. For the same period, BISYS waived its entire administration fee payable
by the Asset Allocation Fund. During the period June 24, 1997 through September
15, 1997, the Asset Allocation Fund paid BISYS administration fees at an
effective annual rate of 0.03% of the Asset Allocation Fund's average daily net
assets, and BISYS waived a portion of its administration fee at an effective
annual rate of 0.03% of such Fund's average daily net assets. For the period
September 15, 1997 through February 28, 1998, the Asset Allocation Fund paid
Bank of America administration fees at an effective annual rate of 0.10% of such
Fund's average daily net assets. Bank of America waived no fees with respect to
such Fund during such period. During the period March 1, 1997 through September
15, 1997, the Investment Grade Bond Master Portfolio and Blue Chip Master
Portfolios paid BISYS administration fees at the effective annual rates of 0.02%
and 0.03%, respectively, and BISYS waived a portion of its fees at the effective
annual rates of 0.01% and 0.00%, respectively. For the same period, BISYS waived
the entire administration fee payable by the Intermediate Bond and Blue Chip
Funds. During the period March 1, 1997 through September 15, 1997, the
Intermediate Bond Fund paid BISYS administration fees at an effective annual
rate of 0.02% of such Fund's average daily net assets and BISYS waived a portion
of its fees at an effective annual rate of 0.10% of such Fund's average daily
net assets. During the period March 1, 1997 through September 15, 1997, the Blue
Chip Fund paid BISYS administration fees at an effective annual rate of 0.04% of
such Fund's average daily net assets and BISYS waived a portion of the
administration fees at an effective annual rate of 0.01% of such Fund's average
daily net assets. During the period September 15, 1997 through February 28,
1998, the Intermediate Bond Fund paid Bank of America administration fees at an
effective annual rate of 0.14% of such Fund's average daily net assets and Bank
of America waived a portion of its fees at an effective annual rate of 0.01% of
such Fund's average daily net assets. During the period September 15, 1997
through February 28, 1998, the Blue Chip Fund paid Bank of America
administration fees at an effective annual rate of 0.07% of such Fund's average
daily net assets. During the period September 15, 1997 through February 28, 1998
the Intermediate Bond Master Portfolio and Blue Chip Master Portfolios paid PFPC
International Ltd. administration fees at the effective annual rates of 0.02%
and 0.02%. For the same period Bank of America waived the entire administration
fee payable by the Intermediate Bond and Blue Chip Fund.
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<PAGE> 447
Bank of America has entered into an agreement with PFPC Inc., an indirect,
wholly-owned subsidiary of PNC Bank Corp., ("PFPC") pursuant to which PFPC has
agreed to provide certain sub-administration services to the Funds, including,
among other things, assisting in the developing and monitoring of compliance
procedures; participating in periodic updating of certain Fund materials;
providing periodic reports to the Company's Board; and providing certain
record-keeping services. Bank of America will bear all fees and expenses charged
by PFPC for such services.
Pursuant to the authority granted in the administration agreements, Bank of
America or a subcontractor has entered into agreements with PFPC, Inc. ("PFPC")
under which PFPC (and an offshore affiliate of PFPC) provide certain accounting,
bookkeeping, pricing and dividend and distribution calculation services to the
Funds. The Funds bear all fees and expenses charged by PFPC for these services.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Provident Distributors,
Inc. ("PDI" or the "Distributor"). The Distributor is located at Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pa 19428.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th Floor, Philadelphia,
Pennsylvania, 19103 serves as the Custodian of the Funds. PFPC is the transfer
and dividend disbursing agent for each of the Funds and its address as transfer
agent is P.O. Box 8968, Wilmington, Delaware 19809-8968. PFPC has entered into a
sub-transfer agent agreement with Bank of America's Northwest Division under
which Bank of America's Northwest Division provides certain transfer agency
services to SRF Shares of the Funds.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of each Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of these entities. However, the service providers retain the ability
to discontinue such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time each Fund held the relevant
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<PAGE> 448
assets). You will be subject to income tax on these distributions regardless of
whether they are paid in cash or reinvested in additional shares.
You should note that if you purchase shares just prior to a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends that were received with
respect to the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges, and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
It is expected that a Fund itself will be subject to foreign withholding taxes
with respect to dividends or interest received from sources in foreign
countries. Fund may make an election to treat a proportionate amount of such
taxes as constituting a distribution to each shareholder, which would allow each
shareholder either (1) to credit such proportionate amount of taxes against U.S.
federal income tax liability, or (2) to take such amount as an itemized
deduction.
For more information regarding the taxation of the Fund, consult the Statement
of Additional Information under the heading "Additional Information About
Taxes." You should also consult your tax adviser for information regarding the
federal, state and local tax consequences and the applicability of any foreign
taxes or U.S. withholding taxes with respect to your specific situation.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30-day
period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the
33
<PAGE> 449
result on a semi-annual basis. The 30 day or one month measuring period will be
identified along with any yield quotation to which it relates.
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to stock, bond and other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class M Common Stock, 100 million shares of Class M -- Special Series 3 Common
Stock, 100 million shares of Class M -- Special Series 5 Common Stock and 100
million shares of Class M -- Special Series 7 Common Stock, representing
interests in the Intermediate Bond Fund; 100 million shares of Class N Common
Stock, 100 million shares of Class N -- Special Series 3 Common Stock, 100
million shares of Class N -- Special Series 5 Common Stock and 100 million
shares of Class N -- Special Series 7 Common Stock, representing interests in
the Blue Chip Fund; and 100 million shares of Class O Common Stock, 100 million
shares of Class O -- Special Series 3 Common Stock, 100 million shares of Class
O -- Special Series 5 Common Stock and 100 million shares of Class O -- Special
Series 7 Common Stock, representing interests in the Asset Allocation Fund; and
additional classes of shares representing interests in other investment
portfolios of the Company. Class M, N and O Common Stock represent the "A"
Shares, Class M, N and O -- Special Series 3 Common Stock represent "B" Shares,
Class M, N and O -- Special Series 5 Common Stock represent the "K" Shares and
Class M, N and O -- Special Series 7 Common Stock represent the "SRF" Shares. As
of the date of this Prospectus, 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 M Common Stock, Class M -- Special Series 3 Common
Stock,
34
<PAGE> 450
Class M -- Special Series 5 Common Stock, Class M -- Special Series 7 Common
Stock, Class N Common Stock, Class N -- Special Series 3 Common Stock, Class
N -- Special Series 5 Common Stock, Class N -- Special Series 7 Common Stock,
Class O Common Stock, Class O -- Special Series 3 Common Stock, Class
O -- Special Series 5 Common Stock or Class O -- Special Series 7 Common Stock)
into one or more series. This Prospectus relates primarily to the Funds' SRF
Shares. For more information about the Funds' A, B and K Shares or about the
Company's other portfolios, contact the Company at the telephone number listed
on the cover page of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the Reorganization Date. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available, which is the case for eligible retirement accounts. A
Shares may be purchased directly by the public, by clients of Bank of America
through their qualified trust and agency accounts, or by clients of securities
dealers, financial institutions (including banks) and other industry
professionals, such as investment advisers, accountants and estate planning
firms that have entered into service and/or selling agreements with the
Distributor. B Shares are sold to investors without a front-end sales charge but
are subject to a contingent deferred sales charge. K Shares are neither subject
to a front-end sales charge nor a contingent deferred sales charge. K Shares 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 PDI and
Robertson Stephens, respectively, or their affiliates; (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Fund of
the Company or a Time Horizon Fund and subsequent purchases into an IRA rollover
account, so long as the original IRA rollover account remains open on the
Company's books; (d) accounts under Section 403 (b) (7) of the Code, (e)
deferred compensation plans under Section 457 of the Code and (f) certain other
retirement plans.
A Shares, B Shares, K Shares and SRF Shares each have certain purchase,
redemption and exchange privileges. Additionally, A Shares, B Shares and K
Shares have certain shareholder services, such as TeleTrade, an automatic
investment program, an automatic withdrawal plan, a directed distribution plan
and a direct deposit program.
The four classes of shares in the Funds which are publicly offered represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except (a) SRF Shares and A Shares
bear the expenses of their respective Shareholder Services Plans; (b) B Shares
bear the expenses of a Distribution and Services Plan; and (c) K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to SRF, A, B and K Shares and the
dividends payable on such Shares will be reduced by the amount of the: (a)
Shareholder Services Plan fees attributable to SRF Shares and A Shares,
respectively, (b) Distribution Plan fees and/or Administrative and Shareholder
Services Plan fees attributable to B and K Shares, respectively, and (c) the
incremental expenses associated with such Plans. SRF, A, B and K Shares may have
different performance results due to sales charges and other expenses
attributable to distribution and/or shareholder servicing plans applicable with
respect to a particular share class.
35
<PAGE> 451
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). Only holders of SRF Shares will
be entitled to vote on matters submitted to a vote of shareholders relating to
the Shareholder Services Plan attributable to SRF Shares; only holders of A
Shares will be entitled to vote on matters submitted to a vote of shareholders
relating to the Shareholder Services Plan attributable to A Shares; only holders
of B Shares will be entitled to vote on matters submitted to a vote of
shareholders relating to the Distribution and Services Plan attributable to B
Shares; and only holders of K Shares will be entitled to vote on matters
submitted to a vote of shareholders relating to the Distribution Plan and
Administrative and Shareholder Services Plan attributable to K Shares. Fund
shares have no preemptive rights and only such conversion and exchange rights as
the Board may grant in its discretion. When issued for payment as described in
this Prospectus, Fund shares will be fully paid and non-assessable.
The Funds do not presently intend to hold annual meetings of shareholders to
elect directors or for other business unless and until such time as less than a
majority of the directors holding office have been elected by the shareholders.
At that time, the directors then in office will call a shareholders' meeting for
the election of directors. Under certain circumstances, however, shareholders
have the right to call a shareholder meeting to consider the removal of one or
more directors. Such meetings will be held when requested by the shareholders of
10% or more of the Company's outstanding shares of common stock. The Funds will
assist in shareholder communications in such matters to the extent required by
law and the Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED SEPARATE SHAREHOLDER SERVICES PLANS
(THE "PLANS") FOR SRF SHARES AND A SHARES
The Company has adopted separate Shareholder Services Plans for SRF Shares and A
Shares, under which SRF Shares and A Shares of each Fund reimburse the
Distributor for shareholder servicing fees the Distributor pays to Service
Organizations.
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under a particular Plan, payments by a Fund for shareholder servicing expenses
may not exceed 0.25% (annualized) of the respective average daily net assets of
such Fund's SRF Shares or A Shares, as appropriate. Excluded from this
calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the period ended February
28, 1998, the Intermediate Bond, Blue Chip and Asset Allocation Funds paid the
Distributor shareholder servicing fees under the Shareholder Services Plan with
respect to the Funds' A Shares at an effective annual rate of 0.17%, 0.25% and
0.25% of such Funds' respective average daily net assets, and the Distributor
waived a portion of its fee with respect to the Intermediate Bond Fund at the
effective annual rates of 0.08% of such Funds' average daily net
36
<PAGE> 452
assets. During the period June 23, 1997 through February 28, 1998, the
Intermediate Bond, Blue Chip and Asset Allocation Funds paid the distributor
shareholder servicing fees under the Shareholder Services Plan with respect to
such Funds' SRF Shares at the effective annual rates of 0.15%, 0.04% and 0.17%
and the Distributor waived a portion of its fees with respect to such Funds at
the effective annual rates of 0.02%, 0.13% of the Intermediate Bond Fund and the
Blue Chip Fund, respectively, of such Funds' average daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the particular Plan is in effect
until such time when it may be paid. However, any "carried forward" amounts will
not be payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
37
<PAGE> 453
APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -- judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa -- judged to be of high quality by all
standards; A -- deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa -- considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C -- protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of desirable investment, Caa represents bonds which are in poor
standing, Ca represents a high degree of speculation and C represents the lowest
rated class of bonds); Caa, Ca and C bonds may be in default. Moody's applies
numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa to
B. The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic rating
category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and to repay
principal for debt in this category than for higher rated categories. Debt rated
"BB," "B," "CCC," "CC" or "C" is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. Debt rated
"CI" is reserved for income bonds on which no interest is being paid. Debt rated
"D" is in default. This rating is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. The ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Excerpts from Fitch IBCA's description of its corporate bond ratings:
"AAA" -- considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA" -- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A" -- deemed investment grade and of high credit quality,
although the capacity to pay interest and repay principal may be more
susceptible to the adverse changes in economic conditions and circumstances than
bonds with higher ratings; "BBB" is considered to be investment grade and is
regarded as having satisfactory credit quality with an adequate capacity to pay
interest and repay
A-1
<PAGE> 454
principal although adverse changes in economic conditions and circumstances are
more likely to impair timely payment than for higher rated categories; "BB,"
"B," "CCC," "CC," "C," "DDD," "DD," and "D"--regarded as speculative
investments. The ratings "BB" to "C" represent the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch IBCA short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
designation "F-1" indicates that the securities possess very strong credit
quality. Those securities determined to possess exceptionally strong credit
quality are denoted with a plus (+) sign designation. Securities rated "F-2" are
considered to possess good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
A-2
<PAGE> 455
PACIFIC HORIZON MUTUAL FUNDS
SRF SHARES OF THE
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
PROSPECTUS
July 1, 1998
NOT FDIC INSURED
<PAGE> 456
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
STATEMENT OF ADDITIONAL INFORMATION
FOR
NATIONAL MUNICIPAL BOND FUND
CALIFORNIA MUNICIPAL BOND FUND
AGGRESSIVE GROWTH FUND
U.S. GOVERNMENT SECURITIES FUND
CAPITAL INCOME FUND
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
FLEXIBLE INCOME FUND
INTERNATIONAL EQUITY FUND
SHORT-TERM GOVERNMENT FUND
July 1, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY..........................................................................2
INVESTMENT OBJECTIVES AND POLICIES...................................................3
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................42
ADDITIONAL INFORMATION CONCERNING TAXES.............................................51
MANAGEMENT..........................................................................56
GENERAL INFORMATION................................................................102
APPENDIX A.........................................................................A-1
APPENDIX B.........................................................................B-1
</TABLE>
This Statement of Additional Information applies to A, B and K Shares
of the Pacific Horizon Aggressive Growth Fund, Pacific Horizon U.S. Government
Securities Fund, Pacific Horizon Short-Term Government Fund, Pacific Horizon
Capital Income Fund, Pacific Horizon National Municipal Bond Fund, Pacific
Horizon California Municipal Bond Fund, Pacific Horizon Flexible Income Fund,
Pacific Horizon Asset Allocation Fund, Pacific Horizon International Equity Fund
(collectively, the "Non-Feeder Funds"), Pacific Horizon Intermediate Bond Fund
and Pacific Horizon Blue Chip Fund, (collectively, the "Feeder Funds" and,
collectively with the Non-Feeder Funds, the "Funds") of Pacific Horizon Funds,
Inc. (the "Company or "Pacific Horizon"). This Statement of Additional
Information also applies to SRF Shares of the Pacific Horizon Intermediate Bond
Fund, Pacific Horizon Blue Chip Fund and Pacific Horizon Asset Allocation Fund.
The Master Portfolios corresponding to the Intermediate Bond Fund and Blue Chip
Fund are referred to individually as the "Intermediate Bond Master Portfolio"
and "Blue Chip Master Portfolio," respectively, and collectively as
<PAGE> 457
the "Master Portfolios," and collectively with the Non-Feeder Funds, the
"Funds." The Company and Master Investment Trust, Series I ("Master Trust") are
collectively referred to herein as the "Companies." This Statement of Additional
Information is meant to be read in conjunction with the Prospectuses dated July
1, 1998, as they may from time to time be revised (individually, a "Prospectus"
and collectively, the "Prospectuses"), which describe the particular Fund of the
Company in which the investor is interested. This Statement of Additional
Information is incorporated by reference in its entirety into each such
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, no investment in A, B, K or SRF Shares of any Fund should be made
solely upon the information contained herein. Copies of the Prospectuses
relating to Pacific Horizon's Funds to which this Statement of Additional
Information relates may be obtained by calling Provident Distributors, Inc.
("PDI" or the "Distributor") at 800-346-2087. Capitalized terms used but not
defined herein have the same meaning as in the Prospectuses.
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The National Municipal Bond Fund, Aggressive Growth Fund,
Intermediate Bond Fund (formerly, Flexible Bond Fund), Blue Chip Fund, Asset
Allocation Fund, International Equity Fund and Short-Term Government Fund
commenced operations on January 28, 1994, March 31, 1984, January 24, 1994,
January 13, 1994, January 18, 1994, May 13, 1996, and August 2, 1996,
respectively. The California Municipal Bond Fund (formerly, California
Tax-Exempt Bond Fund) originally commenced operations on March 30, 1984 as a
separate portfolio of Pacific Horizon Tax-Exempt Funds, Inc., which subsequently
changed its name to Pacific Horizon California Tax-Exempt Bond Fund, Inc. (the
"Predecessor California Tax-Exempt Bond Fund"). The Capital Income Fund
originally commenced operations on September 25, 1987 as The Total Return Fund
(the "Predecessor Capital Income Fund"), a separate portfolio of a Massachusetts
business trust named The Horizon Capital Funds. The U.S. Government Securities
Fund commenced operations on January 7, 1988, also as a separate portfolio of
The Horizon Capital Funds, under the name GNMA Extra Fund (the "Predecessor GNMA
Fund" or the "Predecessor U.S. Government Securities Fund"). On January 1, 1989
the Predecessor Capital Income Fund and the Predecessor GNMA Fund changed their
names to the Pacific Horizon Convertible Securities Fund and the Pacific Horizon
GNMA Extra Fund. In January 1990 these three Predecessor Funds were reorganized
as portfolios of Pacific Horizon. On June 28, 1991, the GNMA Extra Fund changed
its name to the U.S. Government Securities Fund and on September 16, 1991 the
Convertible Securities Fund changed its name to the Capital Income Fund. The
Flexible Income Fund (formerly, the Corporate Bond Fund) originally commenced
operations in 1973 as a diversified, closed-end management investment company
(that is, as an investment company with non-redeemable shares) known as Bunker
Hill Income Securities, Inc. (the "Corporate Predecessor Fund"). On April 25,
1994 the Corporate Predecessor Fund was reorganized as a separate portfolio of
the Company and all of the assets and liabilities of the Corporate Predecessor
Fund were transferred to the Flexible Income Fund.
The Feeder Funds seek to achieve their respective investment
objectives by investing substantially all of their assets in diversified
investment portfolios of an open end, management investment company having the
same investment objective as these Funds. Prior to July 1, 1996, September 1,
1996, September 1, 1996, June 23, 1997, the National Municipal Bond Fund,
Flexible Income Fund (formerly, the Corporate Bond Fund), International Equity
Fund and Asset Allocation Fund, respectively, invested all of their respective
assets in the National Municipal Bond Portfolio of Master Investment Trust,
Series, II ("Municipal Master Portfolio"); Corporate Bond Portfolio of Master
Trust ("Corporate Bond Master Portfolio"); International Equity Portfolio of
Master Trust ("International Equity Master Portfolio") and Asset Allocation
-2-
<PAGE> 458
Portfolio ("Asset Allocation Master Portfolio") of Master Trust. On July 1,
1996, September 1, 1996, September 1, 1996 and June 23, 1997, the National
Municipal Bond Fund, Flexible Income Fund, International Equity Fund and Asset
Allocation Fund, respectively, withdrew their respective assets from their
respective master portfolios and invested them directly in securities. The
Intermediate Bond and Blue Chip Funds currently invest all of their respective
assets in the Investment Grade Bond Portfolio of Master Trust (the "Intermediate
Bond Master Portfolio") and the Blue Chip Portfolio of Master Trust (the "Blue
Chip Master Portfolio"). The Municipal Master Portfolio, International Equity
Master Portfolio, Asset Allocation Master Portfolio, Intermediate Bond Master
Portfolio, Corporate Bond Master Portfolio and Blue Chip Master Portfolio are
singularly referred to as a "Master Portfolio" and collectively as "Master
Portfolios."
The Company also offers other investment portfolios which are
described in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment
objective of the Fund to which it applies. Because the investment
characteristics of each Feeder Fund will correspond with its respective Master
Portfolio, the following is a discussion of the various investments and
techniques employed by each Master Portfolio. The following information
supplements and should be read in conjunction with the descriptions of the
investment objective and policies in the Prospectus for each Fund.
Portfolio Transactions
The portfolio turnover rate described in each Prospectus is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities at the time of acquisition
were one year or less. Portfolio turnover may vary greatly from year to year as
well as within a particular year, and may also be affected by cash requirements
for redemptions of shares and by requirements which enable the Company to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. The portfolio turnover rate for
the Aggressive Growth Fund, U.S. Government Securities Fund and Capital Income
Fund may be particularly high.
For the fiscal years or periods indicated, the portfolio
turnover rates for the National Municipal Bond Fund, U.S. Government Securities
Fund, California Municipal Bond Fund, Capital Income Fund, Aggressive Growth
Fund, Asset Allocation Fund, International Equity Fund, Short-Term Government
Fund, Flexible Income Fund, Intermediate Bond Master Portfolio and Blue Chip
Master Portfolio, were as follows:
-3-
<PAGE> 459
<TABLE>
<CAPTION>
===========================================================================================================================
Year Ended Year or Period Ended
February 28, 1998 February 28, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Municipal Bond Fund(1) 36% 12%
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund 51% 94%
- ---------------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund 28% 34%
- ---------------------------------------------------------------------------------------------------------------------------
Capital Income Fund 69% 124%
- ---------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund 83% 99%
- ---------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund(2) 67% 116%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) 79% 114%
- ---------------------------------------------------------------------------------------------------------------------------
Short Term Government Fund(4) 82% 81%
- ---------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund(5) 63% 59%
- ---------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master Portfolio 127% 83%
- ---------------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio 67% 91%
===========================================================================================================================
</TABLE>
- --------------------
(1) Until July 1, 1996, the National Municipal Bond Fund invested all of its
assets in the Municipal Master Portfolio. Information contained in the chart
above includes portfolio turnover of the Municipal Master Portfolio.
(2) Until June 23, 1997, the Asset Allocation Fund invested all of its assets in
the Asset Allocation Master Portfolio. Information contained in the above chart
includes portfolio turnover of the Asset Allocation Master Portfolio.
(3) Until September 1, 1996, the International Equity Fund invested all of its
assets in the International Equity Master Portfolio. Information contained in
the chart above includes the portfolio turnover of the International Equity
Master Portfolio. Not annualized for period from May 13, 1996 (inception date)
to February 28, 1997.
(4) Not annualized for period from August 2, 1996 (inception date) to February
28, 1997.
(5) Until September 1, 1996, the Flexible Income Fund invested all of its assets
in the Corporate Bond Master Portfolio. Information contained in the chart above
includes portfolio turnover of the Corporate Bond Master Portfolio.
Subject to the general control of the Company's Board of
Directors, and the Master Portfolios' Trustees, Bank of America National Savings
and Trust Association ("Bank of America" or the "investment adviser") is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for each Fund. Wellington Management
Company ("Wellington Management" or the "sub-adviser") serves as the
International Equity Fund's sub-adviser. References in this Statement of
Additional
-4-
<PAGE> 460
Information to Bank of America's action and responsibilities with respect to the
International Equity Fund shall be deemed to include Wellington Management
unless the context clearly indicates otherwise.
Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market, but the price includes
an undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of fixed income securities are
normally principal transactions without brokerage commissions.
For the fiscal years or periods indicated, the Aggressive
Growth Fund, Capital Income Fund, Blue Chip Master Portfolio, Asset Allocation
Fund, California Municipal Bond Fund, U.S. Government Securities Fund,
Intermediate Bond Master Portfolio, National Municipal Bond Fund, International
Equity Fund, and Short-Term Government Fund paid the following brokerage
commissions:
<TABLE>
<CAPTION>
=============================================================================================================================
Year Ended Year or Period Ended Year Ended
February 28, 1998 February 28, 1997 February 29, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $296,651 $225,515 $369,002
- -----------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $137,371 $184,327 $ 95,126
- -----------------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $748,691 $637,281 $428,667
- -----------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund+ $125,211 $152,270 $175,960
- -----------------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities
Fund $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master
Portfolio $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund++ $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
International Equity Fund+++ $181,774 $78,268 N/A
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund++++ $0 $0 N/A
- -----------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $0 $0 $0
=============================================================================================================================
</TABLE>
- --------------------
+ Until June 23, 1997, the Asset Allocation Fund invested all of its assets in
the Asset Allocation Master Portfolio. Information contained in the chart above
includes brokerage commissions paid by the Asset Allocation Master Portfolio.
++ Until July 1, 1996, the National Municipal Bond Fund invested all of its
assets in the Municipal Master Portfolio. Information contained in the chart
above includes brokerage expenses of the Municipal Master Portfolio.
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<PAGE> 461
+++ The International Equity Fund commenced operations on May 13, 1996. Until
September 1, 1996 the International Equity Fund invested all of its assets in
the International Equity Master Portfolio. Information contained in the chart
above includes brokerage commissions paid by the International Equity Master
Portfolio.
++++ The Short-Term Government Fund commenced operations on August 2, 1996.
+++++ Until September 1, 1996, the Flexible Income Fund (formerly, the Corporate
Bond Fund) invested all of its assets in the Corporate Bond Master Portfolio.
Information contained in the chart above includes brokerage expenses of the
Corporate Bond Master Portfolio.
In executing portfolio transactions and selecting brokers or
dealers, it is the Funds' policy to seek the best overall terms available. The
Investment Advisory Agreements between the particular Company and Bank of
America and the Sub-Advisory Agreement with Wellington Management on behalf of
the International Equity Fund provide that, in assessing the best overall terms
available for any transaction, Bank of America or Wellington Management shall
consider factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In addition, the
Investment Advisory and Sub-Advisory Agreements authorize Bank of America and
Wellington Management (with respect to the International Equity Fund), subject
to the approval of the particular Board, to cause a 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 particular Company or Fund. 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, a
particular Company or any given 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 or Wellington Management. Such services may be useful to Bank of America
or Wellington Management in serving both the Company, the Funds and other
clients and, conversely, services obtained by the placement of business of other
clients may be useful to Bank of America or Wellington Management in carrying
out the obligations to the Company and the Funds. In connection with the
investment management services with respect to the Funds, 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 Funds, Bank of America, Wellington Management,
the Distributor and their affiliates acting as principal, underwriter, syndicate
member, market-maker, dealer, broker or in any
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<PAGE> 462
similar capacity, provided such purchase, sale or dealing is permitted under the
Investment Company Act of 1940 (the "1940 Act") and the rules thereunder.
A Fund may participate, if and when practicable, in bidding
for the purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Fund will engage
in this practice only when Bank of America or Wellington Management, in their
sole discretion subject to guidelines adopted by the particular Board, believes
such practice to be in the interest of the 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
Funds with those to be sold or purchased for other investment companies or
common trust funds in order to obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b- 1 under the 1940 Act or their
parents held by Pacific Horizon as of the close of its most recent fiscal year.
As of February 28, 1998: (a) the Treasury Fund held the following securities:
Repurchase Agreement with Morgan Stanley Dean Witter & Co. in the principal
amount of $145,000,000; Repurchase Agreement with Lehman Brothers, Inc. in the
principal amount of $50,000,000; Repurchase Agreement with Merrill Lynch
Securities, Inc. in the principal amount of $145,000,000; and Repurchase
Agreement with Goldman Sachs & Co. in the principal amount of $574,667,000; (b)
the Government Fund held the following securities: Repurchase Agreement with
Morgan Stanley Dean Witter & Co. in the principal amount of $20,000,000;
Repurchase Agreement with Goldman Sachs & Co. in the principal amount of
$97,174,000; and Repurchase Agreement with Merrill Lynch Securities, Inc. in the
principal amount of $20,000,000; (c) the Prime Fund held the following
securities: Merrill Lynch & Co., Inc. commercial paper (2) in the principal
amounts of $25,000,000 and $100,000,000; Lehman Brothers Holdings, Inc.
commercial paper in the principal amount of $25,000,000; Merrill Lynch & Co.,
Inc. daily variable rate obligations (2) in the principal amounts of $25,000,000
and $25,000,000; Merrill Lynch & Co., Inc. weekly variable rate obligation in
the principal amount of $19,000,000; Dean Witter corporate obligation in the
principal amount of $15,000,000; Goldman Sachs Group L.P. master note in the
principal amount of $400,000,000; Morgan Stanley Group, Inc. master note in the
principal amount of $300,000,000; Bear Stearns Companies, Inc. daily variable
rate obligations (2) in the principal amounts of $75,000,000 and $60,000,000;
Bear Stearns Companies, Inc. monthly variable rate obligations (2) in the
principal amounts of $25,000,000 and $18,000,000; Lehman Brothers Holdings, Inc.
daily variable rate obligation in the principal amount of $50,000,000; Lehman
Brothers Holdings, Inc. weekly variable rate obligation in the principal amount
of $50,000,000; Lehman Brothers Holdings, Inc. quarterly variable rate
obligation in the principal amount of $36,000,000; Repurchase Agreement with
Morgan Stanley Dean Witter & Co. in the principal amount of $180,000,000;
Repurchase Agreements (2) with Goldman Sachs & Co. in the principal amounts of
$118,567,000 and $325,000,000; (d) the Corporate Bond Fund held the following
securities: Bear Stearns corporate obligation in the principal amount of
$400,000; and Merrill Lynch & Co., Inc. corporate obligation in the principal
amount of $1,500,000; (e) the Intermediate Bond Master Portfolio held the
following securities: Bear Stearns & Company corporate obligation in the
principal amount of $1,500,000; and Lehman Brothers Holdings medium term note in
the principal amount of $2,000,000; (f) the Asset Allocation Fund held the
following securities: Morgan Stanley Group, Inc. common stock in the amount of
$1,400,719; Bear Stearns & Co. medium term note in the principal amount of
$1,100,000; and Paine Webber Group medium term note in the principal amount of
$1,250,000; (g) the Blue Chip Master Portfolio held the following security:
Morgan
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<PAGE> 463
Stanley Dean Witter Discover & Co. common stock in the amount of $12,299,844;
(h) the International Equity Fund held the following security: Repurchase
Agreement with Paine Webber, Inc. in the amount of $5,784,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns
Co., Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc.,
Dean Witter Reynolds, Inc., and Paine Webber are considered to be regular
brokers and dealers of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the descriptions of such
investments in the Prospectuses.
Bank Certificates of Deposit, Bankers' Acceptances and Time
Deposits. Certificates of deposit, bankers' acceptances and time deposits are
eligible investments for each Fund as described in the Funds' Prospectuses,
except that the National Municipal Bond Fund and California Municipal Bond Fund
may not purchase time deposits. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' Acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Certificates of Deposit and Bankers Acceptances
may only be purchased from domestic or foreign banks and financial institutions
having total assets at the time of purchase in excess of $2.5 billion (including
assets of both domestic and foreign branches). Time deposits are non-negotiable
deposits maintained at a banking institution for a specified period of time at a
specified interest rate. Obligations issued by the International Bank for
Reconstruction and Development, the Asian Development Bank or the Inter-American
Development Bank are not permissible investments for the Intermediate Bond and
Blue Chip Master Portfolios and Asset Allocation Fund.
Instruments issued by foreign banks or financial institutions
may be subject to investment risks that are different in some respects than the
risks associated with instruments issued by those U.S. domestic issuers. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which may
be made and interest rates which may be charged. In addition, the profitability
of the banking industry is dependent largely upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an
important part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels of
reserves, limited in the amount which they can loan to a single borrower, and
subject to other regulations designed to promote financial soundness. However,
such laws and regulations do not necessarily apply to foreign bank obligations.
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<PAGE> 464
Commercial Paper and Short-Term Notes. The investment policies
of the Funds permit investment in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Except as noted below with respect to variable and floating rate instruments,
issues of commercial paper and short-term notes will normally have maturities of
less than 9 months and fixed rates of return, although such instruments may have
maturities of up to one year.
Commercial paper and short-term notes will consist of issues
rated at the time of purchase A-2 or higher by Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors Service,
Inc. ("Moody's"), or similarly rated by another nationally recognized
statistical rating organization ("NRSRO") in the case of purchases by each Fund
other than the Capital Income and U.S. Government Securities Funds, and A-1 or
better by S&P, Prime-1 by Moody's or similarly rated by another NRSRO in the
case of purchases by the Capital Income and U.S. Government Securities Funds; or
if unrated, will be determined by Bank of America or Wellington Management to be
of comparable quality under procedures established by the particular Board.
Other Investment Companies. In connection with the management of
their daily cash position, each Fund (including the Intermediate Bond and Blue
Chip Master Portfolios) may invest in the securities of other investment
companies (including money market mutual funds advised by Bank of America) whose
investment objectives are consistent with those of the Fund. Each Fund is also
permitted to invest the greater of 5% of their respective net assets or $2.5
million. As a shareholder of another investment company, a Fund would bear along
with other shareholders, its pro-rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that the Fund bears directly in connection with its
own operations. The Aggressive Growth Fund may also acquire shares of closed-end
investment companies, including companies that invest in foreign issuers, but
only in furtherance of its investment objective. The International Equity Fund
may acquire shares of open and closed-end investment companies.
The 1940 Act generally prohibits each 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 Funds and any other investment company advised by the
investment adviser or sub-adviser.
Repurchase Agreements. Each Fund is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to such
agreements, a 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. Repurchase agreements maturing in more
than seven days are considered illiquid investments and investments in such
repurchase agreements along with any other illiquid securities will not exceed
15% of the value of the net assets of each Fund. The Funds are not permitted to
enter into repurchase agreements with
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<PAGE> 465
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 a Fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase agreements
will be held by a custodian or sub-custodian of the Fund or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will
be required to deliver instruments the value of which is 102% of the repurchase
price (excluding accrued interest), provided that notwithstanding such
requirement, the adviser or sub-adviser shall require that the value of the
collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, shall be equal to or greater than the
resale price (including interest) provided in the agreement. If the seller
defaulted on its repurchase obligation, a 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 particular
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans by a Fund under the 1940 Act.
U.S. Government Obligations. Each 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. Government would provide financial support
to U.S. Government sponsored instrumentalities if it is not obligated to do so
by law.
Variable and Floating Rate Instruments. As described in their
Prospectuses, the Aggressive Growth Fund, Short-Term Government, U.S. Government
Securities, National Municipal Bond Fund, California Municipal Bond Fund, Asset
Allocation Fund, Flexible Income Fund, International Equity Fund, Intermediate
Bond Master Portfolio and Blue Chip Master Portfolio may acquire variable and
floating rate instruments including with respect to the Asset Allocation Fund,
Blue Chip and Intermediate Bond Master Portfolios, master demand notes. The
actual yield on variable and floating rate instruments varies not only as a
result of variations in the lives of the underlying securities, but also as a
result of changes in prevailing interest rates. Such instruments are frequently
not rated by credit rating agencies. However, in determining the
creditworthiness of unrated variable and floating rate instruments and their
eligibility for purchase by a 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 a 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
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<PAGE> 466
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.
Municipal Securities. The U.S. Government Securities, Short-Term
Government and Asset Allocation Funds and Intermediate Bond Master Portfolio may
invest in Municipal Securities. The two principal classifications of Municipal
Securities are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue service such as the user of the facility being
financed. Private activity bonds held by the Funds are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
Municipal Securities are debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular federal income tax.
The U.S. Government Securities, Short-Term Government and
Asset Allocation Funds and the Intermediate Bond Master Portfolio may also
invest in "moral obligation" securities, which are normally issued by special
purpose public authorities. If the issuer of moral obligation securities is
unable to meet its debt service obligations from current revenues, it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
The California Municipal Bond, National Municipal Bond, U.S.
Government Securities, Short-Term Government and Asset Allocation Funds and the
Intermediate Bond Master Portfolio may purchase short-term Tax Anticipation
Notes, Bond Anticipation Notes, Revenue Anticipation Notes and other forms of
short-term tax-exempt loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. Those Funds may also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's, S&P, Fitch IBCA, Inc. ("Fitch IBCA") and Duff & Phelps
Credit Rating Co.
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<PAGE> 467
("D&P") represent their opinions as to the quality of Municipal Securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate and rating may have different yields while Municipal Securities of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease
to be rated or its rating may be reduced. The investment adviser will consider
such an event in determining whether a Fund should continue to hold the
obligation.
An issuer's obligations under its Municipal Securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the federal Bankruptcy Code, and laws,
if any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. The power or ability of an issuer to meet
its obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities issued after August 15, 1986 (August 31, 1986 in the case of certain
bonds), the issuer must comply with certain rules formerly applicable only to
"industrial development bonds" which, if the issuer fails to observe them, could
cause interest on the Municipal Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of
Municipal Securities may be less available than about corporations, a class of
whose securities is registered under the Securities Exchange Act of 1934.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to federal
tax legislation passed in 1986, interest on certain private activity bonds must
be included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the Fund's Prospectus under "Tax
Information.") Proposals to further restrict or eliminate the tax benefits of
municipal securities, while pending or if enacted, might materially adversely
affect the availability of Municipal Securities for investment by the particular
Fund and the liquidity and value of the Fund. In such an event, the particular
Fund would re-evaluate its investment objective and policies and consider
changes in its structure or possible dissolution. Moreover, with respect to
Municipal Securities issued by the State of California, Pacific Horizon cannot
predict what legislation, if any, may be proposed in California.
Stand-By Commitments. The California Municipal Bond Fund and
National Municipal Bond Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in their respective portfolios. Under a "stand-by
commitment," a dealer agrees to purchase from the particular Fund, at the Fund's
option, specified Municipal Securities at a specified price. "Stand-by
commitments" acquired by a Fund may also be referred to in this Statement of
Additional Information as "put" options.
The amount payable to the particular Fund upon its exercise of
a "stand-by commitment" is normally (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which the Fund paid on
their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. A "stand-by commitment" may be sold,
transferred or assigned by the Fund only with the instrument involved.
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<PAGE> 468
The Funds expect that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Funds may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held by a Fund will not exceed 1/2
of 1% of the value of its total assets calculated immediately after each
"stand-by commitment" is acquired.
Each Fund intends to obtain "stand-by commitments" only from
dealers, banks and broker-dealers which, in the investment adviser's opinion,
present minimal credit risks. A Fund's reliance upon the credit of these
dealers, banks and broker-dealers is secured by the value of the underlying
Municipal Securities that are subject to a commitment.
Each Fund would acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a "stand-by commitment"
would not affect the valuation or assumed maturity of the underlying Municipal
Securities, which would continue to be valued in accordance with the ordinary
method of valuation employed by the Fund. "Stand-by commitments" which would be
acquired by a Fund would be valued at zero in determining net asset value. Where
a Fund paid any consideration directly or indirectly for a "stand-by
commitment," its cost would be reflected as unrealized depreciation for the
period during which the commitment was held by the Fund.
Convertible Securities. The Capital Income Fund, Flexible
Income Fund and International Equity Fund may invest in convertible securities.
Convertible securities entitle the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible securities
mature or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities for a Fund, the investment
adviser or sub-adviser will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the underlying stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Fund as to issuers; and whether the
securities are rated by Moody's, S&P, D&P or Fitch IBCA 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
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<PAGE> 469
stock approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying stock while holding fixed income securities.
The Funds may convert Convertible Securities during periods
when market conditions are unfavorable for their disposition or as a result of
developments such as the issuer's call or a decline in the market liquidity for
such Convertible Securities. The securities obtained upon the conversion may be
retained for temporary periods of not greater than two months after conversion,
and during such periods such securities will be considered to be Convertible
Securities for purposes of complying with this policy. Conversions may also
occur when necessary to permit orderly disposition of the investment (for
example, where a more substantial market exists for the underlying security than
for a relatively thinly traded Convertible Security) or when a Convertible
Security reaches maturity or has been called for redemption.
Asset-Backed and Mortgage-Related Securities. The Short-Term
Government Fund, Flexible Income Fund, Intermediate Bond Master Portfolio, Asset
Allocation Fund and U.S. Government Securities Fund may purchase mortgage-backed
securities representing an undivided interest in a pool of mortgages that are
secured by entities, including but not limited to, the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), commercial banks, trusts,
financial companies, finance subsidiaries of industrial companies, savings and
loan associations, mortgage banks and investment banks. These securities are in
most cases pass-through instruments, through which the holder receives a share
of all interest and principal payments from the mortgages underlying the
security, net of certain fees. The average life of a mortgage-backed security
varies with the underlying mortgage instruments, which have maximum maturities
of 40 years. The average life is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as the result
of prepayments, mortgage refinancings or foreclosure. Mortgage prepayment rates
are affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments.
There are a number of important differences among the
agencies, instrumentalities and sponsored enterprises of the U.S. Government
that issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the GNMA include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by the FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned,
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Bank, and do not
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constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
The U.S. Government Securities Fund and Short-Term Government
Fund may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S. Government
agencies, instrumentalities, or sponsored enterprises including FNMA and FHLMC,
or by trusts formed by private originators of, or investors in, mortgage loans.
In general, CMOs and REMICs are debt obligations of a legal entity that are
collateralized by, and multiple class pass-through securities represent direct
ownership interests in, a pool of residential mortgage loans or mortgage
pass-through securities (the "Mortgage Assets"), the payments on which are used
to make payments on the CMOs or multiple pass-through securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Fund does not intend to purchase residual
interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of principal
will be made on any class of sequential pay CMOs or REMIC Certificates until all
other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest
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priority on each payment date after interest due has been paid to all classes
entitled to receive interest currently. Shortfalls, if any, are added to the
amount payable on the next payment date. The PAC Certificate payment schedule is
taken into account in calculating the final distribution date of each class of
PAC. In order to create PAC tranches, one or more tranches generally must be
created that absorb most of the volatility in the underlying Mortgage Assets.
These tranches tend to have market prices and yields that are much more volatile
than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally guarantees
ultimate collection of all principal of the related mortgage loans without
offset or deduction. FHLMC also guarantees timely payment of principal on
certain Pcs, referred to as "Gold Pcs."
The Flexible Income Fund, Asset Allocation Fund, Intermediate
Bond Master Portfolio, Short-Term Government Fund and U.S. Government Securities
Fund may also invest in non-mortgage backed securities including interests in
pools of receivables, such as motor vehicle installment purchase obligations and
credit card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities may also be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Non-mortgage backed securities may not be issued
or guaranteed by the U.S. Government or its agencies or instrumentalities;
however, the payment of principal and interest on such obligations may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution (such as a bank or insurance company)
unaffiliated with the issuers of such securities.
The purchase of non-mortgage backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in the respective obligations only by filing a financing statement and
by having the servicer of the obligations, which is usually the originator, take
custody thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset- backed securities. Also, although most of the
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle
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owner the right to assert against the holder of the owner's obligation certain
defenses such owner would have against the seller of the motor vehicle. The
assertion of such defenses could reduce payments on the related asset-backed
securities. Insofar as credit card receivables are concerned, credit card
holders are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such holders the right to set off certain
amounts against balances owed on the credit card, thereby reducing the amounts
paid on such receivables. In addition, unlike most other asset-backed
securities, credit card receivables are unsecured obligations of the cardholder.
The development of non-mortgage backed securities is at an
early stage compared to mortgage backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for mortgage
backed securities issued by certain private organizations and non-mortgage
backed securities is not as well developed as that for mortgage backed
securities guaranteed by government agencies or instrumentalities. Bank of
America intends to limit its purchases for the Flexible Income Fund of mortgage
backed securities issued by certain private organizations and non-mortgage
backed securities to securities that are readily marketable at the time of
purchase.
Zero Coupon Securities. The California Municipal Bond Fund and
National Municipal Bond Fund may invest in zero coupon securities which pay no
cash income and are sold at substantial discounts from their value at maturity.
When held to maturity, their entire income, which consists of accretion of
discount, comes from the difference between the purchase price and their value
at maturity.
The discount varies, depending on the time remaining until
maturity or cash payment date, prevailing interests rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon and delayed interest securities are generally more volatile and more
likely to respond to changes in interest rates than the market prices of
securities having similar maturities and credit quality that pay interest
periodically. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on such security (other than tax-exempt original issue discount from a
zero coupon security) that accrues that year, even though the holder receives no
cash payments of interest during the year. Zero coupon securities are subject to
greater market value fluctuations from changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest (cash).
Reverse Repurchase Agreements. As described in the
Prospectuses, each Fund (except the Short-Term Government Fund) is permitted to
borrow funds for temporary purposes by entering into reverse repurchase
agreements with such financial institutions as banks and broker-dealers in
accordance with the investment limitations described therein. Whenever a Fund
enters into a reverse repurchase agreement, it will segregate liquid assets such
as cash, U.S. Government securities or other liquid high grade securities having
a value equal to the repurchase price (including accrued interest), and Bank of
America or Wellington Management will subsequently continuously monitor the
account for maintenance of such equivalent value. Each 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 a Fund under the 1940
Act.
Options Trading. A 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
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securities or to various stock indices. In addition, a 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. The International Equity Fund
may also invest in futures for the purposes of adjusting country exposure,
hedging or income enhancement.
Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Regardless of how much the market price
of the underlying security, index or currency increases or decreases, the option
buyer's risk is limited to the amount of the original premium paid for the
purchase of the option. However, options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. A listed call option for a particular
security or amount of currency gives the purchaser of the option the right to
buy from a clearing corporation, and a writer has the obligation to sell to the
clearing corporation the underlying security or currency amount at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security or currency. The premium paid to the writer is
in consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security or amount of currency at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security or currency. In contrast to an option on a
particular security, an option on a stock index provides the holder with the
right to make or receive a cash settlement upon exercise of the option. The
amount of this settlement will be equal to the difference between the closing
price of the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple. Unlisted options are not
subject to the protections afforded purchases of options listed by the Options
Clearing Corporation, which performs the obligations of its members who fail to
do so in connection with the purchase or sale of options. Furthermore, it is the
position of the staff of the SEC that over-the-counter options are illiquid. To
the extent that a 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.
A 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 a Fund in connection with its purchase of put options will be
limited to the premiums paid by the Fund for the options plus any transaction
costs. A gain or loss may be wholly or partially offset by a change in the value
of the underlying security which the Fund owns.
In the case of a call option on a security, the option is
"covered" if a 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 a Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if a 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
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of loss should the price of the security decline. Unlike one who owns securities
not subject to an option, the covered option writer has no control over when it
may be required to sell its securities, since it may be assigned an exercise
notice at any time prior to the expiration of its obligation as a writer.
If a 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, a 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 a Fund purchases a put or call option, the premium paid
by it is recorded as an asset of the Fund. When a Fund writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Fund is included in the liability section of the statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a 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 a 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 a 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 Funds may engage in futures contracts. The
International Equity Fund may also invest in futures for the purposes of
adjusting country exposure, hedging or income enhancement. A futures contract is
a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the value of a specified obligation or stock index (which
assigns relative values to the common stocks included in the index) at the close
of the last trading day of the contract and the price at which the futures
contract is originally struck. No physical delivery of the underlying securities
is normally made. A 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 that 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 a 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 a 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, a
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, a Fund involved will experience either a loss or gain on the futures
contract which will not be completely offset by movements in the price of the
securities which are the subject of the hedge.
It is also possible that, where a 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 a Fund may decline. If this
occurred, a 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.
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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 Funds intend to purchase or sell futures contracts only
on exchanges or boards of trade where there appear to be active secondary
markets, there is no assurance that a liquid secondary market on any exchange or
board of trade will exist for any particular contract or at any particular time.
In such event, it may not be possible to close a futures investment position,
and in the event of adverse price movements, a 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 a Fund the right (but not the
obligation), for a specified price, to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium, to
sell a futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, the Fund becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Fund will incur
transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on the same
series. There is no guarantee that such closing transactions can be effected. A
Fund's ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
Interest Rate and Currency Swaps. Inasmuch as interest rate
and currency swaps are entered into for hedging purposes or are offset by a
segregated account as described below, the Flexible Income Fund and Bank of
America believe that swaps do not constitute senior securities as defined in the
1940 Act and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions. The net amount of the excess, if any, of the Flexible
Income Fund's obligations over its entitlements with respect to each interest
rate or currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (i.e., securities rated in one of the top
three ratings categories by Moody's or Standard & Poor's), or, if unrated,
deemed by Bank of America to be of comparable credit quality, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by the Fund's custodian. The Flexible Income
Fund will not enter into any interest rate or currency swap unless the credit
quality of the unsecured
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senior debt or the claims-paying ability of the other party thereto is
considered to be investment grade by Bank of America. If there were a default by
the other party to such a transaction, the Flexible Income Fund would have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standard swap documentation. As a result, the swap market has become relatively
liquid in comparison with the markets for other similar instruments which are
traded in the interbank market.
Foreign Investments. In considering whether to invest in the
securities of a foreign company, Bank of America or Wellington Management
considers such factors as the characteristics of the particular company,
differences between 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 U.S. Government Securities Fund, Short-Term Government
Fund, Flexible Income Fund, Intermediate Bond Master Portfolio, Asset Allocation
Fund and International Equity Fund may invest in securities of foreign issuers
that may or may not be publicly traded in the United States. The Aggressive
Growth Fund may invest up to 20% of its total assets, either directly, or
indirectly through investments in American Depositary Receipts ("ADRs") and
closed-end investment companies, in securities issued by foreign companies
wherever organized. The Capital Income Fund may invest up to 15% of its total
assets in Eurodollar Convertible Securities that are convertible into or
exchangeable for foreign equity securities represented by listed ADRs. Interest
and dividends on such Eurodollar securities are payable in U.S. dollars outside
of the United States.
ADRs are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars;
the underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. The extent to which a Fund will be invested in foreign
companies and ADRs will fluctuate from time to time within the limits stated in
the Prospectuses depending on the investment adviser's or sub-adviser's
assessment of prevailing market, economic and other conditions.
The International Equity Fund may purchase debt obligations
issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their agencies,
authorities or instrumentalities. The International Equity Fund and the Flexible
Income Fund may purchase debt obligations issued or guaranteed by supranational
entities organized or supported by several national governments, such as the
International Bank for Reconstruction and Development (the "World Bank"), the
Inter-American Development Bank, the Asian Development Bank and the European
Investment Bank. The International Equity Fund also may purchase debt
obligations of foreign corporations or financial institutions, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers),
Samurai bonds (yen-denominated bonds sold in Japan by non-Japanese issuers and
Euro bonds (bonds not issued in the country (and possibly currency of the
country) of the issuer). The International Equity Fund's investments will be
allocated among securities denominated in the 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
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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
International Equity Fund.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Funds endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of a Fund is uninvested and no
return is earned thereon. The inability of the Funds to make intended security
purchases due to settlement problems could cause a Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Funds due to subsequent
declines in value of the portfolio securities, or, if a 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 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.
The expected introduction of a single currency, the European
Currency Unit ("Euro"), on January 1, 1999 for participating nations in the
European Economic and Monetary Union presents unique uncertainties, including
whether the payment and operational systems of banks and other financial
institutions will be ready by the scheduled launch date; the legal treatment of
certain outstanding financial contracts after January 1, 1999 that refer to
existing currencies rather than the Euro; the establishment of exchange rates
for existing currencies and the Euro; and the creation of suitable clearing and
settlement payment systems for the new currency. These or other factors,
including political and economic risks, could cause market disruptions before or
after the introduction of the Euro, and could adversely affect the value of
securities held by the Funds.
Bonds of Supranational Entities. The Flexible Income Fund and
International Equity Fund may invest in bonds of supranational entities. A
supranational entity is an entity established or financially supported
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by the national governments of one or more countries to promote reconstruction
or development. Examples of supranational entities include, among others, the
World Bank, the European Economic Community, the European Coal and Steel
Community, the European Investment Bank, the Inter-American Development Bank,
the Export-Import Bank and the Asian Development Bank. The risks associated with
investments in foreign issuers are described above under "Foreign Investments."
Obligations issued by the International Bank for Reconstruction and Development,
the Asian Development Bank or the Inter-American Development Bank are not
permissible investments for the Asset Allocation, Blue Chip and Intermediate
Bond Master Funds.
When-Issued Securities, Forward Commitments and Delayed
Settlements. All Funds may agree to purchase securities on a "when-issued," and
"forward commitment" basis. All Funds except for the Asset Allocation Fund,
Intermediate Bond and Blue Chip Master Portfolios may agree to purchase
securities on a "delayed settlement" basis. When a Fund agrees to purchase
securities on a "when-issued," "forward commitment" or "delayed settlement"
basis, its custodian will set aside cash or liquid portfolio securities equal to
the amount of the commitment in a separate account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment. In such a case,
a 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 a 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 Funds do not intend
to engage in these transactions for speculative purposes but primarily in order
to hedge against anticipated changes in interest rates. Because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described, its liquidity and the ability of the investment adviser or
sub-adviser to manage it may be affected in the event the forward commitments,
commitments to purchase when-issued securities and delayed settlements ever
exceeded 25% of the value of a Fund's assets.
A Fund will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss.
When a Fund engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Fund's incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued
purchase, forward commitment to purchase securities, or a delayed settlement and
any subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
Securities Lending. The Aggressive Growth, Capital Income,
U.S. Government Securities, Flexible Income, Asset Allocation and International
Equity Funds and Blue Chip Master Portfolio may lend securities as described in
their Prospectuses. Such loans will be secured by cash or securities of the U.S.
Government and its agencies and instrumentalities, and additionally in the case
of the Aggressive Growth Fund by an irrevocable letter of credit issued by a
U.S. commercial bank that is a member of the Federal Reserve System or the
Federal Deposit Insurance Corporation and has total assets in the excess of $1.5
billion. The
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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. In the case of the Capital
Income and U.S. Government Securities Funds, cash collateral may be invested in
short-term U.S. Government securities, and in the case of the Aggressive Growth,
International Equity and Flexible Income Funds, cash collateral may be invested
in short-term U.S. Government securities, certificates of deposit, other
high-grade, short-term obligations or interest-bearing cash equivalents.
Additionally, the International Equity Fund may also invest cash collateral in
U.S. Treasury notes. Although voting rights, or rights to consent, attendant to
securities loaned pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by a fund if a material event
affecting the investment is to occur.
Illiquid Securities. It is possible that unregistered
securities purchased by a Non-Feeder Fund, in reliance upon Rule 144A under the
Securities Act of 1933 (the "1933 Act") could have the effect of increasing the
level of such Fund's illiquidity to the extent that qualified institutional
buyers become, for a period, uninterested in purchasing these securities.
ADDITIONAL INFORMATION - FLEXIBLE INCOME FUND, CAPITAL INCOME FUND, NATIONAL
MUNICIPAL BOND FUND AND CALIFORNIA MUNICIPAL BOND FUND
In general, investments in high yielding fixed-income
securities are subject to a significant risk of a change in the credit rating or
financial condition of the issuing entity. Investments in high yielding
fixed-income securities of medium or lower quality are also likely to be subject
to greater market fluctuation and to greater risk of loss of income and
principal due to default than investments of higher rated fixed-income
securities. Such high yielding securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities, which react more to fluctuations in the general level of interest
rates. The Fund seeks to reduce risk to the investor by diversification, credit
analysis and attention to current developments in trends of both the economy and
financial markets. However, while diversification reduces the effect on the Fund
of any single investment, it does not reduce the overall risk of investing in
lower rated securities.
In seeking to attain the investment objective of the Fund, the
investment adviser may consider both the relative risks and potential returns of
higher-rated and lower-rated securities. As a result, the Fund may hold
higher-rated fixed-income securities when the differential in return between
lower-rated and higher-rated securities narrows and the investment adviser
believes that the risk of loss of income and principal may be substantially
reduced with only a relatively small reduction in potential capital appreciation
and yield. The relative proportions of the types of securities in the Fund may
vary from time to time according to the prevailing and projected market and
economic conditions and other factors.
ADDITIONAL INFORMATION - AGGRESSIVE GROWTH FUND
The selection of investments for the Aggressive Growth Fund is
the result of a continuous study of trends in industries and companies, earning
power, growth features and other investment criteria. Fund holdings will consist
primarily of common stocks of companies that the investment adviser expects will
experience above-average growth in earnings and price. Most of these companies
will be smaller-capitalized organizations that have limited product lines,
markets and financial resources and are dependent upon a limited management
group. Examples of possible investments include emerging growth companies
employing new
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technology, initial public offerings of companies offering high growth
potential, or other corporations offering good potential for high growth in
market value. The securities of smaller companies may be subject to more abrupt
or erratic market movements than larger, more established companies both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
The Aggressive Growth Fund's net asset value per share is subject to rapid
substantial fluctuation because greater risk is assumed in order to seek maximum
growth.
Securities owned by the Aggressive Growth Fund may be traded
only in the over-the-counter market or on a regional securities exchange, may be
listed only in the quotation service commonly known as the "pink sheets," and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Aggressive Growth Fund
of portfolio securities, to meet redemptions or otherwise, may require the Fund
to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
Custodial Receipts and Participation Interest. Securities
acquired by the California Municipal Bond Fund and National Municipal Bond Fund
may be in the form of custodial receipts evidencing rights to receive a specific
future interest payment, principal payment or both on certain Municipal
Securities. Such obligations are held in custody by a bank on behalf of holders
of the receipts. These custodial receipts are known by various names, including
"Municipal Receipts", "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATs") and "Municipal Zero-Coupon Receipts." Participation
interests that the California Municipal Bond Fund and National Municipal Bond
Fund and the Flexible Income Fund may acquire give the Funds an undivided
interest in the security or securities involved. Participation interests may
have fixed, floating or variable rates of interest, and will have remaining
maturities of thirteen months or less as determined in accordance with the
regulations of the SEC (although the securities held by the issuer may have
longer maturities). If a participation interest is unrated, the investment
adviser will have determined that the interest is of comparable quality to those
instruments in which each Fund may invest pursuant to guidelines approved by the
particular Board. For certain participation interests, each Fund will have the
right to demand payment, on not more than 30 days' notice, for all or any part
of its participation interest, plus accrued interest. As to these instruments,
each Fund intends to exercise its right to demand payment as needed to provide
liquidity, to maintain or improve the quality of its investment portfolio or
upon a default (if permitted under the terms of the instrument).
ADDITIONAL INFORMATION - ALL FUNDS
The investment adviser's or sub-adviser's own investment
portfolios may include bank certificates of deposit, bankers' acceptances,
corporate debt obligations, equity securities and other investments any of which
may also be purchased by a Fund. The Funds may also invest in securities,
interests or obligations of companies or entities which have a deposit, loan,
commercial banking or other business relationship with Bank of America or any of
its affiliates (including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of securities purchased by a Fund).
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company has no reason to believe
that the information summarized herein is not correct in all material
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respects, this information has not been independently verified for accuracy or
thoroughness by the Company. Rather, the information presented herein has been
culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California, available as of the date of this Statement of Additional
Information. Further, the estimates and projections presented herein should not
be construed as statements of fact. They are based upon assumptions which may be
affected by numerous factors and there can be no assurance that target levels
will be achieved. While the Company has not independently verified such
information, it has no reason to believe that such information is not correct in
all material respects.
ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1995-96. Pressures on the State's budget
in the late 1980's and early 1990's were caused by a combination of external
economic conditions and growth of the largest General Fund Program - K-14
education, health, welfare and corrections -- at rates faster than the revenue
base. These pressures could continue as the State's overall population and
school age population continue to grow, and as the State's corrections program
responds to a "Three Strikes" law enacted in 1994, which requires mandatory life
prison terms for certain third-time felony offenders. In addition, the State's
health and welfare programs are in a transition period as result of recent
federal and State welfare reform initiatives.
As a result of these factors and others, and especially
because a severe recession between 1990-94 reduced revenues and increased
expenditures for social welfare programs, from the late 1980's until 1992-93,
the State had period of significant budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in its budget reserve, the Special
Fund for Economic Uncertainties ("SFEU") approaching $2.8 billion at its peak at
June 30, 1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance, including significant cuts in health and welfare
program expenditures; transfers of program responsibilities and funding from the
State to local governments; transfers of about $3.6 billion in annual local
property tax revenues from other local governments to local school districts,
thereby reducing State funding for schools under Proposition 98; and revenue
increases (particularly in the 1991-92 Fiscal Year budget), most of which were
for a short duration.
Despite these budget actions, as noted, the effects of the
recession led to large, unanticipated deficits in the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated deficit
was so large that it was impractical to budget to retire such deficits in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over to the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year Plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish cash
reserves, the State Controller issued registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and mandates
from court orders. Available funds were used to make
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constitutionally-mandated payments, such as debt service on bonds and warrants.
Between July 1 and September 4, 1992, when the budget was adopted, the State
Controller issued a total of approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was
forced to rely on external debt markets to meet its cash needs, as a succession
of notes and revenue anticipation warrants were issued in the period from June
1992 to July 1994, often needed to pay previously maturing notes or warrants.
These borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier. The
last and largest of these borrowings was $4.0 billion of revenue anticipation
warrants which were issued in July, 1994 and matured on April 25, 1996.
1995-96 AND 1996-97 FISCAL YEARS
With the end of the recession, and a growing economy beginning
in 1994, the State's financial condition improved markedly in the last two
fiscal years, with a combination of better than expected revenues, slowdown in
growth of social welfare programs, and continued spending restraint based on the
actions taken in earlier years. The last of the recession-induced budget
deficits was repaid, allowing the SFEU to post a positive cash balance for only
the second time in the 1990's, totaling $281 million as of June 30, 1997. The
State's cash position also returned to health, as cash flow borrowing was
limited to $3 billion in 1996-97, and no deficit borrowing has occurred over the
end of these last two fiscal years.
In each of these two fiscal years, the State budget contained
the following major features:
1. Expenditures for K-14 schools grew significantly, as new
revenues were directed to school spending under Proposition 98. This new money
allowed several new education initiatives to be funded, and raised K-12
per-pupil spending to around $4,900 by Fiscal Year 1996-97. See "STATE FINANCES"
- - Proposition 98".
2. The Budgets restrained health and welfare spending levels,
holding to reduced benefit levels enacted in earlier years, and attempted to
reduce General Fund spending by calling for greater support from the federal
government. The State also attempted to shift to the federal government a larger
share of the cost of incarceration and social services for illegal aliens. Some
of these efforts were successful, and federal welfare reform also helped, but as
a whole the federal support never reached the levels anticipated when the
budgets were enacted. These funding shortfalls were, however, filled by the
strong revenue collections, which exceeded expectations.
3. General Fund support for the University of California and
the California State University system grew by an average of 5.2 percent and 3.3
percent per year, respectively, and there were no increases in student fees.
4. General Fund support for the Department of Corrections grew
as needed to meet increased prison population. No new prisons were approved for
construction, however.
5. There were no tax increases, and starting January 1, 1997,
there was a 5 percent cut in corporate taxes. The suspension of the Renter's Tax
Credit, first taken as a cost-saving measure during the recession, was
continued.
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As noted, the economy grew strongly during these fiscal years,
and as a result, the General Fund took in substantially greater tax revenues
(about $2.2 billion in 1995-96 and $1.6 billion in 1996-97) than were initially
planned when the budgets were enacted. These additional funds were largely
directed to school spending as mandated by Proposition 98, and to make up
shortfalls from reduced federal health and welfare aid. As a result, there was
no dramatic increase in budget reserves, although the accumulated budget deficit
from the recession years was finally eliminated in the past fiscal year.
1997-98 FISCAL YEAR
Background
On January 9, 1997, the Governor released his proposed budget
for the 1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget
estimated General Fund revenues and transfers of about $50.7 billion, and
proposed expenditures of $50.3 billion, resulting in an anticipated budget
reserve in the SFEU of about $550 million. The Proposed Budget included
provisions for a further 10% cut in Bank and Corporation Taxes, which ultimately
was not enacted by the Legislature.
At the time of the Department of Finance May Revision,
released on May 14, 1997, the Department of Finance increased it revenue
estimate for the upcoming fiscal year by $1.3 billion, in response to the
continued strong growth in the State's economy. Budget negotiations continued
into the summer, with major issues to be resolved including final agreement on
State welfare reform, an increase in State employee salaries and consideration
of the tax cut proposed by the Governor.
In May, 1997, action was taken by the California Supreme Court
in an ongoing lawsuit, PERS v. Wilson, below, which made final a judgment
against the State requiring an immediate payment from the General Fund to the
Public Employees Retirement Fund ("PERF") to make up certain deferrals in annual
retirement fund contributions which had been legislated in earlier years for
budget savings, and which the courts found to be unconstitutional. On July 30,
1997, following a direction from the Governor, the Controller transferred $1.235
billion from the General Fund to the PERF in satisfaction of the judgment,
representing the principal amount of the improperly deferred payments from
1995-96 and 1996-97. In late 1997, the plaintiffs filed a claim with the State
Board of Control for payment of interest under the Court rulings in an amount of
$308 million. The Department of Finance has recommended approval of this claim.
If approved by the Board of Control, the claim would become part of an annual
claims bill in the 1998-99 Budget.
FISCAL YEAR 1997-98 BUDGET ACT
Following the transfer of funds to the PERF, final agreement
was reached within a few weeks on the welfare package and remainder of the
budget. The Legislature passed the Budget Bill on August 11, 1997, along with
numerous related bills to implement its provisions. Agreement was not finally
reached at that time on one aspect of the budget plan, concerning the Governor's
proposal for a comprehensive educational testing program.
On August 18, 1997, the Governor signed the Budget Act, but
vetoed about $314 million of specific spending items, primarily in health and
welfare and education areas from both the General Fund and
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Special Funds. Approximately $200 million of this amount was restored in
subsequent legislation passed before the end of the Legislative Session.
The Budget Act anticipated General Fund revenues and transfers
of $52.5 billion (a 6.8 percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from the 1996-97 levels).
The Budget Act also included Special Fund expenditures of $14.4 billion (as
against estimated Special Fund revenues of $14 billion), and $2.1 billion of
expenditures from various Bond Funds. Subsequent to the Budget Act enactment,
the State undertook its normal cash flow borrowing program by issuing $3 billion
of Notes which mature June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98, reflecting strong
revenues which have exceeded initial budgeted amounts. Part of the nearly $1.75
billion in increased spending was allocated to prior fiscal years. Funds were
provided to fully pay for the cost-of-living- increase component of Proposition
98, and to extend the class size reduction and reading initiatives. See "STATE
FINANCES Proposition 98.
2. The Budget Act reflected the $1.228 billion pension case
judgment payment, and brings funding of the State's pension contribution back to
the quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Continuing the third year of a four-year "compact" which
the Administration had made with higher education units, funding from the
General Fund for the University of California and the California State
University system was increased by approximately 6 percent ($121 million and
$107 million, respectively). There was no increase in student fees.
4. Because of the effect of the pension payment, most other
State programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing
generally the grant levels from prior years, as part of the initial
implementation of the new CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on
uncertain federal budget actions. About $300 million in general funds, already
included in the federal FY 1997 and 1998 budgets, were included in the Budget
Act, to offset incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million. The Legislature has not made any decision on
conformity of State tax laws to the recent federal tax reduction bill; a
comprehensive review of this subject is expected to take place next year.
At the end of the Legislative Session on September 13, 1997,
the Legislature passed and the Governor later signed several bills encompassing
a coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial
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courts, with the State to assume greater financial responsibility. The
Department of Finance estimates that the major impact of these fiscal reforms
will occur in Fiscal Year 1998-99 and subsequent years.
The Department of Finance released updated estimates for the
1997-98 Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal
Year Budget Proposal. Total revenues and transfers are projected at $52.9
billion, up approximately $360 million from the Budget Act projection.
Expenditures for the fiscal year are expected to rise approximately $200 million
above the original Budget Act, to $53 billion. The balance in the budget
reserve, the SFEU, is projected to be $329 million at June 30, 1998, compared to
$461 million at June 30, 1997.
PROPOSED 1998-99 FISCAL YEAR BUDGET
On January 9, 1998, the Governor released his Budget Proposal
for the 1998-99 Fiscal Year (the "Governor's Budget"). The Governor's Budget
projects total General Fund revenues and transfers of $55.4 billion, a $2.5
billion increase (4.7 percent) over revised 1997-98 revenues. This revenue
increase takes into account reduced revenues of approximately $600 million from
the 1997 tax cut package, but also assumes approximately $500 million additional
revenues primarily associated with capital gains realizations. The Governor's
Budget notes, however, that capital gains activity and the resultant revenues
derived from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at
$55.4 billion, an increase of $2.4 billion (4.5 percent) above the revised
1997-98 level. The Governor's Budget includes funds to pay the interest claim
relating to the court decision on pension fund payments PERS v. Wilson (See
"1997-98 Fiscal Year" above). The Governor's Budget projects that the State will
carry out its normal intra-year cash flow external borrowing in 1998-99, in an
estimated amount of $3 billion. The Governor's Budget projects that the budget
reserve, the SFEU, will be $296 million at June 30, 1999, slightly lower than
the projected level at June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7
billion, and Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal
Year. A total of $3.2 billion of bond fund expenditures are also proposed.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange
County, California and its Investment Pool (the "Pool") filed for bankruptcy
under Chapter 9 of the United States Bankruptcy Code. The subsequent
restructuring led to the sale of substantially all of the Pool's portfolio and
resulted in losses estimated to be approximately $1.7 billion (or approximately
22% of amounts deposited by the Pool investors). Approximately 187 California
public entities -- substantially all of which are public agencies within the
county -- had various bonds, notes or other forms of indebtedness outstanding.
In some instances the proceeds of such indebtedness were invested in the Pool.
In April, 1996, the County emerged from bankruptcy after
closing on a $900 million recovery bond transaction. At that time, the County
and its financial advisors stated that the County had emerged from the
bankruptcy without any structural fiscal problems and assured that the County
would not slip back into bankruptcy. However, for many of the cities, schools
and special districts that lost money in the County portfolio, repayment remains
contingent on the outcome of litigation which is pending against investment
firms
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and other finance professionals. Thus, it is impossible to determine the
ultimate impact of the bankruptcy and its aftermath on these various agencies
and their claims.
In May 1996, a taxpayer action was filed against the City of San
Diego ("San Diego") and the San Diego Convention Center Expansion Authority (the
"Authority") challenging the validity of a lease revenue financing involving a
lease (the "San Diego Lease") having features similar to the leases commonly
used in California lease-based financings such as certificates of participation
(the "Rider Case"). The Rider Case plaintiffs alleged that voter approval is
required for the San Diego Lease (a) since the lease constituted indebtedness
prohibited by Article XVI, Section 18 of the California Constitution without a
two-thirds vote of the electorate, and (b) since San Diego was prohibited under
its charter from issuing bonds without a two-thirds vote of the electorate, and
the power of the Authority, a joint powers' authority, one of the members of
which is San Diego, to issue bonds is no greater than the power of San Diego. In
response to San Diego's motion for summary judgment, the trial court rejected
the plaintiffs' arguments and ruled that the San Diego Lease was
constitutionally valid and that the Authority's related lease revenue bonds did
not require voter approval. The plaintiffs appealed the matter to the Court of
Appeals for the Fourth District, which affirmed the validity of the San Diego
Lease and of the lease revenue bond financing arrangements. The plaintiffs then
filed a petition for review with the California State Supreme Court, and, on
April 2, 1997, the Court granted the plaintiff's petition for review. A decision
from the Supreme Court is expected to be decided within the 1998 calendar year.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.
Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could produce the adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain Debt Obligations in the
California Municipal Bond Fund may be obligations of issuers which rely in whole
or in part on California State revenues for payment of these obligations.
Property tax revenues and a portion of the State's general fund surplus are
distributed to counties, cities and their various taxing entities and the State
assumes certain obligations theretofore paid out of local funds. Whether and to
what extent a portion of the State's general fund will be distributed in the
future to counties, cities and their various entities is unclear.
HEALTH CARE LEGISLATION. Certain Debt Obligations in the
California Municipal Bond Fund may be obligations which are payable solely from
the revenues of health care institutions. Certain provisions under California
law may adversely affect these revenues and, consequently, payment on those Debt
Obligations.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation. California
law now provides that the State of California shall selectively contract with
hospitals to provide acute inpatient services to Medi-Cal patients. Medi-Cal
contracts currently apply only to acute inpatient services. Generally, such
selective contracting is made on a flat per diem payment basis for all services
to Medi-Cal beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions or limitations
may be imposed on payment for services rendered to MediCal beneficiaries in the
future.
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Under this approach, in most geographical areas of California,
only those hospitals which enter into a MediCal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured Debt Obligations, the State Treasurer will
issue debentures payable out of a reserve fund established under the insurance
program or will pay principal and interest on an unaccelerated basis from
unappropriated State funds. At the request of the Office of Statewide Health
Planning and Development, Arthur D. Little, Inc. prepared a study in December
1983, to evaluate the adequacy of the reserve fund established under the
insurance program and based on certain formulations and assumptions found the
reserve fund substantially underfunded. In September of 1986, Arthur D. Little,
Inc. prepared an update of the study and concluded that an additional 10%
reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method. In March of 1990, Arthur D. Little, Inc. prepared a further review of
the study and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
MORTGAGES AND DEEDS. Certain Debt Obligations in the
California Municipal Bond Fund may be obligations which are secured in whole or
in part by a mortgage or deed of trust on real property. California has five
principal statutory provisions which limit the remedies of a creditor secured by
a mortgage or deed of trust. Two statutes limit the creditor's right to obtain a
deficiency judgment, one limitation being based on the method of foreclosure and
the other on the type of debt secured. Under the former, a deficiency judgment
is barred when the foreclosure is accomplished by means of a nonjudicial
trustee's sale. Under the latter, a deficiency judgment is barred when the
foreclosed mortgage or deed of trust secures certain purchase money obligations.
Another California statute, commonly known as the "one form of action" rule,
requires creditors secured by real property to exhaust their real property
security by foreclosure before bringing a personal action against the debtor.
The fourth statutory provision limits any deficiency judgment obtained by a
creditor secured by real property following a judicial sale of such property to
the excess of the outstanding debt over the fair value of the property at the
time of the sale, thus preventing the creditor from obtaining a large deficiency
judgment against
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the debtor as the result of low bids at a judicial sale. The fifth statutory
provision gives the debtor the right to redeem the real property from any
judicial foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold that
the private-right-of-sale proceedings violate the due process requirements of
the Federal or State Constitutions, consequently preventing an issuer from using
the nonjudicial foreclosure remedy described above.
Certain Debt Obligations in the California Municipal Bond Fund
may be obligations which finance the acquisition of single family home mortgages
for low and moderate income mortgagors. These obligations may be payable solely
from revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
PROPOSITION 13. Certain of the Debt Obligations may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, California voters approved an
amendment to the California Constitution known as Proposition 13, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA was to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues.
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Section 1 of Article XIIIA, as amended, limits the maximum ad
valorem tax on real property to 1% of full cash value to be collected by the
counties and apportioned according to law. The 1% limitation does not apply to
ad valorem taxes or special assessments to pay the interest and redemption
charges on any bonded indebtedness for the acquisition or improvement of real
property approved by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under 'full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement
Article XIIIA provides that notwithstanding any other law, local agencies may
not levy any ad valorem property tax except to pay debt service on indebtedness
approved by the voters prior to July 1, 1978, and that each county will levy the
maximum tax permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be adjusted annually to reflect changes in consumer prices,
population, and certain services provided by these entities. Article XIIIB also
provides that if these entities' revenues in any year exceed the amounts
permitted to be spent, the excess is to be returned by revising tax rates or fee
schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment and
statute called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote
of both houses, with the Governor's concurrence -- to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98
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also contains provisions transferring certain State tax revenues in excess of
the Article XIII B limit to K-14 schools.
During the recession years of the early 1990s, General Fund
revenues for several years were less than originally projected, so that the
original Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school funding will not be in jeopardy over repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1 -- on the June
5, 1990 ballot as Proposition 111 -- was approved by the voters and took effect
on July 1, 1990. Among a number of important provisions, Proposition 111
recalculated spending limits for the State and for local governments, allowed
greater annual increases in the limits, allowed the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduced the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removed the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts in
the base calculation for the next year, limited the amount of State tax revenue
over the limit which would be transferred to school districts and community
college districts, and exempted increased gasoline taxes and truck weight fees
from the State appropriations limit. Additionally, Proposition 111 exempted from
the State appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative provided
the following:
1. Requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or ordinance adopted by a
two-thirds vote of the governmental entity's legislative body and by a majority
vote of the electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for
other than general governmental purposes) imposed by a local governmental entity
be approved by a two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by Article XIIIA;
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5. Prohibits the imposition of transaction taxes and sales
taxes on the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the electorate within two
years of the adoption of the initiative;
7. Requires that, in the event a local government fails to
comply with the provisions of this measure, a reduction in the amount of
property tax revenue allocated to such local government occurs in an amount
equal to the revenues received by such entity attributable to the tax levied in
violation of the initiative; and
8. Permits these provisions to be amended exclusively by the
voters of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino,
(Sept. 28, 1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12
Cal.4th 344e, the California Supreme Court upheld the constitutionality of
Proposition 62's popular vote requirements for future taxes, and specifically
disapproved of the City of Woodlake decision as erroneous. The Court did not
determine the correctness of the City of Westminster decision, because that case
appeared distinguishable, was not relied on by the parties in Guardino, and
involved taxes not likely to still be at issue. It is impossible to predict the
impact of the Supreme Court's decision on charter cities or on taxes imposed in
reliance on the City of Woodlake case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996,
would make the Guardino decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995. The
California State Senate passed the Bill on May 16, 1996 and it is currently
pending in the California State Assembly. It is not clear whether the Bill, if
enacted, would be constitutional as a non-voted amendment to Proposition 62 or
as a non-voted change to Proposition 62's operative date.
PROPOSITION 218. On November 5, 1996,the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and
XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of local governments to levy and collect both
existing and future taxes, assessments, fees and charges. Proposition 218 became
effective on November 6, 1996. The Sponsors are unable to predict whether and to
what extent Proposition 218 may be held to be constitutional or how its terms
will be interpreted and applied by the courts. However, if upheld, Proposition
218 could substantially restrict certain local
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governments' ability to raise future revenues and could subject certain existing
sources of revenue to reduction or repeal, and increase local government costs
to hold elections, calculate fees and assessments, notify the public and defend
local government fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter
approval for the imposition, extension or increase of general taxes and
two-thirds voter approval for the imposition, extension or increase of special
taxes, including special taxes deposited into a local government's general fund.
Proposition 218 also provides that any general tax imposed, extended or
increased without voter approval by any local government on or after January 1,
1995 and prior to November 6, 1996 shall continue to be imposed only if approved
by a majority vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
Rossi v. Brown, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of
Proposition 218, by its terms, applies to all local taxes, assessments, fees and
charges and is not limited to local taxes, assessments, fees and charges that
are property related.
Article XIII D of Proposition 218 adds several new
requirements making it generally more difficult for local agencies to levy and
maintain "assessments" for municipal services and programs. "Assessment" is
defined to mean any levy or charge upon real property for a special benefit
conferred upon the real property.
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for
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fees or charges for sewer, water and refuse collection services, no property
related fee or charge may be imposed or increased without majority approval by
the property owners subject to the fee or charge or, at the option of the local
agency, two-thirds voter approval by the electorate residing in the affected
area.
PROPOSITION 87. On November 8, 1988, California voters
approved Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989.
Other Investment Information. The investment adviser believes
that it is likely that sufficient California Municipal Securities will be
available to satisfy the investment objective, policies and limitations of the
California Municipal Bond Fund, and to enable the Fund to invest at least 50% of
its total assets in California Municipal Securities at the close of each of its
fiscal quarters. In meeting this investment policy the Fund may invest in
Municipal Securities which are private activity bonds (including industrial
development bonds under prior law) the interest on which is subject to the 26%
to 28% federal alternative minimum tax applicable to individuals and the 20%
federal alternative minimum tax and the environmental tax applicable to
corporations. The environmental tax applicable to corporations is imposed at the
rate of .12% on the excess of the corporations modified federal alternative
minimum taxable income over $2,000,000. Investments in such securities, however,
will not exceed under normal market conditions 20% of the Fund's total assets
when added together with any taxable investments held by the Fund. Moreover,
although the Fund does not presently intend to do so on a regular basis, it may
invest more than 25% of its assets in Municipal Securities the interest on which
is paid solely from revenues of similar projects if such investment is deemed
necessary or appropriate by the Fund's investment adviser in light of the Fund's
investment objective and policies. To the extent that the Fund's assets are
concentrated in Municipal Securities payable from revenues on similar projects,
the Fund will be subject to the peculiar risks presented by such projects to a
greater extent than it would be if the Fund's assets were not so concentrated.
If Pacific Horizon's Board of Directors, after consultation
with the investment adviser, should for any reason determine that it is
impracticable to invest at least 50% of the Fund's total assets in California
Municipal Bond Fund at the close of each quarter of the Fund's taxable year, the
Board would re-evaluate the Fund's investment objective and policies and
consider changes in its structure and name or possible dissolution.
OTHER INVESTMENT LIMITATIONS
A Fund's or Master Portfolio's investment objectives are
non-fundamental and may be changed without a vote of shareholders. The
prospectus for each Fund or Master Portfolio summarizes certain fundamental
policies that may not be changed with respect to a Fund or Master Portfolio
without the affirmative vote of the holders of the majority of the Fund's or
Master Portfolio's outstanding shares (as defined below under "Additional
Information - Miscellaneous"). Similarly, the following enumerated additional
fundamental policies may not be changed with respect to each Fund or Master
Portfolio or without such a vote of shareholders.
Each Fund of the Company or Master Portfolio of Master Trust
may not:
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1. Underwrite any issue of securities within the meaning of
the Securities Act of 1933 (the "1933 Act") except when it might technically be
deemed to be an underwriter either (a) in connection with the disposition of a
portfolio security, or (b) in connection with the purchase of securities
directly from the issuer thereof in accordance with its investment objective.
2. Purchase or sell real estate, except a Fund may purchase
securities of issuers which deal or invest in real estate and may purchase
securities which are secured by real estate or interests in real estate.
3. Purchase or sell commodities, except that a Fund may to the
extent consistent with its investment objective, invest in securities of
companies that purchase or sell commodities or which invest in such programs,
and purchase and sell options, forward contracts, futures contracts, and options
on futures contracts. This limitation does not apply to foreign currency
transactions including without limitation forward currency contracts.
4. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that: (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state or territory
of the United States, or any of their agencies, instrumentalities or political
subdivisions, and (b) notwithstanding this limitation or any other fundamental
investment limitation, assets may be invested in the securities of one or more
diversified management investment companies to the extent permitted by the 1940
Act and the rules and regulations thereunder.
5. Make loans, except to the extent permitted by the 1940 Act.
6. Borrow money, issue senior securities or mortgage, pledge
or hypothecate its assets except to the extent permitted under the 1940 Act.
7. Purchase securities (except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities) of any one issuer if,
as a result, more than 5% of its total assets will be invested in the securities
of such issuer or it would own more than 10% of the voting securities of such
issuer, except that (a) up to 25% of its total assets may be invested without
regard to these limitations and (b) a Fund's assets may be invested in the
securities of one or more diversified management investment companies to the
extent permitted by the 1940 Act.
In addition, each Fund or Master Portfolio is subject to the
following non-fundamental policies and limitations, which may be changed without
the vote of shareholders:
Each Fund of the Company and Portfolio of the Master Trust may
not:
1. Sell securities short, maintain a short position, or
purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions. For this purpose, a deposit or
payment by a Fund for initial or maintenance margin in connection with futures
contracts is not considered to be the purchase or sale of a security on margin.
2. Purchase securities of other investment companies except as
permitted by the 1940 Act.
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The National Municipal Bond Fund, Aggressive Growth Fund and
California Municipal Bond Fund may not:
1. Purchase securities of companies for the purpose of
exercising control.
The National Municipal Bond Fund, International Equity Fund,
Flexible Income Fund, Intermediate Bond Master Portfolio, Blue Chip Master
Portfolio, Asset Allocation Fund, U.S. Government Securities Fund, Capital
Income Fund and California Municipal Bond Fund may not:
1. Write or sell puts, calls, straddles, spreads or
combinations thereof except that a Fund may acquire standby commitments and may
enter into futures contracts and options in accordance with their investment
objectives.
***
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
***
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how
such shares are priced, is included in the Prospectuses. Additional information
is contained below. The net asset value of each of the Feeder Funds is equal to
such Fund's pro rata share of the total investments and other assets of its
corresponding Master Portfolio, less any liabilities with respect to such Feeder
Fund, including each Feeder Fund's pro rata share of the Master Portfolio's
liabilities.
VALUATION OF THE AGGRESSIVE GROWTH FUND
Portfolio securities are valued at the last sales price on the
securities exchange on which such securities are primarily traded or at the last
sales price obtained from NASDAQ. Securities not listed on an exchange or
NASDAQ, or securities for which there were no transactions, are valued at the
average of the most recent bid and asked prices. Restricted securities,
securities for which market quotations are not readily available, and other
assets are valued at fair value, using methods determined under the supervision
of the Board of the Company. Valuation of options is described above under
"Investment Objectives and Policies--Options Trading." Short-term securities
with remaining maturities of sixty days or less are valued at amortized cost,
which approximates market value. The amortized cost method involves valuing a
security at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost.
VALUATION OF THE CALIFORNIA MUNICIPAL BOND FUND AND THE NATIONAL MUNICIPAL BOND
FUND
The California Municipal Bond Fund's and National Municipal
Bond Fund's assets are valued for purposes of pricing sales and redemptions by
an independent pricing service (the "Service") approved by the Board. When, in
the judgment of the Service, quoted bid prices for portfolio securities are
readily available and are representative of the bid side of the market, these
investments are valued at the mean between quoted bid
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prices (as obtained by the Service from dealers in such securities) and asked
prices (as calculated by the Service based upon its evaluation of the market for
such securities). Other investments (which constitute a majority of the
California Municipal Bond Fund's securities) are carried at fair value as
determined by the Service, based on methods which include consideration of
yields or prices of municipal bonds of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. The
Service may also employ electronic data processing techniques and matrix systems
to determine value. Short-term securities with remaining maturities of 60 days
or less are valued at amortized cost, which approximates market value. The
amortized cost method involves valuing a security at its cost on the date of
purchase or, in the case of securities purchased with more than 60 days
remaining to maturity and to be valued on the amortized cost basis only during
the final 60 days of its maturity, the market value on the 61st day prior to
maturity. Thereafter, the Company assumes a constant amortization to maturity of
the difference between the principal amount due at maturity and cost.
VALUATION OF CAPITAL INCOME FUND, U.S. GOVERNMENT SECURITIES FUND, SHORT-TERM
GOVERNMENT FUND, INTERNATIONAL EQUITY FUND, ASSET ALLOCATION FUND AND FLEXIBLE
INCOME FUND
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers. Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the particular Board. Debt securities with remaining maturities
of 60 days or less are valued on an amortized cost basis unless the Board
determines that such basis does not represent fair value at the time. Under this
method, such securities are valued initially at cost on the date of purchase or,
in the case of securities purchased with more than 60 days to maturity, are
valued at their market or fair value each day until the 61st day prior to
maturity. Thereafter, absent unusual circumstances, a constant proportionate
amortization of any discount or premium is assumed until maturity of the
security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely solely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the particular Board. Valuation of options is
described above under "Investment Objectives and Policies - Options Trading."
VALUATION OF THE INTERMEDIATE BOND AND BLUE CHIP MASTER PORTFOLIOS
Except for debt securities held by the Intermediate Bond and
Blue Chip Master Portfolios with remaining maturities of 60 days or less, assets
for which market quotations are available are valued as follows: (a) each listed
security is valued at its closing price obtained from the primary exchange on
which the security is listed, or, if there were no sales on that day, at its
last reported current closing price; (b) each unlisted security is valued at the
last current bid price (or last current sale price, as applicable) obtained from
NASDAQ; (c) United States Government and agency obligations are valued based
upon bid quotations from the Federal Reserve Bank for identical or similar
obligations; and (d) short-term money market instruments (such as certificates
of deposit, bankers' acceptances and commercial paper) are most often valued by
bid quotations or by reference to bid quotations of available yields for similar
instruments of issuers with similar credit ratings. The Board of
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<PAGE> 498
Trustees of Master Trust has determined that the values obtained using the
procedures described in (c) and (d) represent the fair values of the securities
valued by such procedures. Most of these prices are obtained by PFPC, Inc.
("PFPC") from a service that collects and disseminates such market prices. Bid
quotations for short-term money market instruments reported by such service are
the bid quotations reported to it by major dealers in such instruments.
Valuation of options is described above under "Investment
Objectives and Policies--Options Trading."
Debt securities held by the Intermediate Bond and Blue Chip
Master Portfolios with remaining maturities of 60 days or less are valued on the
basis of amortized cost, which provides stability of net asset value. Under this
method of valuation, the security is initially valued at cost on the date of
purchase or, in the case of securities purchased with more than 60 days
remaining to maturity and to be valued on the amortized cost basis only during
the final 60 days of its maturity, the market value on the 61st day prior to
maturity. Thereafter Master Trust assumes a constant proportionate amortization
in value until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security, unless the Board
of Trustees determines that amortized cost no longer represents fair value.
Master Trust will monitor the market value of these investments for the purpose
of ascertaining whether any such circumstances exist.
When approved by the Board of Trustees of Master Trust,
certain securities may be valued on the basis of valuations provided by an
independent pricing service when such prices are believed to reflect the fair
market value of such securities. These securities may include those that have no
available recent market value, have few outstanding shares and therefore
infrequent trades, or for which there is a lack of consensus on the value, with
quoted prices covering a wide range. The lack of consensus might result from
relatively unusual circumstances such as no trading in the security for long
periods of time, or a company's involvement in merger or acquisition activity,
with widely varying valuations placed on the company's assets or stock. Prices
provided by an independent pricing service may be determined without exclusive
reliance on quoted prices and may take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data.
In the absence of an ascertainable market value, assets are
valued at their fair value as determined using methods and procedures reviewed
and approved by the Board of Trustees of Master Trust.
SUPPLEMENTARY PURCHASE INFORMATION - A SHARES
For the purpose of applying the Right of Accumulation or
Letter of Intent privileges available to certain shareholders as described in
the Prospectuses, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) although more than one
beneficiary is involved; or "a qualified group" which has been in existence for
more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount, provided
that the purchases are made through a central administrator or a single dealer,
or by other means which result in economy of sales effort or expense. A
"qualified group" must have more than 10 members, must be available to arrange
for group meetings between representatives of the Funds and the members, and
must be able to arrange for mailings to members at reduced
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<PAGE> 499
or no cost to the Distributor. The value of shares eligible for the Right of
Accumulation privilege may also be used as a credit toward completion of the
Letter of Intent privilege. Such shares will be valued at their offering price
prevailing on the date of submission of the Letter of Intent. Distributions on
shares held in escrow pursuant to the Letter of Intent privilege will be
credited to the shareholder, but such shares are not eligible for a Fund's
Exchange Privilege.
The computation of the hypothetical offering price per share
of A Shares for each Fund based on the value of the California Municipal Bond,
Aggressive Growth, U.S. Government Securities, Capital Income, Intermediate
Bond, Blue Chip, Asset Allocation, Flexible Income, National Municipal Bond,
Short-Term Government and International Equity Funds' net assets on February 28,
1998, and each Fund's A Shares outstanding on such date is as follows:
<TABLE>
<CAPTION>
U.S.
California Aggressive Government Capital Intermediate Blue Chip Fund
Municipal Growth Fund Securities Income Fund Bond Fund
Bond Fund Fund
--------- ----
<S> <C> <C> <C> <C> <C> <C>
Net Assets $213,984,976 $218,607,479 $71,101,297 $391,142,965 $41,874,875 $288,256,185
Outstanding
Securities 28,026,050 9,654,371 7,465,492 22,641,045 4,322,374 9,640,840
Net Asset
Value Per
Share $7.64 $22.64 $9.52 $17.28 $9.69 $29.90
Sales
Charge, 4.50
percent of
offering
price (4.71
percent of
net asset
value per
share) $0.36 $1.07 $0.45 $0.81 $0.46 $1.41
Maximum
Offering
Price to
Public $8.00 $23.71 $9.97 $18.09 $10.15 $31.31
</TABLE>
<TABLE>
<CAPTION>
Asset Flexible National Short-Term International
Allocation Income Fund Municipal Bond Government Equity Fund
Fund Fund Fund
---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Assets $49,239,679 $37,105,146 $14,262,911 $32,685,244 $41,642,883
Outstanding
Securities 2,299,985 2,259,885 1,355,717 3,259,919 3,947,858
Net Asset
Value Per
Share $21.41 $16.42 $10.52 $10.03 $10.55
Sales
Charge, 4.50
percent of
offering
price (4.71
percent of
net asset
value per
share) $1.01 $0.77 $0.50 $0.47 $0.50
Maximum
Offering
Price to
Public $22.42 $17.19 $11.02 $10.50 $11.05
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: A, B AND K SHARES
A, B and K Shares in the Capital Income Fund, U.S. Government
Securities Fund, California Municipal Bond Fund, Intermediate Bond Fund, Blue
Chip Fund, Asset Allocation Fund, Flexible Income Fund, International Equity
Fund, Short- Term Government Fund (A and B Shares Only) and National Municipal
Bond Fund for which orders for wire redemption are received on a business day
before the close of regular trading hours on the New York Stock Exchange
(currently 4:00 p.m. Eastern time) will be redeemed as of the close of regular
trading hours on such Exchange and the proceeds of redemption (less any
applicable contingent deferred sales charge on B Shares) will normally be wired
in federal funds on the next business day to the commercial bank specified by
the investor on the Account Application (or other bank of record on the
investor's file with the Transfer Agent). To qualify to use the wire redemption
privilege, the payment for Fund shares must be drawn on, and redemption proceeds
paid to, the same bank and account as designated on the Account Application (or
other bank of record as described above). If the proceeds of a particular
redemption are to be wired to another bank, the request must be in writing and
signature guaranteed. Shares for which orders for wire redemption are received
after the close of regular trading hours on the New York Stock Exchange or on a
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<PAGE> 500
non-business day will be redeemed as of the close of trading on such Exchange on
the next day on which shares of the particular Fund are priced and the proceeds
(less any applicable contingent deferred sales charge on B Shares) will normally
be wired in federal funds on the next business day thereafter. Redemption
proceeds (less any applicable contingent deferred sales charge on B Shares) 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 8968, Wilmington, Delaware 19899-8968. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectuses. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
A, B and K Share investors in the U.S. Government Securities
Fund, California Municipal Bond Fund, Flexible Income Fund and National
Municipal Bond Fund redeeming by check generally will be subject to the same
rules and regulations that commercial banks apply to checking accounts, although
the election of this privilege creates only a shareholder-transfer agent
relationship with the Transfer Agent. An investor may deliver Checks directly to
the Transfer Agent, PFPC, P.O. Box 8968, Wilmington, Delaware 19899-8968, in
which case the proceeds will be mailed, wired or made available at the Transfer
Agent on the next business day. The Check delivered to the Transfer Agent must
be accompanied by a properly executed stock power form on which the investor's
signature is guaranteed as described in the Funds' Prospectuses. After
clearance, Checks will be returned to the investor.
Because dividends on the U.S. Government Securities Fund,
California Municipal Bond Fund, Flexible Income Fund and National Municipal Bond
Fund are declared daily, Checks should not be used to close an account, as a
small balance is likely to result.
Check redemption may be modified or terminated at any time by
the Company or the Transfer Agent upon notice to shareholders.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION: ALL FUNDS
In General. As described in the Prospectuses, both A and B
Shares may be purchased directly by the public, by clients of Bank of America
through their qualified trust and agency accounts, or by clients of securities
dealers, financial institutions (including banks) and other industry
professionals, such as investment advisers, accountants and estate planning
firms that have entered into service and/or selling agreements with the
Distributor. (The Distributor, such institutions and professionals are
collectively referred to as "Service Organizations.") K Shares may only be
purchased by: (a) businesses or other organizations that participate in the
Daily Advantage(R) Program sponsored by Bank of America; (b) individuals
investing proceeds from a redemption of shares from another open-end investment
company on which such individual paid a front-end sales load if (i) such
redemption occurred within 30 days prior to the purchase order, and (ii) such
other open-end investment company was not distributed and advised by PDI and
Bank of America, respectively, or their affiliates; (c) accounts opened for IRA
rollovers from a 401(k) plan in which the assets were held in any Pacific
-45-
<PAGE> 501
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open; (d) accounts under Section 403(b)(7) of the Code, (e) deferred
compensation plans under Section 457 of the Code and (f) certain other
retirement plans. Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the
Funds and described in the respective Prospectuses. Purchase orders will be
effected only on business days. SRF Shares of the Funds are available for the
investment of retirement funds held in Eligible Retirement Accounts as described
in the SRF Share Prospectus.
A Shares in each Fund are sold with a sales load, except for
such exemptions as noted in the Prospectuses. The exemptions to the imposition
of a sales load on A Shares are due to the nature of the investors and/or the
reduced sales efforts that will be necessary in obtaining such investments. A
Shares are also subject to a shareholder servicing fee. B Shares are sold
without a front-end sales load, but are subject to a contingent deferred sales
charge and an ongoing distribution and shareholder servicing fee. K Shares are
offered at net asset value with neither a front-end sales charge, nor a
contingent deferred sales charge. K Shares are subject to a distribution plan
fee and an administrative and shareholder services fee. SRF Shares in each Fund
are sold without a sales load. SRF Shares are subject to Shareholder Servicing
fees. Service Organizations may be paid by the Distributor at the Company's
expense for shareholder services. Depending on the terms of the particular
account, Bank of America, its affiliates, and Service Organizations also may
charge their customers fees for automatic investment, redemption and other
services provided. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Bank of America or the particular Service Organization is
responsible for providing information concerning these services and any charges
to any customer who must authorize the purchase of Fund shares prior to such
purchase.
Persons or organizations wishing to purchase Company shares
through their accounts at Bank of America or a Service Organization should
contact such entity directly for appropriate instructions.
Initial purchases of A, B or K shares into a new account may
not be made by wire. However, persons wishing to make a subsequent purchase of
Company shares into an already existing account by wire should telephone the
Transfer Agent at (800) 346-2087. The investor's bank must be instructed to wire
federal funds to the Transfer Agent, referring in the wire to the particular
Fund in which such investment is to be made; the investor's portfolio account
number; and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for
IRAs, payment of which could require the liquidation of shares. B Shares
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.
-46-
<PAGE> 502
Investors should be aware that if they have selected the
TeleTrade Privilege, any request for a wire redemption will be effected as a
TeleTrade transaction through the Automated Clearing House (ACH) system unless
more prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
All or a portion of the SRF Shares held in a Fund can be
redeemed (sold) at any time. The redemption price will be the net asset value
per share next determined following receipt by the Company of a shareholder's
satisfactorily completed instructions. The value of an SRF Share upon redemption
may be more or less than the value when purchased, depending upon the net asset
value of an SRF Share of the Fund at the time of the redemption. Redemptions are
subject to determination by the Company that the investment instruction form or
the redemption request and other distribution documents, if any, are complete.
Payment for SRF Shares redeemed will normally be made to the
custodian of the shareholder within one business day of receipt by the Company
of redemption instructions, but in no event will payment be made more than seven
days after receipt of redemption instructions except in the circumstances
described below.
Exchange Privileges for A, B and K Shares. Shareholders in the
Pacific Horizon Family of Funds have an exchange privilege whereby they may
exchange all or part of their shares for like shares of another investment
portfolio in the Pacific Horizon Family of Funds or for like shares of an
investment portfolio of Time Horizon Funds. In addition, shareholders of the
Funds may exchange B Shares for Pacific Horizon Shares of the Pacific Horizon
Prime Fund without the payment of any contingent deferred sales charge at the
time the exchange is made. By use of the exchange privilege, the investor
authorizes the Transfer Agent to act on telephonic, telegraphic or written
exchange instructions from any person representing himself 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, F
and G below will be made on the basis of the relative net asset values per share
of the investment portfolios involved in the transaction.
A. A Shares of any investment portfolio purchased with a sales load, as
well as additional shares acquired through reinvestment of dividends or
distributions on such shares, may be exchanged without a sales load for other A
Shares of any other investment portfolio in the Pacific Horizon Family of Funds
or for like shares of the Time Horizon Funds.
B. B Shares acquired pursuant to an exchange transaction will continue
to be subject to a contingent deferred sales charge. However, B Shares that have
been acquired through an exchange of B Shares may be exchanged for other B
Shares or for like shares of Time Horizon Funds without the payment of a
contingent deferred sales charge at the time of exchange. Except as noted in C
below, in determining the holding period for calculating the contingent deferred
sales charge payable on redemption of B Shares, the holding period of the shares
originally held will be added to the holding period of the shares acquired
through exchange.
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<PAGE> 503
C. B Shares may be exchanged for Y Shares of the Pacific Horizon Prime
Fund ("Prime Shares") without paying a contingent deferred sales charge. At the
time of such an exchange, a shareholder's holding period for calculating the
contingent deferred sales charge payable on redemption of B Shares of a Fund
will cease to accumulate. If the shareholder subsequently exchanges the shares
back into B Shares of a Fund, the holding period accumulation on the shares will
resume as of the time when the exchange was made into the Prime Shares. In the
event that a shareholder wishes to redeem Prime Shares acquired by exchange for
B Shares of a Fund, the contingent deferred sales charge applicable to the
accumulated B Shares of a Fund holding period prior to the exchange into the
Prime Shares will be charged.
D. A or B 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 or B Shares, as the case
may be, 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.
E. 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.
F. A Shares of any investment portfolio in the Pacific Horizon Family
of Funds purchased without a sales load may be exchanged without a sales load
for A Shares in any other portfolio in the Pacific Horizon Family of Funds.
G. 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.
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<PAGE> 504
Exchange Privileges for Eligible Retirement Accounts. SRF
Shares held in any Fund may be exchanged for SRF Shares of any other Fund. SRF
Shares held in any Fund may also be exchanged for A Shares in any other taxable,
non-money market Fund offered by the Company or a Time Horizon Fund without
incurring the front-end sales charge otherwise applicable on sales of A Shares
("Eligible Exchange Shares"). SRF Shares or Eligible Exchange Shares may be
exchanged for Pacific Horizon Shares of the Pacific Horizon Prime Fund. Eligible
Exchange Shares may be further exchanged for A Shares in any taxable, non- money
market fund offered by the Company or a Time Horizon Fund without incurring the
front-end sales charges otherwise applicable, or for SRF Shares offered by a
Fund. SRF Shares or Eligible Exchange Shares held in an IRA account for which a
Participant's surviving spouse is the beneficiary may continue to be exchanged
for SRF Shares or A Shares as described above. By use of the exchange privilege,
the investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange instructions from any person representing himself or herself to
be the investor and believed by the Transfer Agent to be genuine. The Transfer
Agent's records of such instructions are binding. The exchange privilege may be
modified or terminated at any time upon notice to shareholders.
The following transactions are examples of transactions that
will interrupt the maintenance of Eligible Retirement Account status for a
Participant's account and will terminate the account's ability to engage in the
exchange privileges described above:
1. SRF Shares or Eligible Exchange Shares held in an Eligible Pension
or Profit Sharing Trust or a SEP IRA, which are transferred by the Participant
into a personal rollover IRA, will no longer be eligible to exchange such shares
for A Shares without incurring the front-end sales load applicable to A Shares;
2. SRF Shares or Eligible Exchange Shares held in an IRA account for
which a Participant's surviving beneficiary upon transfer out of the decedent's
account is other than the Participant's spouse will no longer be eligible to
exchange such shares for A Shares without incurring the front-end sales load
applicable to A Shares; and
3. SRF Shares or Eligible Exchange Shares which are liquidated in their
entirety by the Participant into a Certificate of Deposit will no longer be
eligible to exchange such shares for A Shares without incurring the front-end
sales load applicable to A Shares.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of
America or a Service Organization, certain purchasers may arrange with the
Company's custodian for sub-accounting services paid by the Company without
direct charge to the purchaser.
A "business day" for purposes of processing share purchases
and redemptions received by the Transfer Agent is a day on which the New York
Stock Exchange is open for trading. In 1998, the holidays on which the New York
Stock Exchange is closed are: New Year's Day, Dr. Martin Luther King, Jr. 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
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<PAGE> 505
regulations of the SEC; (b) the New York Stock Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC. (The Company
may also suspend or postpone the recordation of the transfer of its shares upon
the occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The contingent
deferred sales charge with respect to B Shares is not charged on involuntary
redemptions. The Company will not require a shareholder to redeem shares of a
Fund if the balance held of record by the shareholder is less than $500 solely
because of a decline in the net asset value of the Fund's shares. The Company
may also redeem shares involuntarily if such redemption is appropriate to carry
out the Company's responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in securities or
other property.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL - ALL FUNDS
Each Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, each Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year a Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions (including amounts derived from interest on
Municipal Securities in the case of the California Municipal Bond Fund and the
National Municipal Bond Fund) to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
particular Fund and would be eligible for the dividends received deduction in
the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
net short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss, if any), subject to certain adjustments and excluding
the excess of net long-term capital gain for the taxable year over the net
short-term capital loss for such year, if any. Each Fund will be taxed on its
undistributed investment company taxable income, if any. As stated, each Fund of
the Company intends to distribute at least 90% of its investment company taxable
income, if any, for each taxable year. To the extent such income is distributed
by a Fund (whether in cash or additional shares), it will be taxable to
shareholders as ordinary income.
Any distribution of the excess of net long-term capital gain
over net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholder has held Fund shares
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<PAGE> 506
and whether such gain is received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year. It
should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for longer than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gain is taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specific percentages of
their ordinary taxable income and capital gain net income (excess of net capital
gain over net capital loss). Each Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company that they are not subject to backup withholding or
that they are "exempt recipients."
At February 28, 1998, the U.S. Government Securities Fund had
capital loss carryovers of $9,126,726 of which $7,462,810, will expire in fiscal
2003 and $1,663,916 will expire in fiscal 2005; and the Flexible Income Fund had
capital loss carryovers of $6,284,642 of which $5,401,993 and $882,649 will
expire in fiscal 1999 and 2003, respectively. To the extent provided by the
regulations of the Code, these capital loss carryovers will be used to offset
future net realized gains on securities transactions. As such, it is probable
that the gains so offset will not be distributed to shareholders.
FEDERAL - CALIFORNIA MUNICIPAL BOND FUND AND NATIONAL MUNICIPAL BOND FUND
The California Municipal Bond Fund's and National Municipal
Bond Fund's policy is to pay each year as exempt- interest dividends
substantially all the Fund's Municipal Securities interest income net of certain
deductions. An exempt-interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of such Fund's taxable year. However, the aggregate amount of dividends so
designated by a Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by such Fund during its taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the particular Fund for such year. In order for a Fund
to pay exempt-interest dividends for any taxable year, at the close of each
quarter of its taxable year at least 50% of the aggregate value of such Fund's
assets must consist of exempt-interest obligations.
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<PAGE> 507
Exempt-interest dividends may be treated by shareholders of
the Funds as items of interest excludable from their gross income under Section
103(a) of the Code. However, each shareholder is advised to consult his or her
tax adviser with respect to whether exempt-interest dividends would retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" or a "related person" to such user with respect to facilities
financed through any of the tax-exempt obligations held by the Funds. A
"substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his or her
trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. A "related person"
includes certain related natural persons, affiliated corporations, partners and
partnerships and S corporations and their shareholders.
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry shares, equal to the percentage of the total
non-capital gain dividends distributed during the shareholder's taxable year
that are exempt-interest dividends, is not deductible for federal income tax
purposes. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six months holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
As discussed in the Prospectus for the California Municipal
Bond Fund, dividends attributable to interest on certain private activity bonds
issued after August 7, 1986 must be included by shareholders as an item of tax
preference for purposes of determining possible liability for the Federal
alternative minimum tax applicable to individuals and corporations and the
environmental tax applicable to corporations. The alternative minimum tax rate
for individuals is 26-28% and for corporations is 20%. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified alternative minimum taxable income over $2,000,000.
Income itself exempt from federal income taxation may be
considered in addition to adjusted gross income when determining whether Social
Security payments received by a shareholder are subject to federal income
taxation.
STATE - CALIFORNIA MUNICIPAL BOND FUND
As a regulated investment company, the California Municipal
Bond Fund (the "Fund") will be relieved of liability for California state
franchise and corporate income tax to the extent its earnings are distributed to
its shareholders. The Fund will be taxed on its undistributed taxable income. If
for any year the Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of the Fund's taxable income (including
interest income on California Municipal Securities for franchise tax purposes
only) may be subject to California state franchise or income tax at regular
corporate rates.
If, at the close of each quarter of its taxable year, at least
50% of the value of the total assets of a regulated investment company, or
series thereof, consists of obligations the interest on which, if held by an
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<PAGE> 508
individual, is exempt from taxation by California ("California Exempt
Securities"), then a regulated investment company, or series thereof, will be
qualified to pay dividends exempt from California state personal income tax to
its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Securities are
generally limited to California Municipal Securities and certain U.S. Government
and U.S. Possession obligations. "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which is
owned by the holders of an exclusive class or series of stock of the company.
The Fund intends to qualify under the above requirements so that it can pay
California exempt-interest dividends. If the Fund fails to so qualify, no part
of its dividends to shareholders will be exempt from the California state
personal income tax. The Fund may reject purchase orders for shares if it
appears desirable to avoid failing to so qualify.
Within 60 days after the close of its taxable year, the Fund
will notify each shareholder of the portion of the dividends paid by the Fund to
the shareholder with respect to such taxable year which is exempt from
California state personal income tax. The total amount of California
exempt-interest dividends paid by the Fund with respect to any taxable year
cannot exceed the excess of the amount of interest received by the Fund for such
year on California Exempt Securities over any amounts that, if the Fund were
treated as an individual, would be considered expenses related to tax-exempt
income or amortizable bond premium and would thus not be deductible under
federal income or California state personal income tax law. The percentage of
total dividends paid by the Fund with respect to any taxable year which
qualifies as California exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Exempt Securities held by the Fund,
such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. See "Additional Information Concerning Taxes
- - Federal - California Municipal Bond Fund" above.
To the extent, if any, dividends paid to shareholders are
derived from the excess of net long-term capital gains over net short-term
capital losses, such dividends will not constitute California exempt-interest
dividends and will generally be taxed as long-term capital gains under rules
similar to those regarding the treatment of capital gains dividends for federal
income tax purposes. See "Additional Information Concerning Taxes - Federal -
All Funds" above. Moreover, interest on indebtedness incurred by a shareholder
to purchase or carry Fund shares is not deductible for California state personal
income tax purposes if the Fund distributes California exempt-interest dividends
during the shareholder's taxable year.
The foregoing is only a summary of some of the important
California state personal income tax considerations generally affecting the Fund
and its shareholders. No attempt is made to present a detailed explanation of
the California state personal income tax treatment of the Fund or its
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of any Fund dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
the Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with
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<PAGE> 509
respect to the application of such taxes to the receipt of Fund dividends and as
to their own California state tax situation, in general.
TAXATION OF THE MASTER PORTFOLIOS
Management of the Master Portfolios corresponding to each of
the Feeder Funds intends for each Master Portfolio to be treated as a
partnership (or, in the event that a Feeder Fund is the sole investor in a
Master Portfolio, as an agent or nominee) rather than as a regulated investment
company or a corporation under the Code. Under the rules applicable to a
partnership (or an agent of nominee) under the Code, any interest, dividends,
gains and losses of the Master Portfolios will be deemed to have been reported
as income/loss (i.e., "passed through") to their investors, regardless of
whether any amounts are actually distributed by the Master Portfolios.
Each investor in a Master Portfolio will be taxed on its share
(as determined in accordance with the governing instruments of the particular
Master Portfolio) of the Master Portfolio's ordinary income and capital gains in
determining its income tax liability. The determination of such share will be
made in accordance with the Code and regulations promulgated thereunder. It is
intended that each Master Portfolio's assets, income and distributions will be
managed in such a way that an investor in a Master Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Master Portfolio.
OTHER INFORMATION
Depending upon the extent of activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities.
Except as noted above with respect to California state
personal income taxation of dividends paid by the California Municipal Bond
Fund, income distributions may be taxable to shareholders under state or local
law as dividend income even though all or a portion of such distributions may be
derived from interest on tax-exempt obligations or U.S. government obligations
which, if realized directly, would be exempt from such income taxes.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally affecting purchasers of Fund shares. No attempt is made
to present a detailed explanation of the federal income tax treatment of the
Funds or their shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential purchasers of Fund shares
should consult their tax advisers with specific reference to their own tax
situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
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<PAGE> 510
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>
William P. Carmichael 53 Director Senior Vice President, Sara Lee
808 S. Garfield Corporation (1991 to 1993); Treasurer,
Hinsdale, IL 60521 Senior Vice President and Chief Financial
Officer, Beatrice Company (1987 to
1990); Trustee, Time Horizon Fund
(registered investment company) (since
1995) Trustee, Pacific Innovations Trust
(since 1997) (registered investment
company); Trustee, 231 Funds (1993 to
1995) (registered investment company).
Edward S. Bottum 63 Director Managing Director, Chase Franklin
C/o Chase Franklin Corporation Corporation (venture capital firm) (since
100 S. Wacker Drive 1990); Trustee, Time Horizon Funds (since
Suite 1140 1995); Trustee and Chairman, Pacific
Chicago, IL 60606 Innovations Trust (since 1997) (registered
investment company ); formerly Vice
Chairman of Continental Bank N.A. (retired
1990); formerly Trustee, 231 Funds
(February 1993 to August 1995).
Robert E. Greeley 66 Director Chairman, Page Mill Asset Management (a
Page Mill Asset Management private investment company) (since 1987);
433 California Street Manager, Morgan Grenfell Small Cap Fund
Suite 900 (since 1986); Trustee, Master Investment
San Francisco, CA 94104 Trust Series I (registered investment
company) (since 1993), former Trustee,
Master Investment Trust, Series II
(registered investment company) (1993-
1997), Trustee, Time Horizon Funds
(registered investment company) (since
1995); Trustee and President, Pacific
Innovations Trust (since 1996)
(registered investment
</TABLE>
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<PAGE> 511
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
company); formerly Director, Bunker Hill
Income Securities, Inc. (from 1989 to
1994); Trustee, SunAmerica Fund Group
(previously Equitec Siebel Fund Group)
(registered investment companies) (from
1984 to 1992); formerly Director,
Manager, Corporate Investments, Hewlett
Packard Company (from 1979 to 1991).
Thomas M. Collins; 63 Director Of counsel, law firm of McDermott &
225 S. Lake Avenue Trayner; Partner of the law firm of
Suite 410 Musick, Peeler &Garrett (until April,
Pasadena, CA 91101-3005 1993); Chairman of the Board and Trustee,
Master Investment Trust, Series I
(registered investment company) (since
1993); President and Chairman of the
Board of Pacific Horizon Funds, Inc.
(1982 to August 31, 1995); Member, Fund
Directions Advisory Board (since July
1993); former Chairman of the Board and
Trustee, Master Investment Trust, Series
II (registered investment company) 1993
to April 1997; former Director, Bunker
Hill Income Securities, Inc. (registered
investment company) through 1991.
Douglas B. Fletcher 73 Vice Chairman of Chairman of the Board and Chief Executive
Fletcher Capital Advisors the Board Officer, Fletcher Capital Advisors,
Incorporated Incorporated, (registered investment
4 Upper Newport Plaza advisor) 1991 to date; Director, FCA
Suite 100, Securities, Inc. (registered
Newport Beach, CA 92660-2629 broker/dealer) 1996 to date; Partner,
Newport Partners (private venture
capital firm), 1981 to date; Chairman of
the Board and Chief Executive Officer,
First Pacific Advisors, Inc. (registered
investment adviser) and seven
</TABLE>
-56-
<PAGE> 512
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
investment companies under its
management, prior to 1983; former Allied
Member, New York Stock Exchange;
Chairman of the Board of FPA Paramount
Fund, Inc. through 1984; Chairman, TIS
Mortgage Investment Company (real estate
investment trust) (since 1988); Trustee
and a former Vice Chairman of the Board,
Claremont McKenna College; Chartered
Financial Analyst.
Cornelius J. Pings* 69 Chairman of the President, Association of American
Association of American Universities Board and Universities, (since February 1993);
1200 New York Avenue, NW President Provost (from 1982 to January 1993) and
Suite 550 Senior Vice President for Academic Affairs
Washington, DC 20005 (from 1981 to January 1993), University of
Southern California; Trustee, Master
Investment Trust, Series I (since 1995);
former Trustee, Master Investment Trust,
Series II (from 1995 to 1997); Director,
Farmers Group, Inc. (insurance company)
(since 1991).
Stephen M. Wynne 41 Vice President Executive Vice President and Chief
Executive Vice President, Accounting Officer (since 1993) and Senior
PFPC Inc. Vice President and Chief Accounting
400 Bellevue Parkway Officer (1991 to 1993), PFPC Inc.;
Wilmington, DE 19809 Executive Vice President, PFPC
International (since 1995); Vice President
and Chief Accounting Officer, PNC
Institutional Management Corp. (since 1987).
</TABLE>
- ----------
* Dr. Pings is an "interested director" of the Company as defined in the
1940 Act.
-57-
<PAGE> 513
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Jay F. Nusblatt 36 Treasurer Vice President and Director of Fund
Vice President, PFPC Inc. Accounting and Administration, PFPC Inc.
103 Bellevue Parkway (since 1993); formerly Assistant Vice
Wilmington, DE 19809 President, Fund/Plan Services, Inc. (1989 to 1993).
W. Bruce McConnel, III 54 Secretary Partner of the law firm of Drinker
1345 Chestnut Street Biddle & Reath LLP.
Philadelphia National Bank Building,
Suite 1100
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant Chief Counsel-Mutual Funds, PNC Bank
Chief Counsel-Mutual Funds, Secretary (since 1994); Associate General Counsel,
PNC Bank The Boston Company, Inc. (1992 to 1994);
1600 Market Street, General Counsel, SunAmerica Asset
28th Fl. Management Inc. (1986 to 1992).
Philadelphia, PA 19103.
J. Robert Dugan 32 Assistant Counsel-Mutual Funds, PNC Bank (since
Counsel-Mutual Funds, Secretary 1993); Associate, Drinker Biddle & Reath
PNC Bank LLP (1990 to 1993).
1600 Market Street
28th Fl.
Philadelphia, PA 19103
</TABLE>
- ----------
* "Interested Person" as defined in the Investment Company Act of 1940.
Mr. Pings is an "interested" person solely by reason of his position as
President of the Company.
The Board has an audit committee, contract review committee,
nominating committee and a valuation committee. The audit committee is
responsible for reviewing the results of the audit of the Company by its
independent public accountant. The contract review committee is responsible for
reviewing the performance of the Company's service providers in connection with
the renewal of the Company's service contracts. The nominating committee is
responsible for reviewing the credentials of proposed nominees for the Company's
Board and for selecting and nominating those directors who are not "interested
persons" (as defined in the 1940 Act) of the Company. The valuation committee is
responsible for handling issues arising out of the pricing of securities.
Each director is entitled to receive an annual fee of $50,000
plus $1,000 for each day that a director participates in all or a part of a
Board meeting; the President receives an additional $40,000 per annum for his
services as Chairman of the Board; each member of a Committee of the Board is
entitled to receive
-58-
<PAGE> 514
$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. Each Director is also reimbursed for out-of-pocket
expenses incurred as a Director. The Funds, and each other fund of the Company,
pays its proportionate share of these amounts based on relative net asset
values.
For the fiscal year ended February 28, 1998, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $393,644. Of that amount, $3,358, $3,250, $1,131, $5,020,
$999, $12,968, $11,226, $5,207, $317, $374 and $6,138 of directors' compensation
were allocated to the Aggressive Growth, California Municipal Bond, U.S.
Government Securities, Capital Income, Intermediate Bond, Blue Chip, Asset
Allocation, Flexible Income, Short-Term Government, International Equity and
National Municipal Bond Funds, respectively. Each director is also reimbursed
for out-of-pocket expenses incurred as a director. Drinker Biddle & Reath LLP,
of which Mr. McConnel is a partner, receives legal fees as counsel to the
Company. As of the date of this Statement of Additional Information, the
directors and officers of the Company, as a group, own less than 1% of the
outstanding shares of each of the Company's investment portfolios.
Under the retirement plan approved by the Board of Directors,
including a majority of its Directors who are not "interested persons" of the
Company, a Director in office for the entire period from February 28, 1994 to
March 18, 1998 who dies or resigns is entitled to receive ten annual payments
each equal to the greater of (i) the "Applicable Percentage" set forth below of
the annual Director's retainer that was payable by the Company during the year
of his/her death or resignation, or (ii) the Applicable Percentage of the annual
Director's retainer then in effect for Directors of the Company during the year
of such payment:
Years of Service
after February 28, 1994 Applicable Percentage*
----------------------- ----------------------
Fewer than 5 0**
5 but fewer than 6 50
6 but fewer than 7 60
7 but fewer than 8 70
8 but fewer than 9 80
9 but fewer than 10 90
10 or more 100
- ----------
* For service that includes a fractional year, a Director's years of service is
rounded to the nearest quarter of a year of service, and the Director's
Applicable Percentage is rounded to the nearest 0.25%.
** A Director who either resigns in good standing or dies before completing five
years of service as a director is assigned an Applicable Percentage of 50
percent.
Such Director is also entitled to receive an additional
retirement benefit following his death or resignation equal to an additional
percentage of the annual Director's retainer described above in this paragraph.
The additional percentage equals one-half of the difference between 100 percent
and the Director's Applicable Percentage. The Director's additional retirement
benefit is paid at the same time and in the same manner as the
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<PAGE> 515
regular retirement benefit. 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 since the Company's inception in 1982. The
retirement benefit in which a Director has become vested may not be reduced by
later Board action.
In lieu of receiving ten annual payments, a Director may elect
to receive substantially equivalent benefits through a single-sum cash payment
of the present value of such benefits to be paid by the Company within 45 days
of the death or resignation of the Director. The present value of such benefits
shall 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.
The obligation of the Company to pay benefits to a former
Director is neither secured nor funded by the Company but shall be binding upon
its successors in interest. The payment of benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a Director (or former Director) other than by will, by the laws
of descent and distribution, or by the Director's written designation of a
beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Trust, their addresses,
age, and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins; 63 Chairman of the See "Directors and Officers of the
225 S. Lake Avenue Board Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 62 Trustee of Master Chartered Accountant; Trustee, Master
Victory House, Nelson Quay Trust Investment Trust, Series II (1993 to
Governor's Harbour February 1997); Retired Partner, KPMG Peat
Grand Cayman Marwick LLP.
Cayman Islands
British West Indies
</TABLE>
-60-
<PAGE> 516
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Robert E. Greeley 66 Trustee of Master See "Directors and Officers of the
Page Mill Asset Management Trust Company."
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 71 Trustee of Master Retired President, Laird Norton Trust
1200 Shenandoah Drive East Trust Company, Chairman of the Board of
Seattle, WA 98112 Advisors, Phoenix Venture Funds; Former
Trustee, Seafirst Retirement Funds (until
June 1997); Trustee, Master Investment
Trust, Series II (1993 to February 1997);
former Supervisor, Collective Investment
Trust for Seafirst Retirement Accounts;
former Trustee, First Funds of America
(registered investment companies).
Cornelius J. Pings* 69 Trustee of Master See "Directors and Officers of the
Association of American Trust Company."
Universities
1200 New York Avenue, NW
Suite 550
Washington, DC 20005
Monroe Haegele 53 President of CEO of Provident Distributors, Inc. (since
Provident Distributors, Inc. Master Trust 1993); formerly Vice Chairman of PNC
Four Falls Corporate Center Institutional Management Corp. (PIMC)
6th floor (1990 to 1992);formerly Partner in The Hay
West Conshohocken, PA 19428 Group (1981 to 1986); formerly Senior Vice
President at First Pennsylvania Company
(1978 to
</TABLE>
- ----------
* Mr. Nathane is and "interested trustee" of Master Trust I as defined in
the 1940 Act.
* Dr. Pings is an "interested director" of the Company as defined in the
1940 Act.
-61-
<PAGE> 517
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
1981); formerly Vice President at
Chase Manhattan Bank (1974 to 1978).
Stephen M. Wynne 42 Vice President of See "Directors and Officers of the
Executive Vice President, Master Trust Company."
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
J. Fergus McKeon 38 Treasurer of General Manager, PFPC International (since
80 Harcourt Street Master Trust 1993); formerly Chief Accountant, SBC-ISL
Dublin, Ireland (1990-1993).
Jay F. Nusblatt 36 Assistant See "Directors and Officers of the
Vice President, PFPC Inc. Treasurer of Company."
103 Bellevue Parkway Master Trust
Wilmington, DE 19809
Robert Kelly 29 Assistant Accounting Manager, PFPC International
80 Harcourt Street Treasurer of (since 1996); Accountant, Oppenheimer
Dublin, Ireland Master Trust Funds Inc. (1992 to 1996).
W. Bruce McConnel, III 55 Secretary of See "Directors and Officers of the
1345 Chestnut Street Master Trust Company."
Philadelphia National Bank Building,
Suite 1100
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant See "Directors and Officers of the
Chief Counsel-Mutual Funds, Secretary of Company."
PNC Bank Master Trust
1600 Market Street,
28th Fl.
Philadelphia, PA 19103.
J. Robert Dugan 32 Assistant See "Directors and Officers of the
Counsel-Mutual Funds, Secretary of Company."
PNC Bank Master Trust
1600 Market Street
28th Fl.
</TABLE>
-62-
<PAGE> 518
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Philadelphia, PA 19103
</TABLE>
- ----------
* Mr. Nathane is an "interested trustee" of Master Trust as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a Director or Trustee of a feeder fund of
one of the portfolios of Master Trust) plus $500 per day for each travel day and
each day of a Board or committee meeting attended, for his services as trustee
of each of Master Trust. Each trustee is also reimbursed for out-of-pocket
expenses incurred as a trustee. For its fiscal year ended February 28, 1998,
Master Trust paid or accrued for the account of its trustees as a group for
services in all capacities a total of $72,180; of that amount, $5,177, $19,305,
and $48,198 were allocated to the Master Portfolios corresponding to the Asset
Allocation, Intermediate Bond and Blue Chip Funds, respectively (prior to June
23, 1997 the Asset Allocation Fund operated as part of a master-feeder structure
and invested all of its respective assets in the Asset Allocation Master
Portfolio). The trustee's fees and reimbursements are allocated among all of
Master Trust's portfolios based on their relative net asset values. Drinker
Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal fees as
counsel to Master Trust.
The following table sets forth (i) the aggregate compensation
paid by the Company for the fiscal year ended February 28, 1998 to the Directors
and (ii) the aggregate compensation paid to such Directors for services on the
Company's Board and that of all other funds in the "Fund Complex" (as defined in
Schedule 14A under the Securities Exchange Act of 1934):
<TABLE>
<CAPTION>
====================================================================================================================================
NAME OF PERSON/ POSITION AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION FROM
COMPENSATION FROM RETIREMENT BENEFITS BENEFITS UPON REGISTRANT AND FUND
THE COMPANY ACCRUED AS PART OF RETIREMENT COMPLEX(2) PAID TO
FUND EXPENSES(1) DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward S. Bottum (3) Not Applicable Not Applicable Not Applicable $29,125
- ------------------------------------------------------------------------------------------------------------------------------------
William P. Carmichael (3) Not Applicable Not Applicable Not Applicable $27,625
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas M. Collins(4) $46,750 $16,199 $50,500 $53,500
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $36,750 $23,195 $37,500 $36,750
Vice Chairman of the Board
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley(5) $36,750 $16,220 $37,500 $72,750
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $35,750 $28,422 $ * (6) $40,250
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings(4) $69,250 $26,984 $40,500 $81,892
President and Chairman of
the Board
====================================================================================================================================
</TABLE>
- ----------
-63-
<PAGE> 519
(1) For the fiscal year ended February 28, 1998, the Company accrued on the
part of all of the directors an aggregate of $284,393 in retirement benefits.
(2) The "Fund Complex" consists of the Company, Master Trust, Time Horizon
Funds, Pacific Innovations Trust and Seafirst Retirement Funds (which were
merged into the Company on June 23, 1997). Fees from the Time Horizon Funds are
for the period from March 1, 1997 to February 28, 1998.
(3) Messrs. Bottum and Carmichael currently serve as Trustees of the
Pacific Innovations Trust and Time Horizon Funds.
(4) Mr. Collins and Dr. Pings also serve as Trustee for Master Trust.
(5) Mr. Greeley currently also serves as Trustee for the Time Horizon
Funds, Pacific Innovations Trust and Master Trust.
(6) Mr. Hanson served as Director until July 1, 1998. On July 1, 1998:
Mr. Hanson was entitled to retirement benefits of $170,995 (0.002%), $53,533
(0.002%), $7,516 (0.002%), $8,456 (0.002%), $12,527 (0.002%), $25,054 (0.002%),
$1,253 (0.002%), $626 (0.002%), $1,253 (0.002%), $626 (0.002%), $313 (0.002%),
$3,758 (0.002%), $1,253 (0.002%), $626 (0.002%), $1,253 (0.002%), $626 (0.002%),
$313 (0.002%), $3,758 (0.002%), $6,890 (0.002%), $4,384 (0.002%), $3,758
(0.002%), $11,588 (0.002%) and $626 (0.001%) from the Prime, Treasury, Treasury
Only, Government, Tax-Exempt Money, California Tax-Exempt Money Market,
Intermediate Bond, Corporate Bond, U.S. Government Securities, Short-Term
Government, National Municipal Bond, California Tax- Exempt Bond, Capital
Income, Asset Allocation, Aggressive Growth, Blue Chip and International Equity
Funds, respectively. Bank of America has agreed to reimburse the Company
$100,136 in the aggregate relating to these benefits.
INVESTMENT ADVISER
Bank of America serves as investment adviser to each Fund of
the Company. Bank of America was the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to the Company since the commencement of its operations. As described in
the Prospectuses, the Feeder Funds have not retained the services of an
investment adviser because they seek to achieve their investment objectives by
investing all their assets in their corresponding Master Portfolio. In the
Investment Advisory Agreements with the Company and Master Trust, Bank of
America has agreed to provide investment advisory services as described in each
Prospectus. Bank of America has also agreed to pay all expenses incurred by it
in connection with its activities under its agreements other than the cost of
securities, including brokerage commissions, if any, purchased for the Funds. In
rendering its advisory services, Bank of America may utilize officers from one
or more of the departments of Bank of America 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 subsidiaries and other affiliates of Bank of America or its
parent corporation. In addition, the 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.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and
NationsBank Corporation ("NationsBank") announced a definitive agreement to
merge and form a new holding company to be named BankAmerica Corporation (the
"Merger"). The Merger is anticipated to close by the end of 1998, however, it is
subject to a number of approvals including shareholder and regulatory approvals.
For the services provided and expenses assumed pursuant to the
investment advisory agreement, the Company has agreed to pay Bank of America
fees, accrued daily and payable monthly, at the annual rates of .25% of the
average daily net assets of the Short-Term Government Fund; .30% of the net
assets of the Intermediate Bond Master Portfolio and California Municipal Bond
Fund; .35% of the net assets of each of the National Municipal Bond Fund and
U.S. Government Securities Fund; .40% of the net assets of the Asset Allocation
Fund; .45% of the net assets of each of the Capital Income Fund and Flexible
Income Fund; .50% of
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<PAGE> 520
the net assets of the Blue Chip Master Portfolio; .60% of the net assets of the
Aggressive Growth Fund; and .75% of the net assets of the International Equity
Fund for the services provided and expenses assumed pursuant to the particular
Investment Advisory Agreement. From time to time, Bank of America may
voluntarily waive fees or reimburse a particular Fund for expenses. Prior to
June 3, 1997, Bank of America was entitled to receive an investment advisory fee
at the annual rate of 0.45%, 0.75% and 0.55% of the respective average daily net
assets of the Intermediate Bond, Blue Chip and Asset Allocation Master
Portfolios. Prior to October 28, 1997, Bank of America was entitled to receive
an investment advisory fee at the annual rate of 0.40% of the daily net assets
of the California Municipal Bond Fund.
For the fiscal years indicated, the following advisory fees
(net of waivers) were paid or payable to Bank of America by the Aggressive
Growth, California Municipal Bond, Capital Income, U.S. Government Securities
Funds, International Equity Fund and Short-Term Government Fund as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year ended Year ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,239,141 $1,239,652 $ 935,275
- ---------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $ 828,272 $ 857,206 $ 584,994
- ---------------------------------------------------------------------------------------------------------------------
Capital Income Fund $1,637,658 $1,220,622 $ 992,349
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 257,392 $ 283,471 $ 269,498
- ---------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 232,581 $ 48,128(1) N/A
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 64,249 $ 12,022(2) N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Period from September 1, 1996 to February 28, 1997. For the period from
May 13, 1996 (inception date) to August 31, 1996, the International Equity
Master Portfolio paid $0 in advisory fees (net of waivers) to Bank of America.
(2) Period from August 2, 1996 (inception date) to February 28, 1997.
-65-
<PAGE> 521
For the fiscal years indicated, Bank of America waived
advisory fees with respect to the Aggressive Growth, California Municipal Bond,
Capital Income, U.S. Government Securities, International Equity and Short-Term
Government Funds as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $194,717 $244,720 $234,006
- --------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $211,393 $134,763 $ 41,779
- --------------------------------------------------------------------------------------------------------------------
International Equity Fund $232,580 $ 56,931(1) N/A(1)
- --------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 64,249 $ 12,022(2) N/A
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Period from September 1, 1996 to February 28, 1997. For the period from
May 13, 1996 (inception date) to August 31, 1996, Bank of America waived
advisory fees of $8,262 with respect to the International Equity Master
Portfolio.
(2) Period from August 2, 1996 (inception date) to February 28, 1997.
Except as noted below, for the fiscal years indicated Bank of
America waived its entire advisory fee with respect to the Intermediate Bond
Master Portfolio, Blue Chip Master Portfolio, Asset Allocation Fund (Asset
Allocation Master Portfolio for periods prior to June 23, 1997) and National
Municipal Bond Fund (Municipal Master Portfolio for periods prior to July 1,
1996) as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Master $ 466,254(1) $ 428,287(2) $ 296,136
Portfolio
- -----------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $3,362,041(1) $2,701,648(2) $1,574,388(3)
- -----------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 650,191(1) $1,046,406(2) $ 913,660(3)
- -----------------------------------------------------------------------------------------------------------
National Municipal Bond Fund(4) $ 48,653(1) $ 34,135(2) $ 24,739
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the fiscal year ended February 28, 1998, Bank of America waived
$248,915, $262,519 and $48,653 in advisory fees with respect to the Intermediate
Bond Master Portfolio, Blue Chip Master Portfolio and National Municipal Bond
Fund, respectively. Prior to June 23, 1997, the Asset Allocation Fund invested
all of its assets in the Asset Allocation Master Portfolio. On June 23, 1997,
the Asset Allocation Fund withdrew its assets from the Asset Allocation Master
Portfolio and invested them directly in investment securities. For the period
from March 1, 1997 to June 23, 1997 the Asset Allocation Master Portfolio paid
advisory fees of $58,038 and Bank of America waived advisory fees of $302,575.
(2) For the fiscal year ended February 28, 1997, Bank of America waived
$256,439, $961,001, $735,797 and $0 in advisory fees with respect to the
Intermediate Bond Master Portfolio, Blue Chip Master Portfolio, Asset Allocation
Master Portfolio and National Municipal Bond Fund.
-66-
<PAGE> 522
(3) For the fiscal year ended February 29, 1996, Bank of America waived
$1,164,328 and $720,259, respectively, in advisory fees with respect to the Blue
Chip Master Portfolio and Asset Allocation Master Portfolio.
(4) Prior to July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. On July 1, 1996, the National
Municipal Bond Fund withdrew assets from the Municipal Master Portfolio and
invested them directly in investment securities. For the period from March 1,
1996 to June 30, 1996 the Municipal Master Portfolio paid advisory fees of $0
and Bank of America waived advisory fees of $14,997.
Additionally, for the fiscal years indicated, Bank of America
and/or BISYS assumed certain operating expenses of the Intermediate Bond Fund,
Blue Chip Fund, Asset Allocation Fund, Municipal Master Portfolio, National
Municipal Bond Fund, U.S. Government Securities Fund, Flexible Income Fund,
International Equity Fund, and Short-Term Government Fund as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $ 0 $146,716 $ 0
- -------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 0 $ 31,598 $ 0
- -------------------------------------------------------------------------------------------------------------
Municipal Master Portfolio N/A $ 0(1) $ 0
- -------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 41,459 $ 93,097 $ 0
- -------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 2,889 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------
International Equity Fund $ 54,966 $132,666(2) N/A
- -------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 52,181 $114,415(3) N/A
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. On July 1, 1996, the National
Municipal Bond Fund withdrew assets from the Municipal Master Portfolio and
invested them directly in investment securities. Assumed operating expenses are
for the period March 1, 1996 to June 30, 1996.
(2) Period from September 1, 1996 to February 28, 1997. For the period from
May 13, 1996 (inception date) to August 31, 1996, Bank of America assumed
operating expenses of $41,154 with respect to the International Equity Master
Portfolio.
(3) Period from August 2, 1996 (inception date) to February 28, 1997.
For the periods indicated, Bank of America waived its entire
advisory fee with respect to the Flexible Income Fund (formerly, Corporate Bond
Fund) (and Corporate Bond Master Portfolio for the period prior to September 1,
1996) as follows:
-67-
<PAGE> 523
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flexible Income $164,104(2) $70,991(1) $144,324
Fund
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to September 1, 1996, the Flexible Income Fund (formerly,
Corporate Bond Fund) invested all of its assets in the Corporate Bond Master
Portfolio. On September 1, 1996, the Flexible Income Fund withdrew assets from
the Corporate Bond Master Portfolio and invested them directly in investment
securities. Fees waived are for the period from September 1, 1996 to February
28, 1997. For the same period Bank of America waived $129,971 in advisory fees
with respect to the Flexible Income Fund. For the period from March 1, 1996 to
August 31, 1996 the Corporate Bond Master Portfolio paid advisory fees of $0 and
Bank of America waived $69,539 in advisory fees with respect to the Corporate
Bond Master Portfolio.
(2) For the fiscal year ended February 28, 1998, Bank of America waived
$164,104 in advisory fees with respect to the Flexible Income Fund.
The Investment Advisory Agreements between Bank of America and
the Company will be in effect until October 31, 1999, and will continue in
effect with respect to a particular Fund or Master Portfolio from year to year
thereafter only so long as such continuation is approved at least annually by
(i) the Board of Trustees/Directors of the particular Company or the vote of a
"majority," as defined in the 1940 Act, of the outstanding voting securities of
such particular Master Portfolio or Fund, and (ii) a majority of those
trustees/directors of the particular Company who are not "interested persons,"
as defined in the 1940 Act, of any party to the particular Investment Advisory
Agreement, acting in person at a meeting called for the purpose of voting on
such approval. Each Investment Advisory Agreement will terminate automatically
in the event of its "assignment," as defined in the 1940 Act. In addition, the
Investment Advisory Agreement is terminable with respect to a particular Master
Portfolio or Fund at any time without penalty upon 60 days' written notice by
the Board of Trustees/Directors of the Company, by vote of the holders of a
majority of a Master Portfolio's or Fund's outstanding voting securities, or by
Bank of America.
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Funds.
The Investment Advisory Agreements provide that Bank of
America shall not be liable for any error of judgment or mistake of law or for
any loss suffered in connection with the performance of the Investment Advisory
Agreements, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
SUB-ADVISER
Wellington Management, with principal offices at 75 State
Street, Boston, Massachusetts 02109, serves as sub-adviser to the International
Equity Fund. Wellington Management is a professional investment counseling firm
that provides investment services to investment companies, employee benefit
plans, endowments, foundations, and other institutions and individuals. The
Sub-Adviser's predecessor organizations have provided investment advisory
services to investment companies since 1933 and to investment counseling clients
since 1960.
Under the Sub-Advisory Agreement 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,
-68-
<PAGE> 524
provides a continuous investment program for the International Equity Fund,
including investment research and management with respect to all securities and
investments and cash equivalents in the International Equity Fund. The
Sub-Adviser also determines from time to time what securities and other
investments will be purchased, retained or sold by the International Equity
Fund. The Sub-Advisory Agreement provides that Bank of America will pay
Wellington Management a quarterly fee based on the average month-end net assets
of the International Equity Fund, at the annual rate of 0.40% of the Fund's
first $50 million of average month-end net assets, plus 0.30% of the next $100
million of the Fund's average month-end net assets, plus 0.25% of the next $350
million of the Fund's average month-end net assets, plus 0.20% of the Fund's
average month-end net assets over $500 million.
Pursuant to the sub-advisory agreement, the Sub-Adviser is not liable
for any error of judgment or mistake of law or for any loss suffered by the
Company in connection with the performance of the sub-advisory agreement, except
that the Sub-Adviser is liable to the Company and the Adviser for any loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or any loss resulting from willful 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, 1999 and continue in effect for
successive annual periods ending on October 31, provided such continuance is
specifically approved at least annually (a) by the vote of a majority of those
members of the Company's Board of Directors who are not interested persons of
any party to the sub-advisory agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Company's Board of
Directors or by vote of a majority of the outstanding voting securities of the
International Equity Fund. The Agreement may be terminated at any time, without
the payment of any penalty, by the Adviser or by the Company (in the case of the
Company, by vote of the Company's Board of Directors or by vote of a majority of
the outstanding voting securities of the International Equity Fund) on sixty
days' written notice to the Sub-Adviser, or by the Sub- Adviser, on sixty days'
written notice to the Company, provided that in each such case, notice is given
simultaneously to the Adviser. In addition, in the event of the termination of
the Investment Advisory Agreement with respect to the International Equity Fund
for any reason (whether by the Company, by the Adviser or by operation of law)
the sub-advisory agreement terminates upon the effective date of such
termination of the Investment Advisory Agreement.
For the fiscal year ended February 28, 1998, Wellington
Management earned advisory fees of $32,702 and Wellington Management waived
advisory fees of $76,305. For the period January 1, 1997 to February 28, 1997,
Wellington Management earned advisory fees of $2,924 and Wellington Management
waived advisory fees of $6,823.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board of Governors") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company registered under the Federal Bank Holding
-69-
<PAGE> 525
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 Portfolios contemplated by the particular Investment Advisory Agreement, the
Prospectuses, and this Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a
national bank may perform services comparable to those performed by Bank of
America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Portfolios or from continuing to purchase Fund shares for the accounts of its
customers. (For a discussion of the Glass Steagall Act in connection with the
Company's Shareholder Service Plan, see "Plan Payments" in the Funds'
Prospectuses.)
On the other hand, as described herein, the Funds are
currently distributed by PDI. If current restrictions under the Glass-Steagall
Act preventing a bank from sponsoring, organizing, controlling, or distributing
shares of an investment company were relaxed, the Companies expect that Bank of
America would consider the possibility of offering to perform some or all of the
services now provided by PDI. From time to time, legislation modifying such
restriction has been introduced in Congress which, if enacted, would permit a
bank holding company to establish a non-bank subsidiary having the authority to
organize, sponsor and distribute shares of an investment company. If this or
similar legislation were enacted, the Companies expect that Bank of America's
parent bank holding company would consider the possibility of one of its
non-bank subsidiaries offering to perform some or all of the services now
provided by PDI. It is not possible, of course, to predict whether or in what
form such legislation might be enacted or the terms upon which Bank of America
or such a non-bank affiliate might offer to provide services for consideration
by a particular Company's Board of Directors/Trustees.
ADMINISTRATOR
Bank of America (the "Administrator") serves as administrator
of the Funds. For the period from March 1, 1997 through September 15, 1997, the
BISYS Group, Inc., through its wholly-owned subsidiary BISYS Fund Services L.P.
(collectively, "BISYS"), served as administrator to the Fund. For the period
September 15, 1997 through February 28, 1998, Bank of America served as the
Funds' administrator. PFPC International Ltd. serves as administrator and
accounting services agent of the Intermediate Bond and Blue Chip Master
Portfolios. Bank of America and PFPC International Ltd. are each referred to as
an "Administrator" and collectively referred to as the "Administrators." Prior
to November 1, 1996, Concord Holding Corporation, an indirect, wholly-owned
subsidiary of BISYS served as the Funds' and Master Portfolios' administrator
("Concord Holding").
-70-
<PAGE> 526
Bank of America provides administrative services to the Funds
as described in the Funds' Prospectuses pursuant to an Administration Agreement
with the Company. Unless sooner terminated, the Administration Agreement
continues in effect until October 31, 1999 and thereafter will be extended with
respect to each Fund for successive periods of one year, provided that each such
extension is specifically approved at least annually by (a) vote of a majority
of those members of the Company's Board of Directors who are not parties to the
administration agreement or "interested persons" of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
the Company's Board of Directors or by vote of a "majority of the outstanding
voting securities" of such Fund. The agreement is terminable at any time without
cause and without payment of any penalty by vote of a majority of the Company's
Board of Directors or by vote of a majority of the outstanding voting securities
of any Fund upon 60 days' written notice to the Administrator, or by the
Administrator at any time, without payment of any penalty upon 90 days' written
notice to the Company. The agreement will immediately terminate in the event of
its "assignment."
The Company has agreed to pay the Administrator fees for its
services as administrator of the Funds, computed daily and payable monthly, at
the annual rates of .15% of the average daily net assets of the Intermediate
Bond Fund, Blue Chip Fund and Asset Allocation Fund; .20% of the average daily
net assets of the U.S. Government Securities, National Municipal Bond Fund,
Short-Term Government, Capital Income, Flexible Income, International Equity and
California Municipal Bond Funds; and .30% of the average daily net assets of the
Aggressive Growth Fund. Master Trust I has agreed to pay PFPC International Ltd.
fees for its services as administrator of the Master Portfolios, computed daily
and payable monthly, at the annual rates of .05% of the average daily net assets
of the Intermediate Bond Master Portfolio and Blue Chip Master Portfolio. The
fees payable to the Administrators are not subject to reduction as the value of
each Fund's and Master Portfolio's net assets increase. From time to time, Bank
of America may voluntarily waive fees or reimburse a Fund or Master Portfolio
for expenses. Prior to October 28, 1997, BISYS, Concord Holding or Bank of
America was entitled to receive an administration fee payable at the annual rate
of 0.30% of the California Municipal Bond Fund's average daily net assets. Prior
to July 1, 1996, September 1, 1996, September 1, 1996 and June 23, 1997, the
following Funds and Master Portfolios paid administration fees at the following
annual rates: 0.15% of the National Municipal Bond Fund's and 0.05% of the
Municipal Master Portfolio's average daily net assets, 0.15% of the Flexible
Income Fund's and 0.05% of the Corporate Bond Master Portfolio's average daily
net assets, 0.15% of the International Equity Fund's and 0.05% of the
International Equity Master Portfolio's average daily net assets and 0.15% of
the Asset Allocation Fund's and 0.05% of the Asset Allocation Master Portfolio's
average daily net assets.
For the fiscal years indicated, the following administration
fees (net of waivers) were paid or payable to, Bank of America, BISYS or Concord
Holding by the Aggressive Growth Fund, California Municipal Bond Fund, Capital
Income Fund, U.S. Government Securities Fund, Short-Term Government Fund,
International Equity Fund and International Equity Master Portfolio as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $619,570(1) $619,826 $467,638
- --------------------------------------------------------------------------------------------------
California Municipal Bond Fund $608,975(1) $642,905 $438,745
- --------------------------------------------------------------------------------------------------
Capital Income Fund $727,852(1) $542,500 $441,044
- --------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $147,083(1) $162,212 $153,997
- --------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 61,399(1) $ 0(2) N/A
- --------------------------------------------------------------------------------------------------
International Equity Fund $ 62,021(1) $ 0(3) N/A
- --------------------------------------------------------------------------------------------------
International Equity Master N/A $ 0(4) N/A
Portfolio
- --------------------------------------------------------------------------------------------------
</TABLE>
-71-
<PAGE> 527
(1) $294,171, $206,346, $355,132, $17,219, $0 and $0 was paid to Bank of
America and $325,399, $256,592, $322,702, $13,303, $0 and $0 was paid to BISYS
with respect to the Aggressive Growth Fund, California Municipal Bond Fund,
Capital Income Fund, U.S. Government Securities Fund, Short-Term Government
Fund, International Equity Fund and International Equity Portfolio.
(2) Period from August 2, 1996 (inception date of fund) to February 28,
1997.
(3) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
(4) Prior to September 1, 1996, the International Equity Fund invested all
of its assets in the International Equity Master Portfolio. On September 1,
1996, the International Equity Fund withdrew its assets from the International
Equity Master Portfolio and invested directly in investment securities. For the
period from May 13, 1996 (inception date) to August 31, 1996, the International
Equity Master Portfolio paid administration fees (net of waivers) of $0 to
Concord Holding and Concord Holding waived administration fees of $551 with
respect to the International Equity Master Portfolio.
-72-
<PAGE> 528
For the fiscal years indicated, Bank of America, BISYS or
Concord Holding waived administration fees with respect to the California
Municipal Bond, U.S. Government Securities, Short-Term Government and
International Equity Funds as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Municipal Bond Fund $43,399 Bank of America $183,837 $175,505
$102,638 BISYS
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $49,555 Bank of America $ 77,220 $ 23,875
$67,006 BISYS
- --------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $27,820 Bank of America $ 9,617(2) N/A
$23,579 BISYS
- --------------------------------------------------------------------------------------------------------------------------
International Equity Fund $33,933 Bank of America $ 15,032(3) N/A
$20,088 BISYS
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) $0, $43,399, $0, $49,555, $27,820 and $33,933 was waived by Bank of America
and $0, $102,638, $0, $67,006, $23,579 and $28,088 was waived by BISYS.
(2) Period from August 2, 1996 (inception date of fund) to February 28, 1997.
(3) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
Additionally, for the fiscal years indicated, Bank of America,
BISYS or Concord Holding reimbursed operating expenses of the Blue Chip Fund,
Asset Allocation Fund, Intermediate Bond Fund, National Municipal Bond Fund,
Municipal Master Portfolio, Flexible Income Fund, Corporate Bond Master
Portfolio, and International Equity Fund as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year ended February Year ended February Year ended February
28, 1998 28, 1997 29, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Fund $ 0 $ 303 $150,472
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 0 $ 31,598 $192,545
- ------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 0 $146,716 $253,991
- ------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $41,459 $147,200 $172,071
- ------------------------------------------------------------------------------------------------------------------
Municipal Master Portfolio(1) N/A $ 0 $169,773
- ------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 2,889 $ 297 $ 0
- ------------------------------------------------------------------------------------------------------------------
Corporate Bond Master N/A $ 0 $233,360
Portfolio(2)
- ------------------------------------------------------------------------------------------------------------------
International Equity Fund $54,966 $132,666(6) N/A
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Prior to July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. On July 1, 1996, the National
Municipal Bond Fund withdrew its investment from the Municipal Master Portfolio
and invested directly in investment securities. For the period March 1, 1996 to
June 30, 1996 Concord Holding reimbursed operating expenses of $0 with respect
to the Municipal Master Portfolio.
-73-
<PAGE> 529
(2) Prior to September 1, 1996, the Flexible Income Fund invested all of
its assets in the Corporate Bond Master Portfolio. On September 1, 1996, the
Flexible Income Fund withdrew its investment from the Corporate Bond Master
Portfolio and invested directly in investment securities. For the period March
1, 1996 to August 31, 1996, Concord Holding reimbursed operating expenses of $0
with respect to the Corporate Bond Master Portfolio.
(3) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
Except as noted below, for the fiscal years indicated Bank of
America, PFPC International Ltd., BISYS or Concord Holding waived its entire
administration fee with respect to the Intermediate Bond Fund and the
Intermediate Bond Master Portfolio, the Blue Chip Fund and the Blue Chip Master
Portfolio, the Asset Allocation Fund and the Asset Allocation Master Portfolio
and National Municipal Bond Fund and the Municipal Master Portfolio as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Year ended Year ended Year ended February
February 28, February 28, 1997 29, 1996
1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $ 94,118(2) $ 24,165 $ 9,952
- ------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master $ 69,900(3) $ 47,588(4) $ 30,769
Portfolio
- ------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $673,969(2) $ 153,571 $ 44,971
- ------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio $296,792(3) $180,110(4) $104,889(5)
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $258,691(2) $ 41,432 $ 19,909
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Master N/A $ 94,685(4) $ 83,060(5)
Portfolio(1)
- ------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 27,802(2) $ 25,897(4) $ 10,543
- ------------------------------------------------------------------------------------------------------------------
Municipal Master Portfolio(1) N/A $ 0 $ 3,534
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Prior to June 23, 1997, and July 1, 1996, the Asset Allocation and
National Municipal Bond Funds invested all of their respective assets in the
Asset Allocation and Municipal Master Portfolios. On June 23, 1997 and July 1,
1996, the Asset Allocation and National Municipal Bond Funds withdrew their
respective assets from the Asset Allocation and Municipal Master Portfolios and
invested directly in investment securities. For the period from March 1, 1996 to
June 30, 1996 the Municipal Master Portfolio paid administration fees of $0 and
Concord Holding waived administration fees of $1,951 with respect to the
Municipal Master Portfolio. For the period from March 1, 1997 to June 23, 1997,
the Asset Allocation Master Portfolio paid administrative fees of $5,280 and
Concord Holding waived administrative fees of $27,800 with respect to the Asset
Allocation Master Portfolio.
(2) $4,035, $0; $0, and $12,714 was waived by Bank of America and $35,332
$73,397, $17,413, and $15,088 was waived by BISYS with respect to the
Intermediate Bond, Blue Chip, Asset Allocation and National Municipal Bond
Funds.
-74-
<PAGE> 530
(3) $1,324, $0, and $0 was waived by PFPC International Ltd. and
$16,513, $17,122, and $27,800 was waived by BISYS/Concord Holding with respect
to the Intermediate Bond, Blue Chip and Asset Allocation Master Portfolio.
(4) For the fiscal year ended February 28, 1997, BISYS or Concord Holding
waived $28,508, $64,005, $66,954 and $0 with respect to the Intermediate Bond
Master Portfolio, Blue Chip Master Portfolio, Asset Allocation Master Portfolio
and National Municipal Bond Fund, respectively.
(5) For the fiscal year ended February 29, 1996, Concord Holding waived
$77,922 and $65,491, respectively in administration fees with respect to the
Blue Chip Master Portfolio and Asset Allocation Master Portfolio.
For the periods indicated, Bank of America, BISYS or Concord
Holding waived its entire administration fee with respect to the Flexible Income
Fund and the Corporate Bond Master Portfolio as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flexible Income Fund 72,940(2) $54,670 $48,108
- ------------------------------------------------------------------------------------------------
Corporate Bond Master N/A $ 0 $16,036
Portfolio(1)
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to September 1, 1996, the Flexible Income Fund invested all of
its assets on the Corporate Bond Master Portfolio. On September 1, 1996, the
Flexible Income Fund withdrew its investment from the Corporate Bond Master
Portfolio and invested them directly in portfolio securities. For the period
from March 1, 1996 to August 31, 1996, the Corporate Bond Master Portfolio paid
administration fees of $0 and Concord Holding waived administration fees of
$7,727 with respect to the Corporate Bond Master Portfolio.
(2) $34,613 was waived by Bank of America and $38,327 was waived by BISYS
with respect to the Flexible Income Fund.
During the course of the Company's fiscal year, Bank of
America and other service providers may prospectively waive payment of fees
and/or assume certain expenses of one or more of the Master Portfolios or Funds,
as a result of competitive pressures and in order to preserve and protect the
business and reputation of these entities. This will have the effect of
increasing yield to investors at the time such fees are not received or amounts
are assumed and decreasing yield when such fees or amounts are reimbursed.
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 The Bank of New York (with respect to the
National Municipal Bond Fund, California Municipal Bond Fund, U.S. Government
Securities Fund, Capital Income Fund and Aggressive Growth Fund) and PFPC (with
respect to the Flexible Income Fund, International Equity Fund, Short-Term
Government Fund, Asset Allocation Fund, Intermediate Bond Fund and Blue Chip
Fund) for certain fund accounting services which are borne by the Funds. See
"General Information--Custodian, Accounting Agent and Transfer Agent" below.
Expenses borne by the Funds and Master Portfolios include taxes, interest,
brokerage fees and commissions, if any, fees of Board members who are not
officers,
-75-
<PAGE> 531
directors, partners, employees or holders of 5% or more of the outstanding
voting securities of Bank of America or their subcontractors or any of their
affiliates, SEC fees and state securities registration and qualification fees,
advisory fees, fees payable to shareholder organizations, fees for special
management services, administration fees, charges of custodians, transfer and
dividend disbursing agents' fees, certain insurance premiums, outside auditing
and legal expenses, costs of maintaining corporate existence, costs attributable
to investor services, including without limitation telephone and personnel
expenses, costs of preparing and printing prospectuses or any supplement or
amendment thereto, necessary for the continued effective registration of shares
under the 1933 Act or state securities laws, costs of printing and distributing
any prospectus, supplement or amendment thereto for existing shareholders, cost
of shareholders' and interestholders' reports and corporate meetings and any
extraordinary expenses. Certain shareholder servicing (and/or certain
distribution fees with respect to the Non-Feeder Funds) in connection with
Pacific Horizon's shares are also paid by Pacific Horizon. See "Distributor and
Plan Payments."
The Company's Administration Agreement provides that Bank of
America shall not be liable for any error of judgment or mistake of law or any
loss suffered by the Company or the Funds in connection with the performance of
the Administration Agreement, except a loss resulting from willful misfeasance,
bad faith or negligence in the performance of its duties or from the reckless
disregard by it of its obligations and duties under the Administration
Agreement. Under its Administration and Accounting Services Agreement with
Master Trust, PFPC International Ltd. is obligated to exercise care and
diligence in the performance of its duties, to act in good faith and to use its
best efforts, within reasonable limits, in performing services thereunder. PFPC
International Ltd. shall be liable for any damages arising out of its failure to
perform its duties under the administration and accounting services agreement to
the extent such damages arise out of its willful misfeasance, bad faith,
negligence or reckless disregard of its duties.
Bank of America may from time to time employ such person or
persons as it may believe to be particularly fitted to assist in the performance
of the Administration Agreement; provided, however, that the compensation of
such person or persons shall be paid by Bank of America and Bank of America
shall be as fully responsible to the Company for the acts and omissions of any
subcontractor as it is for its own acts and omissions. The Bank of New York
("BONY") (with respect to the National Municipal Bond Fund, California Municipal
Bond Fund, U.S. Government Securities Fund, Capital Income Fund and Aggressive
Growth Fund) and PFPC (with respect to the Flexible Income Fund, International
Equity Fund, Short-Term Government Fund, Asset Allocation Fund, Intermediate
Bond Fund and Blue Chip Fund) provide the Funds with certain accounting services
pursuant to separate fund accounting services agreements with the Administrator.
Under the fund accounting services agreements, BONY and PFPC have agreed to
provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect to the Funds. The monthly fees charged by BONY
and PFPC under the fund accounting services agreements are borne by the Funds.
Bank of America has also entered into an agreement with PFPC
to provide certain sub-administration services to the Funds as described in the
Prospectuses. The monthly fees charged by PFPC for these services under the sub-
administration agreement are borne by Bank of America.
PFPC International Ltd. may assign its rights and delegate its
duties under its Administration and Accounting Services Agreement to any
wholly-owned direct or indirect subsidiary of PNC Bank, N.A. or PNC Bank Corp.,
provided, however that PFPC International Ltd. shall be as fully responsible to
Master Trust for the acts and omissions of any delegate as PFPC International
Ltd. is for its own acts and omissions.
-76-
<PAGE> 532
DISTRIBUTOR AND PLAN PAYMENTS
Provident Distributors, Inc. ("PDI" or the "Distributor") acts
as distributor of the shares of Pacific Horizon. Shares are sold on a continuous
basis by the Distributor. Prior to September 15, 1997, Concord Financial Group,
Inc. ("CFG"), a wholly owned subsidiary of BISYS, acted as distributor for the
Funds.
The Distributor has agreed to use its best efforts to effect
sales of shares of the Funds although it is not obliged to sell any certain
number of shares. The distribution agreement became effective September 15, 1997
and, unless sooner terminated, shall continue in effect with respect to each
Fund until October 31, 1999. Thereafter, if not terminated, the distribution
agreement shall continue automatically for successive terms of one year,
provided that such continuance is specifically approved at least annually (a) by
a vote of a majority of those members of Pacific Horizon's Board of Directors
who are not parties to the distribution agreement or "interested persons" of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by Pacific Horizon's Board of Directors or by vote of a
"majority of the outstanding voting securities" of the Funds as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by Pacific Horizon at any time, without the payment
of any penalty, by vote of a majority of Pacific Horizon's entire Board of
Directors or by a vote of a "majority of the outstanding voting securities" of
such Funds on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 90 days' written notice to
Pacific Horizon. The agreement will automatically and immediately terminate in
the event of its "assignment".
For the fiscal years ended February 28, 1998, February 28,
1997 and February 29, 1996, PDI or CFG received sales loads in connection with
the purchase of A shares of the Aggressive Growth, California Municipal Bond,
U.S. Government Securities, Capital Income, Intermediate Bond, Blue Chip, Asset
Allocation, National Municipal Bond, Short-Term Government and International
Equity Funds as follows:
Fiscal Year Ended February 28, 1998
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Total Sales Load Amount of Total Sales Amount of Total
Received By PDI or CFG Load Retained By PDI Sales Load Retained
or CFG By Bank of America
and its Affiliates
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $187,565 $ 25,976(1) $152,093
- -------------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $ 68,983 $ 7,840(1) $ 56,751
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 20,622 $ 2,003(1) $ 15,798
- -------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $741,867 $86,359(1) $563,216
- -------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 4,471 $ 505(1) $ 3,950
- -------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $802,108 $91,344(1) $709,034
- -------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 92,800 $10,024(1) $ 80,281
- -------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 17,666 $ 1,970(1) $ 15,655
- -------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 16,587 $ 1,079(1) $ 8,452
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 81,304 $13,479(1) $ 58,733
=========================================================================================================================
</TABLE>
-77-
<PAGE> 533
(1) $790, $667, $0, $12,083, $1, $1,798, $12, $28, $4, and $11 was retained
by PDI and $25,186, $7,173, $2,003, $74,276, $504, $89,546, $10,012, $1,942,
$1,075, and $13,468 was retained by CFG from the Aggressive Growth, California
Municipal Bond, U.S. Government Securities, Capital Income, Intermediate Bond,
Blue Chip, Asset Allocation, National Municipal Bond, Flexible Income and
International Equity Funds, respectively.
Fiscal Year Ended February 28, 1997
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Total Sales Load Amount of Total Sales Amount of Total
Received By CFG Load Retained By CFG Sales Load Retained
By Affiliates of
Bank of America
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,088,000(1) $120,955 $ 938,206
- -----------------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $ 591,000(1) $ 45,746 $ 542,086
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 179,000(1) $ 19,990 $ 161,482
- -----------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $2,424,000(1) $268,543 $2,094,439
- -----------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 92,000(1) $ 10,026 $ 82,259
- -----------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $2,418,000(1) $268,770 $2,128,530
- -----------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 421,000(1) $ 47,026 $ 373,436
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal $ 203,000(1) $ 21,986 $ 180,834
Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 103,000(1) $ 11,522 $ 90,340
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund2 $ 0(1) $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------------
International Equity Fund3 $ 115,000(1) $ 12,765 $ 101,858
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fiscal Year Ended February 29, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Total Sales Load Amount of Total Sales Amount of Total
Received By CFG Load Retained By CFG Sales Load Retained
By Affiliates of
Bank of America
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 805,092(4) $118,403 $ 653,024
- --------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $1,180,348(1) $131,821 $1,048,152
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 571,074(1) $ 63,560 $ 505,941
- --------------------------------------------------------------------------------------------------------------------
Capital Income Fund $1,746,063(1) $202,102 $1,493,113
- --------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 460,801(1) $ 51,076 $ 408,407
- --------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $2,138,130(1) $255,167 $1,875,240
- --------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 642,818(1) $ 69,818 $ 569,332
- --------------------------------------------------------------------------------------------------------------------
National Municipal $ 370,172(1) $ 40,099 $ 325,350
Bond Fund
- --------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 152,616 $ 17,586 $ 133,287
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-78-
<PAGE> 534
- ----------
1 Balance was paid to selling dealers.
2 Period from August 2, 1996 (inception date of fund) to February 28,
1997.
3 Period from May 13, 1996 (inception date of fund) to February 28, 1997.
4 Balance was paid to selling dealers.
The following table shows all sales loads, commissions and
other compensation received by PDI or CFG directly or indirectly from each of
the Aggressive Growth Fund, California Municipal Bond Fund, U.S. Government
Securities Fund, Capital Income Fund, Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, National Municipal Bond Fund, Flexible Income Fund,
Short-Term Government Fund and International Equity Fund during each fund's
fiscal year ended February 28, 1998.
<TABLE>
<CAPTION>
Net Underwriting Compensation on Brokerage Other
Discounts and Redemption and Commissions in Compensation(3)
Commissions(1) Commissions(1) connection with Fund
Transactions
<S> <C> <C> <C> <C>
Aggressive Growth Fund $25,976(4) 0 0 $467,289
California Municipal Bond Fund $ 7,840(4) 0 0 $300,259
U.S. Government Securities Fund $ 2,003(4) 0 0 $ 19,782
Capital Income Fund $86,359(4) 0 0 $417,280
Intermediate Bond Fund $ 505(4) 0 0 $ 13,385
Blue Chip Fund $91,344(4) 0 0 $229,381
Asset Allocation Fund $10,024(4) 0 0 $ 85,196
National Municipal Bond Fund $ 1,970(4) 0 0 $ 0
Flexible Income Fund $ 1,079(4) 0 0 $ 26,183
Short-Term Government Fund $ 0(4) 0 0 $ 0
International Equity Fund $13,479(4) 0 0 $ 6,583
</TABLE>
- ----------
(1) Represents amounts received from front-end sales charge on A Shares.
-79-
<PAGE> 535
(2) Represents amounts received from contingent deferred sales charges on B
Shares. The basis on which such sales charges are paid by described in the
Prospectuses. As of February 28, 1998, no B Shares were offered.
(3) Represents the total of (i) amounts paid to BISYS or Concord Holding
for administrative services provided to the Fund (see "Management of the
Company-Administrator" above) and (ii) payments made under the Shareholder
Service Plan, Distribution Plan and Administrative and Shareholder Services Plan
(see discussion in next section) and retained by BISYS or CFG.
(4) $790, $667, $0, $12,083, $1, $1,798, $12 $28, $4 and $11 was received
by PDI and $25,186, $7,173, $2,003, $74,276, $504, $89,546, $10,012, $1,942,
$1,075, and $13,468 was received by CFG from the Aggressive Growth, California
Municipal Bond, U.S. Government Securities, Capital Income, Intermediate Bond,
Blue Chip, Asset Allocation, National Municipal Bond, Flexible Income and
International Equity Funds, respectively.
The Shareholder Services Plan. Pacific Horizon has adopted
separate Shareholder Services Plans (the "Plans") for SRF Shares and A Shares,
under which SRF Shares and A Shares of each Fund reimburse the Distributor for
shareholder servicing fees the Distributor pays to Service Organizations. The
fees paid under the Shareholder Services Plan for A Shares are in addition to
the sales loads on A Shares described above and in the Prospectus.
Under the Shareholder Service Plans for A Shares and SRF
Shares, Pacific Horizon pays the Distributor, with respect to the Funds for (a)
non-distribution shareholder services provided by the Distributor to Service
Organizations and/or the beneficial owners of Fund shares, including, but not
limited to shareholder servicing provided by the Distributor at facilities
dedicated for use by Pacific Horizon, provided such shareholder servicing is not
duplicative of the servicing otherwise provided on behalf of the Funds, and (b)
fees paid to Service Organizations (which may include the Distributor itself)
for the provision of support services for shareholders for whom the Service
Organization is the dealer of record or holder of record or with whom the
Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may
include, among other things: (i) establishing and maintaining accounts and
records relating to Clients that invest in Fund shares; (ii) processing dividend
and distribution payments from the Funds on behalf of Clients; (iii) providing
information periodically to Clients regarding their positions in shares; (iv)
arranging for bank wires; (v) responding to Client inquiries concerning their
investments in Fund shares; (vi) providing the information to the Funds
necessary for accounting or subaccounting; (vii) if required by law, forwarding
shareholder communications from the Funds (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (viii) assisting in processing exchange and redemption
requests from Clients; (ix) assisting Clients in changing dividend options,
account designations and addresses; and (x) providing such other similar
services.
Each Shareholder Services Plan provides that the Distributor
is entitled to receive payments for expenses on a monthly basis, at an annual
rate not exceeding .25% of the average daily net assets of the SRF Shares or A
Shares of the Funds, as the case may be, during such month for shareholder
servicing expenses. The calculation of a Fund's average daily net assets for
these purposes does not include assets held in accounts
-80-
<PAGE> 536
opened via a transfer of assets from trust and agency accounts of Bank of
America. Further, payments made out of or charged against the assets of a
particular Fund must be in payment for expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies
than can be immediately paid due to the percentage limitations described above,
the unpaid amount is carried forward from month to month while a Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under a Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid amounts or credits due under a Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
For the fiscal year ended February 28, 1998, the A Shares of
the Aggressive Growth, California Municipal Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Flexible
Income, National Municipal Bond, Short-Term Government and International Equity
Funds were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Amount of Total
Amount of Total Shareholder Shareholder Service Fee
Total Shareholder Service Fee Paid to PDI or Paid to Bank of America
Service Fee CFG and its affiliates
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $513,046 $244,047(1) $209,931
- ------------------------------------------------------------------------------------------------------------------------
California Municipal Bond $548,249 $194,600(1) $313,116
Fund
- ------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $905,435 $54,546(1) $772,752
- ------------------------------------------------------------------------------------------------------------------------
U.S. Government $182,327 $7,155 $129,541
Securities Fund [$39,898 waived]
- ------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $85,538 $9,818(1) $40,786
[$26,307 waived]
- ------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $539,237 $37,962(1) $476,702
- ------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $103,328 $3,724(1) $86,340
[$2,708 waived]
- ------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $90,532 $40,731(1) 18,541
[$17,972 waived]
- ------------------------------------------------------------------------------------------------------------------------
National Municipal Bond $34,753 $13(1) $2,159
Fund [$32,516 waived]
- ------------------------------------------------------------------------------------------------------------------------
Short-Term Government $64,249 $0(1) $0
Fund [$64,249 waived]
- ------------------------------------------------------------------------------------------------------------------------
International Equity Fund $76,721 $6301(1) $8168
[$68,541 waived]
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) $102,847, $80,933, $12,108, $1,493, $70, $5,792, $401, $14,978, $13,
$0, and $0 was paid to PDI and $141,200, $113,667, $42,438, $5,662, $9,748,
$32,170, $3,323, $25,753, $0, $0, and $6,301 was paid to CFG by the Aggressive
Growth, California Municipal Bond, Capital Income, U.S. Government Securities,
Intermediate
-81-
<PAGE> 537
Bond, Blue Chip, Asset Allocation, Flexible Income, National Municipal Bond,
Short-Term Government and International Equity Funds, respectively.
For the fiscal year ended February 28, 1997, the A Shares of
the Aggressive Growth, California Municipal Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Flexible
Income, National Municipal Bond, Short-Term Government and International Equity
Funds were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Total Shareholder Amount of Total Amount of Total Amount of Total
Service Fee Shareholder Shareholder Service Shareholder Service
Service Fee Paid Fee Paid to Bank of Fee Paid to Affiliates
to CFG America of Bank of America
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $516,392 $308,283 $0 $182,530
- ------------------------------------------------------------------------------------------------------------------------------
California Municipal $535,750 $205,096 $0 $303,684
Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $677,727 $46,625 $0 $593,044
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government $202,413 $ 7,966 $0 $185,292
Securities Fund
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 40,161 $ 1,045 $0 $18,409
- ------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $256,504 $19,012 $0 $230,703
- ------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 68,548 $ 2,735 $0 $ 64,576
- ------------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 77,972 $54,333 $0 $ 9,525
- ------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond $ 35,033 $ 478 $0 $ 18,506
Fund [$15,738
waived]
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Government $ 12,022 $0 $0 $0
Fund [$12,022
waived]
- ------------------------------------------------------------------------------------------------------------------------------
International Equity $ 18,778 $0 $0 $0
Fund [$18,778
waived]
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-82-
<PAGE> 538
For the fiscal year ended February 29, 1996, the A Shares of
the Aggressive Growth, California Municipal Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation, Flexible
Income and National Municipal Bond were charged the following amounts pursuant
to the Shareholder Service Plan:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Total Shareholder Amount of Total Amount of Total Amount of Total
Service Fee Shareholder Shareholder Service Shareholder Service
Service Fee Paid Fee Paid to Bank of Fee Paid to Affiliates
to CFG America of Bank of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $389,698 $257,687 $0 $110,825
- -----------------------------------------------------------------------------------------------------------------------------------
California Municipal Bond $511,875 $232,686 $0 $277,153
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $551,305 $ 64,707 $0 $483,153
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities $222,341 $ 17,257 $0 $205,084
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 16,582 $ 0 $0 $ 0
[$ 16,582
waived]
- -----------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 74,950 $ 0 $0 $ 0
[$ 74,950
waived]
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 33,182 $ 0 $0 $ 0
[$ 33,182
waived]
- -----------------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 80,246 $ 0 $0 $ 0
[$ 80,246
waived]
- -----------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond $ 17,571 $ 0 $0 $ 0
Fund [$ 17,571
waived]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-83-
<PAGE> 539
For the fiscal year ended February 28, 1998, the SRF Shares of the Intermediate
Bond, Blue Chip, and as Asset Allocation Funds were charged the following
amounts pursuant to the Shareholder Service Plan:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Amount of Total Shareholder
Amount of Total Service Fee Paid to Bank of
Shareholder Service Fee America and its affiliates
Total Shareholder Paid to PDI or CFG
Service Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund $ 62,182 $ 0 $ 55,252
[$6,406
waived]
- ---------------------------------------------------------------------------------------------------------------
Blue Chip Fund $576,234 $ 0 $ 140,129
[($436,105
waived)]
- ---------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $325,357 $ 0 $ 313,527
[($11,816
waived)]
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) $633, $297,583 and $11,397 was waived by PDI and $5,773, $138,252 and
$419 was waived by BISYS for the Intermediate Bond Fund, Blue Chip Fund and
Asset Allocation Fund, respectively. As of February 28, 1997, no SRF Shares had
been issued in a public offering.
Payments for shareholder service expenses under the Plans are not
subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the Plans,
the Distributor provides that a report of the amounts expended under the Plans,
and the purposes for which such expenditures were incurred, will be made to the
Board of Directors for its review at least quarterly. In addition, the Plans
provide that the selection and nomination of the directors of Pacific Horizon
who are not "interested persons" thereof have been committed to the discretion
of the directors who are neither "interested persons" (as defined in the 1940
Act) of Pacific Horizon nor have any direct or indirect financial interest in
the operation of the Plans (or related servicing agreements) (the
"Non-Interested Plan Directors").
Pacific Horizon understands that Bank of America and/or some
Service Organizations may charge their clients a direct fee for administrative
and shareholder services in connection with the holding of A or SRF Shares.
These fees would be in addition to any amounts which might be received under the
Plans. Small, inactive long-term accounts involving such additional charges may
not be in the best interest of shareholders.
Pacific Horizon's Board of Directors has concluded that the Plans
will benefit the Funds and their A and SRF shareholders. The Plans are subject
to annual reapproval by a majority of the Non-Interested Plan Directors and are
terminable at any time with respect to any Fund by a vote of majority of such
Directors or by vote of the holders of a majority of the A or SRF Shares of the
Fund, as the case may be, involved. Any agreement entered into pursuant to the
Plans with a Service Organization is terminable with respect to any Fund without
penalty, at any time, by vote of the Non-Interested Plan Directors, by vote of
the holders of a majority of the A or SRF Shares of such Fund, as the case may
be, by the Distributor or by the Service Organization. Each agreement will also
terminate automatically in the event of its assignment.
-84-
<PAGE> 540
The Distribution and Services Plan, Distribution Plan and
Administrative and Shareholder Services Plan. The Distributor is also entitled
to payment from the Company for distribution and service fees pursuant to the
Distribution and Services Plan adopted on behalf of the B Shares and 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 B and K Shares; (b) expenses incurred in connection
with preparing, printing, mailing, and distributing or publishing advertisements
and sales literature for B and K Shares; (c) expenses incurred in connection
with printing and mailing Prospectuses and Statements of Additional Information
to other than current B and K shareholders; (d) periodic payments or commissions
to one or more securities dealers, brokers, financial institutions or other
industry professionals, such as investment advisors, accountants, and estate
planning firms (severally, "a Distribution Organization") with respect to a
Fund's B and K Shares beneficially owned by customers for whom the Distribution
Organization is the Distribution Organization of record or holder of record of
such B and K Shares; (e) the direct or indirect cost of financing the payments
or expenses included in (a) and (d) above; or (f) for such other services as may
be construed, by any court or governmental agency or commission, including the
SEC, to constitute distribution services under the 1940 Act or rules and
regulations thereunder. With respect to K Shares, payments under the
Distribution Plan are not intended for distribution services to the extent they
are not permitted under the Employee Retirement Income Security Act of 1974, as
amended.
Pursuant to the Distribution and Services Plan with respect to B
Shares and the Administrative and Shareholder Services Plan with respect to K
Shares, the Company may also pay securities dealers, brokers, financial
institutions or other industry professionals, such as investment advisors,
accountants, and estate planning firms (severally, a "Service Organization") for
support services provided with respect to its Client's B and K Shares.
Administrative and shareholder services provided may include some or all of the
following: (i) processing dividend and distribution payments from a Fund on
behalf of its Clients; (ii) providing statements periodically to its Clients
showing their positions in B and K Shares; (iii) arranging for bank wires; (iv)
responding to routine Client inquiries concerning their investment; (v)
providing the information to the Funds necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from a Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its Clients;
(vii) aggregating and processing purchase, exchange, and redemption requests
from its Clients and placing net purchase, exchange, and redemption orders for
its Clients; (viii) establishing and maintaining accounts and records relating
to Clients; (ix) assisting Clients in changing dividend options, account
designation and addresses or (x) other similar services if requested by the
Company.
The Distribution and Services Plan provides that the Distributor
is entitled to receive payments on a monthly basis at an annual rate not
exceeding 1.00% of the average daily net assets during such month of the
outstanding B Shares. Not more than 0.25% of such net assets will be used to
compensate Service Organizations for personal services provided to B
shareholders, and/or the maintenance of such shareholders' accounts and not more
than 0.75% of such net assets of B Shares will be used for promotional and other
primary distribution activities.
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
-85-
<PAGE> 541
K Shares. The total of all 12b-1 fees, administrative service and shareholder
service fees may not exceed, in the aggregate, the annual rate of 1.00% of the
average daily net assets of a Fund's K Shares.
Payments made out of or charged against the assets of a particular
class of shares of a particular Fund must be in payment for expenses incurred on
behalf of that class.
Payments for distribution expenses under the Distribution Plan
(the "12b-1 Plan") and Distribution and Services Plan (collectively, the "12b-1
Plans") 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 Plans provide that a written report of the amounts expended
under the 12b-1 Plans, and the purposes for which such expenditures were
incurred, will be made to the Board of Directors for its review at least
quarterly. In addition, the 12b-1 Plans provide that it may not be amended to
increase materially the costs which a Fund may bear for distribution pursuant to
the 12b-1 Plans without shareholder approval and that other material amendments
of the 12b-1 Plans 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 Plans, or in any agreements entered into
in connection with the 12b-1 Plans, 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 Plans and the Administrative and
Shareholder Services Plan will benefit the Funds and their B and K shareholders.
The 12b-1 Plans and the Administrative and Shareholder Services Plan are subject
to annual reapproval by a majority of the Company's Board of Directors,
including a majority of the Non-Interested Plan Directors and are terminable
without penalty at any time with respect to any Fund by a vote of a majority of
the Non-Interested Plan Directors or by vote of the holders of a majority of the
outstanding B or K Shares of the Fund involved. Any agreement entered into
pursuant to the 12b-1 Plans and the Administrative and Shareholder Services Plan
with a Service Organization is terminable with respect to any Fund without
penalty, at any time, by vote of a majority of the Non-Interested Plan
Directors, by vote of the holders of a majority of the outstanding B or K Shares
of such Fund, or by the Service Organization. Each agreement will also terminate
automatically in the event of its assignment.
If in any month the Distributor expends or is due more monies than
can be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while a Plan is in effect
until such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under a Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under a Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
For the fiscal year ended February 28, 1998, the K Shares of the
Aggressive Growth, California Municipal Bond, Capital Income, U.S. Government
Securities, Intermediate Bond, Blue Chip, Asset Allocation,
-86-
<PAGE> 542
Flexible Income, National Municipal Bond and International Equity Funds were
charged the following amounts pursuant to the Administrative and Shareholder
Service Plan:
-87-
<PAGE> 543
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Amount of Total
Amount of Total Administrative and
Total Administrative and Shareholder Service Fee
Administrative and Shareholder Service Fee Paid to Bank of America
Shareholder Service Fee Paid to PDI or CFG and its affiliates
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 3,261 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $ 0 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ 4,372 $ 707(1) $ 330
- ------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 1,534 $ 273(1) $ 0
[($485 waived)]
- ------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 1,035 $ 0(1) $ 0
[($359 waived)]
- ------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 8,457 $1,104(1) $ 0
- ------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 2,466 $ 464(1) $ 0
[$59 waived]
- ------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 637 $ 144(1) $ 0
[($628 waived)]
- ------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 0 $ 0(1) $ 0
- ------------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 806 $ 33(1) $ 0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) $39 was paid to PDI with respect to the Blue Chip Fund and $707, $273,
$1,065, $464, $144 and $33 was paid to BISYS with respect to the Capital
Income, U.S. Government Securities, Blue Chip, Asset Allocation, Flexible
Income and International Equity Funds, respectively.
For the fiscal year ended February 28, 1998, the K Shares of the
Aggressive Growth, California Municipal Bond, Capital Income, U.S. Government
Securities, Intermediate Bond, Blue Chip, Asset Allocation, Flexible Income,
National Municipal Bond and International Equity Funds were charged the
following amounts pursuant to the Distribution Plan:
-88-
<PAGE> 544
<TABLE>
<CAPTION>
------------------------------------------------------------------
Total Amount of Total Amount of Total
Distribution Distribution Distribution
Plan Plan Fee Paid to PDI Plan Fee Paid
Fee or CFG to Bank of
America and
affiliates
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 9,783 $ 690(1) $ 0
$3,261 (waived)
- -------------------------------------------------------------------------------------------------------
California Municipal Bond Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------
Capital Income Fund $ 13,115 $ 1,415(1) $660
[$4,372 waived]
- -------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 4,601 $ 544(1) $ 0
[$1,534 waived]
- -------------------------------------------------------------------------------------------------------
Intermediate Bond Fund $ 2,060 $ 462(1) $ 0
- -------------------------------------------------------------------------------------------------------
Blue Chip Fund $ 16,862 $ 2,130(1) $ 0
- -------------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 4,923 $ 929(1) $ 0
- -------------------------------------------------------------------------------------------------------
Flexible Income Fund $ 1,907 $ 286(1) $ 0
[$628 waived]
- -------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------
International Equity Fund $ 2,416 $ 249(1) $ 0
[$806 waived]
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) $0, $0, $0, $0, $0, $0 and $0 was paid to PDI and $690, $1,415,
$544, $462, $2,130, $929, $286 and $249 was paid to BISYS by the Aggressive
Growth, Capital Income, U.S. Government Securities, Intermediate Bond, Blue
Chip, Asset Allocation, Flexible Income, and International Equity Funds,
respectively.
No K Shares were outstanding for the fiscal year ended February
29, 1996.
During the fiscal year ended February 28, 1997, all amounts paid
under the Distribution Plan were paid as compensation to broker/dealers.
YIELD, TAX-EQUIVALENT YIELD AND TOTAL RETURN
From time to time, the yields, tax-equivalent yield (with respect
to the National Municipal and California Municipal Bond Funds) and the total
returns of the Funds may be quoted in and compared to other mutual funds with
similar investment objectives in advertisements, shareholder reports or other
communications to shareholders. The Funds may also include calculations in such
communications that describe hypothetical investment results. (Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of a Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the
-89-
<PAGE> 545
Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash. The Funds may also include discussions or
illustrations of the potential investment goals of a prospective investor
(including but not limited to tax and/or retirement planning), investment
management techniques, policies or investment suitability of a Fund, economic
conditions, legislative developments (including pending legislation), the
effects of inflation and historical performance of various asset classes,
including but not limited to stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund and/or a Master Portfolio), as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stocks, bonds, Treasury bills and shares of a Fund.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or communications may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein. From time to time, the investment adviser may enter into
alliances with retirement plan sponsors, including The Legend Group, and the
Fund may in its advertisements or sales literature include a discussion of
certain attributes or benefits to be derived from its relationship with such
retirement plan sponsors. With proper authorization, a Fund may reprint articles
(or excerpts) written regarding the Fund and provide them to prospective
shareholders. Performance information with respect to the Funds is generally
available by calling (800) 346-2087.
Yield Calculations. The yield for the respective share classes of
a Fund are calculated by dividing the net investment income per share (as
described below) earned by the Fund during a 30-day (or one month) period by the
maximum offering price per share (including the maximum front-end sales charge
of an A Share) on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period with respect to
a particular class is based on the average daily number of shares outstanding in
the class during the period entitled to receive dividends and includes dividends
and interest earned during the period attributable to that class minus expenses
accrued for the period attributable to that class, net of reimbursements. This
calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)(6 power) - 1]
cd
Where: a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of
reimbursements).
c = Expenses accrued for the period (net of
reimbursements).
d = Maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during
the period (variable "a" in the formula), dividend income on equity securities
is recognized by accruing 1/360 of the stated dividend rate of
-90-
<PAGE> 546
the security each day. Except as noted below, interest earned on debt
obligations is calculated by computing the yield to maturity of each obligation
based on the market value of the obligation (including actual accrued interest)
at the close of business on the last business day of each month, or, with
respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations
which are expected to be subject to monthly payments of principal and interest
("pay downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) a Fund or Master Portfolio may elect either (i) to amortize the discount
and premium on the remaining security, based on the cost of the security, to the
weighted average maturity date, if such information is available, or to the
remaining term of the security, if any, if the weighted average maturity date is
not available, or (ii) not to amortize discount or premium on the remaining
security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned income
is the net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. A Fund's maximum offering price per share
for purposes of the formula includes the maximum sales load imposed by the Fund
on A Shares -- currently 4.50% of the per share offering price.
The National Municipal Bond Fund's "tax-equivalent" yield for a
particular class is computed by dividing that portion of the National Municipal
Bond Fund's yield for a particular class (calculated as above) that is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the National Municipal Bond Fund's computed yield for a
particular class that is not tax-exempt. Tax-equivalent yields assume the
payment of Federal income taxes at the stated rate. The Federal income tax rate
used in calculating the National Municipal Bond Fund's tax-equivalent yield for
the 30-day period ended February 28, 1998 was 39.6%. The California Municipal
Bond Fund's "tax-equivalent" yield for a particular class is computed by: (a)
dividing the portion of the California Municipal Bond Fund's yield for a
particular class (calculated as above) that is exempt from both Federal and
California state income taxes by one minus a stated combined Federal and
California State income tax rate; (b) dividing the portion of the California
Municipal Bond Fund's yield for a particular class (calculated as above) that is
exempt from Federal income tax only by one minus a stated Federal income tax
rate; and (c) adding the figures resulting from (a) and (b) above to that
portion, if any, of the California Municipal Bond Fund's yield for a
-91-
<PAGE> 547
particular class that is not exempt from Federal income tax. The combined
Federal and California income tax rate used in calculating the California
Municipal Bond Fund's "tax equivalent" yield for the 30-day period ended
February 28, 1998 was 347%.
Based on the foregoing calculations, the 30-day yields of the A
Shares of the U.S. Government Securities, Capital Income, Intermediate Bond,
Asset Allocation, Short-Term Government and Flexible Income Funds (after fee
waivers and expense reimbursements) for the 30-day period ended February 28,
1998 were as follows:
<TABLE>
<CAPTION>
Yield
-----
<S> <C>
U.S. Government Securities Fund 6.50%
Capital Income Fund 2.92%
Intermediate Bond Fund 4.51%
Asset Allocation Fund 2.22%
Short-Term Government Fund 5.19%
Flexible Income Fund (Corporate Bond) 5.50%
</TABLE>
Based on the foregoing calculations, the A Shares of the
California Municipal Bond Fund's yield and tax- equivalent yield (after fee
waivers) and the A Shares of the National Municipal Bond Fund's yield and
tax-equivalent yield (after fee waivers and expense reimbursements) for the
30-day period ended February 28, 1998 were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C> <C>
California Municipal Bond Fund 3.79% 5.80%
National Municipal Bond Fund 4.14% 6.85%
</TABLE>
Based on the foregoing calculations, the 30-day yields of the K
Shares of the U.S. Government Securities, Capital Income, Intermediate Bond,
Asset Allocation and Flexible Income Funds (after fee waivers and expense
reimbursements) for the 30-day period ended February 28, 1998 were as follows:
<TABLE>
<CAPTION>
Yield
-----
<S> <C>
U.S. Government Securities Fund 6.36%
Capital Income Fund 2.60%
Intermediate Bond Fund 4.27%
Asset Allocation Fund 1.85%
Flexible Income Fund 5.23%
</TABLE>
-92-
<PAGE> 548
Based on the foregoing calculations, the 30-day yield of the SRF
Shares of the Intermediate Bond Fund was 4.72% and of the Asset Allocation Fund
was 2.33%
No B Shares were issued or outstanding during the 30-day period
ended February 28, 1998.
Total Return Calculations. The Funds compute their average annual
total returns separately for their separate share classes by determining the
average annual compounded rates of return during specified periods that equate
the initial amount invested in a particular share class to the ending redeemable
value of such investment in such class. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV (1/n power)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Funds compute their aggregate total returns separately for
their separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all nonrecurring
charges at the end of the period covered by the computations. In addition, the
Funds' average annual total return and aggregate total return quotations
-93-
<PAGE> 549
reflect the deduction of the maximum front-end sales load charged in connection
with the purchase of A Shares and the deduction of any applicable contingent
deferred sales charge with respect to B Shares.
Based on the foregoing calculations, the 1) average annual total
returns, and 2) the aggregate total returns for the A Shares of the Aggressive
Growth, Capital Income, U.S. Government Securities, California Municipal Bond,
Intermediate Bond, Blue Chip, Asset Allocation, National Municipal Bond,
Flexible Income, Short-Term Government and International Equity Funds for the
years or periods indicated were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------
Average Annual Total Returns
----------------------------------------------------------------------------------------------------------------
One-Year Five-Year Ten-Year Period from
Period Ended Period Ended Period Ended Commencement of
February 28, February 28, February 28, Operations through
1998 1998 1998 February 28, 1998*
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund 17.83% 14.06% 15.86% N/A
----------------------------------------------------------------------------------------------------------------
Capital Income Fund 16.06% 14.79% 16.35% N/A
----------------------------------------------------------------------------------------------------------------
U.S. Government Securities 4.33% 4.32% 7.35% N/A
Fund (after fee waivers
----------------------------------------------------------------------------------------------------------------
California Municipal Bond 4.22% 4.89% 6.92% N/A
Fund (after fee waivers)
----------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund 2.57% N/A N/A 4.35%
(after fee waivers)
----------------------------------------------------------------------------------------------------------------
Blue Chip Fund 27.92% N/A N/A 22.68%
(after fee waivers)
----------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 17.55% N/A N/A 14.78%
(after fee waivers)
----------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund 3.76% N/A N/A 5.40%
(fee waivers)
----------------------------------------------------------------------------------------------------------------
Flexible Income Fund 5.61% 7.10% 6.97% N/A
(after fee waivers)
----------------------------------------------------------------------------------------------------------------
International Equity Fund 5.33% N/A N/A 2.50%
(after fee waivers)
----------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* The Aggressive Growth, Capital Income, U.S. Government Securities,
California Municipal Bond, Intermediate Bond, Blue Chip, Asset Allocation,
National Municipal Bond and International Equity Funds commenced operations on
March 31, 1984, September 25, 1987, January 7, 1988, March 30, 1984, January 24,
1994, January 13, 1994, January 18, 1994, January 28, 1994, and May 13, 1996,
respectively.
** Total return for the Pacific Horizon Flexible Income Fund (formerly,
Corporate Bond Fund) from 1984 through April 25, 1994 reflects performance of
the predecessor fund, Bunker Hill Income Securities, Inc., a closed-end fund.
Total return of the closed-end fund is calculated assuming a purchase of common
stock at market value on the opening of the first day of each period reported.
Total return for the closed-end fund does not reflect brokerage commissions. The
annual operating expenses of the predecessor fund were less than the
-94-
<PAGE> 550
current operating expenses of the Pacific Horizon Flexible Income Fund. Had
current expenses been reflected in the predecessor fund's performance, such
performance would have been reduced.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
-----------------------------------------------------------------------------------------------
One-Year Period Five-Year Ten-Year Period Period from
Ended Period Ended Ended Commencement of
February 28, February 28, February 28, Operations through
1998 1998 1998 February 28, 1998*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund 17.83% 93.06% 336.02% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund 16.06% 99.27% 354.52% N/A
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 4.33% 23.55% 103.25% N/A
Fund (after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
California Municipal Bond 4.22% 26.95% 95.31% N/A
Fund (after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund 2.57% N/A N/A 19.09%
(after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 27.92% N/A N/A 132.68%
(after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 17.55% N/A N/A 76.38%
(after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond 3.76% N/A N/A 24.02%
Fund (after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund 5.61% 40.94% 96.14% N/A
(after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund 1.24% N/A N/A 4.61%
(after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
International Equity Fund 5.33% N/A N/A 4.54%
(after fee waivers)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* The Aggressive Growth, Capital Income, U.S. Government Securities,
California Municipal Bond, Intermediate Bond, Blue Chip, Asset Allocation and
National Municipal Bond Funds commenced operations on March 31, 1984, September
25, 1987, January 7, 1988, March 30, 1984, January 24, 1994, January 13, 1994,
January 18, 1994 and January 28, 1994, respectively.
** Total return for the Pacific Horizon Flexible Income Fund from 1984
through April 25, 1994 reflects performance of the predecessor fund, Bunker Hill
Income Securities, Inc., a closed-end fund. Total return of the closed-end fund
is calculated assuming a purchase of common stock at market value on the opening
of the first day of each period reported. Total return for the closed-end fund
does not reflect brokerage commissions. The annual operating expenses of the
predecessor fund were less than the current operating expenses of the Pacific
Horizon Flexible Income Fund. Had current expenses been reflected in the
predecessor fund's performance, such performance would have been reduced.
Based on the foregoing calculations, the 1) average annual total
returns, and 2) the aggregate total returns for the K Shares of the Aggressive
Growth, Capital Income, U.S. Government Securities, Intermediate Bond, Blue
Chip, Asset Allocation, Flexible Income and International Equity Funds for the
years or periods indicated were as follows:
-95-
<PAGE> 551
<TABLE>
<CAPTION>
-----------------------------------------------------
Average Annual Total Return
----------------------------------------------------------------------------------------------------
Period from
One-Year Five-Year Ten-Year Commencement of
Period Ended Period Ended Period Ended Operations**
February 28, February 28, February 28, through February
1998 1998 1998 28, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 22.70% 14.93% 16.30% N/A
Fund*
----------------------------------------------------------------------------------------------------
Capital Income Fund* 20.97% 15.67% 16.79% N/A
----------------------------------------------------------------------------------------------------
U.S. Government 8.92% 5.18% 7.79% N/A
Securities Fund*
(after fee waivers)
----------------------------------------------------------------------------------------------------
Intermediate Bond 6.80% N/A N/A 5.35%
Fund* (after fee
waivers)
----------------------------------------------------------------------------------------------------
Blue Chip Fund* 33.08% N/A N/A 23.82%
(after fee waivers)
----------------------------------------------------------------------------------------------------
Asset Allocation Fund* 22.10% N/A N/A 15.83%
(after fee waivers)
----------------------------------------------------------------------------------------------------
Flexible Income Fund*+ 9.88% 7.94% 7.39% N/A
(after fee waivers)
----------------------------------------------------------------------------------------------------
International Equity 9.35% N/A N/A 4.46%
Fund (after fee
waivers)
----------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* Performance prior to October 25, 1996, October 21, 1996, November 20,
1996, February 28, 1997, November 20, 1996, November 11, 1996, November 11,
1996, February 28, 1997, November 20, 1996 and October 25, 1996 is represented
by performance of the A Shares of the Aggressive Growth, Capital Income, U.S.
Government Securities, California Municipal Bond, Intermediate Bond, Blue Chip,
Asset Allocation, National Municipal Bond, Flexible Income and International
Equity Funds, respectively. On the foregoing dates, K Shares of the above-listed
Funds commenced operations. K shares, unlike A shares, are sold without a
front-end sales load but have an ongoing .75% distribution or administrative
service fee which would have reduced price or performance.
** The Aggressive Growth, Capital Income, U.S. Government Securities,
California Municipal Bond, Intermediate Bond, Blue Chip, Asset Allocation,
National Municipal Bond and International Equity Funds commenced operations on
March 31, 1984, September 25, 1987, January 7, 1988, March 30, 1984, January 24,
1994, January 13, 1994, January 18, 1994, January 28, 1994 and May 13, 1996,
respectively.
+ Total return for the Pacific Horizon Flexible Income (formerly, Corporate
Bond Fund) from 1984 through April 25, 1994 reflects performance of the
predecessor fund, Bunker Hill Income Securities, Inc., a closed-end fund. Total
return of the closed-end fund is calculated assuming a purchase of common stock
at market value on the opening of the first day of each period reported. Total
return for the closed-end fund does not reflect brokerage commissions. The
annual operating expenses of the predecessor fund were less than the
-96-
<PAGE> 552
current operating expenses of the Pacific Horizon Flexible Income Fund. Had
current expenses been reflected in the predecessor fund's performance, such
performance would have been reduced.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Total Returns
------------------------------------------------------------------------------------------
One-Year Period Five-Year Ten-Year Period Period from
Ended Period Ended Ended Commencement of
February 28, February 28, February 28, Operations through
1998 1998 1998 February 28, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund 22.70% 100.51% 352.84% N/A
(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Income Fund 20.97% 107.05% 372.32% N/A
*(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 8.92% 28.76% 111.79% N/A
Fund*(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
California Municipal Bond
Fund* (after fee waivers)* N/A**
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund* 6.80% N/A N/A 23.85%
(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund* 33.08% N/A N/A 141.77%
(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 22.10% N/A N/A 83.16%
(after fee waivers)**
- ----------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond
Fund (after fee waivers)* N/A**
- ----------------------------------------------------------------------------------------------------------------------------------
Flexible Income Fund*+ 9.88% 46.51% 103.95% N/A
(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
International Equity Fund 9.35% N/A N/A 8.16%
(after fee waivers)*
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* Performance prior to October 25, 1996, October 21, 1996, November 20,
1996, February 28, 1997, November 20, 1996, November 11, 1996, November 11,
1996, February 28, 1997, November 20, 1996 and October 25, 1996 is represented
by performance of the A Shares of the Aggressive Growth, Capital Income, U.S.
Government Securities, California Tax Exempt Bond, Intermediate Bond, Blue Chip,
Asset Allocation, National Municipal Bond, Flexible Income and International
Equity Funds, respectively. On the foregoing dates, K Shares of the above-listed
Funds commenced operations. Sold without a front-end sales load but have an
ongoing .75% distribution or administrative services fee which would have
reduced price performance.
+ Total return for the Pacific Horizon Flexible Income Fund (formerly,
Corporate Bond Fund) from 1984 through April 25, 1994 reflects performance of
the predecessor fund, Bunker Hill Income Securities, Inc., a closed-end fund.
Total return of the closed-end fund is calculated assuming a purchase of common
stock at market value on the opening of the first day of each period reported.
Total return for the closed-end fund does not reflect brokerage commissions. The
annual operating expenses of the predecessor fund were less than the current
operating expenses of the Pacific Horizon Flexible Income Fund. Had current
expenses been reflected in the predecessor fund's performance, such performance
would have been reduced.
** K Shares of the California Municipal Bond and National Municipal Bond
Fund ceased operations on September 15, 1997.
-97-
<PAGE> 553
Based on the foregoing calculations, the 1) average annual total
returns, and 2) the aggregate total returns for the SRF Shares of the
Intermediate Bond, Blue Chip and Asset Allocation Funds for the years or periods
indicated were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Average Annual Return
- ------------------------------------------------------------------------------------------------------------------
One-Year Period Five-Year Period Period From Commencement
Ended Ended of Operations* through
February 28, 1998 February 28, 1998 February 28, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 7.18% 5.05% 7.49%
(after fee waivers)*
- ------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 34.32% 22.44% 17.82%
(after fee waivers)*
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 23.14% 15.04% 13.26%
(after fee waivers)*
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Aggregate Total Return
- ------------------------------------------------------------------------------------------------------------------
One-Year Period Five-Year Period Period From Commencement
Ended Ended of Operations* through
February 28, 1998 February 28, 1998 February 28, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 7.18% 27.95% 105.66%
(after fee waivers)*
- ------------------------------------------------------------------------------------------------------------------
Blue Chip Fund 34.32% 175.21% 414.17%
(after fee waivers)*
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 23.14% 101.48% 246.77%
(after fee waivers)*
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* On June 23, 1997, the Bond, Blue Chip and Asset Allocation Funds of
Seafirst Retirement Funds were reorganized into the Intermediate Bond, Blue Chip
and Asset Allocation Funds of the Company. Performance prior to June 23, 1997 is
represented by the performance of the Bond, Blue Chip and Asset Allocation of
Seafirst Retirement Funds. The Intermediate Bond, Blue Chip and Asset Allocation
Funds commenced operations on March 9, 1988.
The Funds may also advertise total return data without reflecting
sales charges in accordance with the rules of the SEC. Quotations which do not
reflect such sales charges will, of course, be higher than quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
Pacific Horizon is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. Pacific Horizon's
Charter authorizes the Board of Directors to issue up to four hundred billion
full and fractional common shares. Pursuant to the authority granted in the
Charter, the Board of Directors has authorized the issuance of twenty-one
classes of stock - Classes A through W Common Stock,
-98-
<PAGE> 554
$.001 par value per share, representing interests in twenty-one separate
investment portfolios. Class D represents interests in the A Shares of the
Aggressive Growth Fund, Class D -- Special Series 3 represents interests in the
B Shares of the Aggressive Growth Fund and Class D -- Special Series 5
represents interests in the K Shares of the Aggressive Growth Fund; Class E
represents interests in the A Shares of the U.S. Government Securities Fund,
Class E -- Special Series 3 represents interests in the B Shares of the U.S.
Government Securities Fund and Class E -- Special Series 5 represents interests
in the K Shares of the U.S. Government Securities Fund; Class F represents
interests in the A Shares of the Capital Income Fund, Class F -- Special Series
3 represents interests in the B Shares of the Capital Income Fund and Class F --
Special Series 5 represents interests in the K Shares of the Capital Income
Fund; Class G represents interests in the A Shares of the California Municipal
Bond Fund, Class G -- Special Series 3 represents interests in the B Shares of
the California Municipal Bond Fund and Class G -- Special Series 5 represents
interests in the K Shares of the California Municipal Bond Fund; Class B
represents interests in the A Shares of the Intermediate Bond Fund, Class B --
Special Series 3 represents interests in the B Shares of the Intermediate Bond
Fund; Class B -- Special Series 5 represents interests in the K Shares of the
Intermediate Bond Fund, Class B -- Special Series 7 represents interests in the
SRF Shares of the Intermediate Bond Fund; Class N represents interests in the A
Shares of the Blue Chip Fund, Class N -- Special Series 3 represents interests
in the B Shares of the Blue Chip Fund; Class N -- Special Series 5 represents
interests in the K Shares of the Blue Chip Fund and Class N -- Special Series 7
represents interests in the SRF Shares of the Blue Chip Fund; Class O represents
interests in the A Shares of the Asset Allocation Fund, Class O -- Special
Series 3 represents interests in the B Shares of the Asset Allocation Fund;
Class O -- Special Series 5 represents interests in the K Shares of the Asset
Allocation Fund and Class O -- Special Series 7 represents interests in the SRF
Shares of the Asset Allocation Fund; Class Q represents interests in the A
Shares of the National Municipal Bond Fund, Class Q -- Special Series 3
represents interests in the B Shares of the National Municipal Bond Fund and
Class Q -- Special Series 5 represents interests in the K Shares of the National
Municipal Bond Fund; Class T represents interests in the A Shares of the
International Equity Fund, Class T -- Special Series 3 represents interests in
the B Shares of the International Equity Fund and Class T -- Special Series 5
represents interests in the K Shares of the International Equity Fund; Class U
represents interests in the A Shares of the Short-Term Government Fund, Class U
- - Special Series 3 represents interests in the B Shares of the Short-Term
Government Fund and Class U - Special Series 5 represents interests in the K
Shares of the Short-Term Government Fund; Class W represents interests in the A
Shares of the Flexible Income Fund, Class W -- Special Series 3 represents
interests in the B Shares of the Flexible Income Fund and Class W -- Special
Series 5 represents interests in the K Shares of the Flexible Income Fund.
Pacific Horizon's charter also authorizes the Board of Directors to classify or
reclassify any particular class of Pacific Horizon's shares into one or more
series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectuses, Pacific Horizon's shares will be fully
paid and non-assessable. For information concerning possible restrictions upon
the transferability of Pacific Horizon's shares and redemption provisions with
respect to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share held,
and fractional votes for fractional shares held, and will vote in the aggregate
and not by class or series except as otherwise required by the 1940 Act or other
applicable law or when permitted by the Board of Directors. Shares have
cumulative voting rights to the extent they may be required by applicable law.
-99-
<PAGE> 555
Rule 18f-2 under the 1940 Act provides that any matter required to
be submitted to the holders of the outstanding voting securities of an
investment company such as Pacific Horizon shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under Rule 18f-2
the approval of an investment advisory agreement or 12b-1 distribution plan or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Fund only if approved by a majority of the outstanding shares
of such Fund. However, the rule also provides that the ratification of
independent public accountants, the approval of principal underwriting contracts
and the election of directors may be effectively acted upon by shareholders of
Pacific Horizon voting without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a greater
vote of Pacific Horizon's common stock (or of the shares of a Fund voting
separately as a class) in connection with any corporate action, unless otherwise
provided by law (for example, by Rule 18f-2 discussed above) or by Pacific
Horizon's Charter, Pacific Horizon may take or authorize such action upon the
favorable vote of the holders of more than 50% of the outstanding common stock
of Pacific Horizon voting without regard to class.
THE MASTER PORTFOLIOS
The Intermediate Bond Master Portfolio and Blue Chip Master
Portfolio are separate series of Master Investment Trust, Series I. The Master
Trust's Declaration of Trust authorizes its Board of Trustees to issue an
unlimited number of interests of beneficial interest and to establish and
designate any unissued interests of one or more additional series of interests.
Investors in the Master Portfolios are entitled to distributions arising from
the net investment income and net realized gains, if any, earned on investments
held by the Master Portfolio. Investors are also entitled to participate in the
net distributable assets of the Master Portfolio in which they hold beneficial
interests on liquidation. Beneficial interests have no preemptive rights,
conversion or exchange rights.
REPORTS
Shareholders will receive unaudited semi-annual reports describing
the Master Portfolio's and Funds' investment operations and annual financial
statements together with the reports of the independent accountants of the
Funds.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York
10286, has been appointed custodian for the Non- Feeder Funds except the
Flexible Income Fund, International Equity Fund and Asset Allocation Fund. PNC
Bank, National Association, 1600 Market Street, Philadelphia, PA 19103 has been
appointed custodian for the Blue Chip Fund, Intermediate Bond Fund, Flexible
Income Fund, International Equity Fund, Asset Allocation Fund, Intermediate Bond
Master Portfolio and Blue Chip Master Portfolio. The Bank of New York (with
respect to the National Municipal Bond Fund, California Municipal Bond Fund,
U.S. Government Securities Fund, Capital Income Fund and Aggressive Growth Fund)
and PFPC (with respect to the Flexible Income Fund, International Equity Fund,
Short-Term Government Fund, Asset Allocation Fund, Intermediate Bond Fund and
Blue Chip Fund) provide the Funds with certain accounting services pursuant to
Fund Accounting Services Agreements with Bank of America. Both PFPC, which is
located at 103 Bellevue
-100-
<PAGE> 556
Parkway, Wilmington, DE 19809, and PNC Bank, National Association are wholly
owned subsidiaries of PNC Bancorp, Inc., a bank holding company. Under separate
Fund Accounting Services Agreements, The Bank of New York and PFPC have agreed
to provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect their respective Funds. The monthly fees
charged by The Bank of New York and PFPC under the Fund Accounting Agreements
are borne by the Funds. As custodians, The Bank of New York and PNC Bank, N.A.
each (i) maintain separate account or accounts in the name of the respective
Funds and/or Master Portfolios, as appropriate (ii) hold and disburse portfolio
securities; (iii) make receipts and disbursements of money, (iv) collect and
receive income and other payments and distributions on account of portfolio
securities, (v) respond to correspondence from security brokers and others
relating to their respective duties and (vi) make periodic reports concerning
their duties.
PFPC Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968, serves
as transfer and dividend disbursing agent for each class of shares of the Funds.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
Pacific Horizon, is a partner), 1345 Chestnut Street, Philadelphia, PA
19107 serves as counsel to the Companies and will pass upon the legality of the
shares offered hereby. O'Melveny & Meyers acts as counsel to Bank of America and
as special California counsel for the California Municipal Bond Fund and has
reviewed the portions of the California Municipal Bond Fund's Prospectus and
this Statement of Additional Information concerning California taxes and the
description of the special considerations relating to California Municipal
Securities.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, representing the combined firms of Price
Waterhouse LLP and Coopers & Lybrand L.L.P., independent accountants, with
offices at 1177 Avenue of the Americas, New York, New York, has been selected as
independent accountants of each Fund for the fiscal year ended February 28,
1999.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended
February 28, 1998 (the "Annual Reports") accompanies this Statement of
Additional Information. The financial statements and notes thereto in each
Annual Report are incorporated in this Statement of Additional Information by
reference, and have been audited by Price Waterhouse LLP, whose report thereon
also appears in each Annual Report and is also incorporated herein by reference.
No other parts of the Annual Report are incorporated by reference herein. Such
financial statements have been incorporated herein in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares or interests of a
Fund, a Master Portfolio or a particular series means the affirmative vote of
the lesser of (a) more than 50% of the outstanding shares or interests of such
Fund, Master Portfolio or series or (b) 67% of the shares or interests of such
Fund, Master Portfolio or series present at a meeting at which
-101-
<PAGE> 557
more than 50% of the outstanding shares or interests of such Fund, Master
Portfolio or series are represented in person or by proxy.
PRINCIPAL HOLDERS OF SECURITIES
As of June 5, 1998, the officers and directors of the Company collectively owned
less than 1% of the outstanding shares of any class of the Funds.
As of June 5, 1998, the following entities were known by the Funds to own 5% or
more of the outstanding shares of any class of the Funds:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF OUTSTANDING
SHARES HELD SHARES OF CLASS
-------------------- ---------------
<S> <C> <C>
PRIME FUND -- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 2,112,267,667.780 80.6%
</TABLE>
-102-
<PAGE> 558
<TABLE>
<S> <C> <C>
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 259,888,898.200 9.9%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
PRIME FUND -- HORIZON SHARES
Bank of America NT&SA 815,409,324.970 31.3%
Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
William Barron Hilton 311,526,000.000 11.9%
Charitable Remainder Trust
9336 Civic Center Drive
Beverly Hills, CA 90210
PRIME FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 934,160,388.770 25.0%
Financial Management and Trust Services
P.O. Box 513577 -- Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 310,996,075.190 8.3%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
Security Pacific Cash Management 708,728,100.000 19.0%
c/o Bank of America
1850 Gateway Blvd.
Concord, CA 94520
PRIME FUND -- X SHARES
BA Investment Services, Inc. 528,249,277.05 50.9%
FBO Customers
Unit 17852
</TABLE>
-103-
<PAGE> 559
<TABLE>
<S> <C> <C>
P.O. Box 7042
San Francisco, CA 94120
PRIME FUND -- Y SHARES
BA Arizona 8,049,762.200 5.5%
2044 Franklin Street
Oakland, CA 94612
Bank of America-California 7,500,000.000 5.1%
2044 Franklin Street
Oakland, CA 94612
Karsten Manufacturing Corporation 8,149,580.350 5.6%
2201 West Desert Cove
Phoenix, AZ 85029
PRIME FUND -- S SHARES
BA Investment Services, Inc. 803,285,361.970 99.2%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY FUND -- PACIFIC HORIZON SHARES
HARE & Co., Bank of New York 64,553,129.890 20.9%
and Short Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 192,584,335.900 62.4%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY FUND -- HORIZON SHARES
Bank of America NT&SA 227,462,997.510 32.4%
Private Banking
Attn: Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
HARE & Co 164,326,526.330 23.4%
c/o Bank of New York
</TABLE>
-104-
<PAGE> 560
<TABLE>
<S> <C> <C>
One Wall Street, 5th Floor
New York, NY 10286
KPMG Peat Marwick LLP 51,000,000.000 7.3%
3 Chestnut Ridge Road
Montvale, NJ 07645
Los Angeles Department of Airports 42,557,369.150 6.1%
515 South Flower Street
Los Angeles, CA 90071
Century Theatres Inc. 47,096,226.750 6.7%
150 Pelican Way
San Rafael, CA 94901
TREASURY FUND -- HORIZON SERVICE SHARES
Security Pacific Cash Management 199,484,100.000 11.3%
c/o Bank of America
1850 Gateway Blvd.
Concord, CA 94520
Bank of America FM&TS 368,064,376.550 20.8%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TREASURY FUND -- X SHARES
BA Investment Services, Inc. 12,694,320.760 5.3%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
Bank of America California 32,000,000.000 13.5%
2044 Franklin Street
Oakland, CA 94612
TREASURY FUND -- Y SHARES
Bank of America California 5,000,000.000 6.6%
2044 Franklin Street
Oakland, CA 94612
BA Arizona 7,700,404.480 10.2%
2044 Franklin Street
</TABLE>
-105-
<PAGE> 561
<TABLE>
<S> <C> <C>
Oakland, CA 94612
BA Nevada 6,071,336.580 8.0%
2044 Franklin Street
Oakland, CA 94612
CCC TA Welfare Benefit Trust 5,736,144.850 7.6%
2950 E. Rochelle Ave
Las Vegas, NV 89121
Collectron AZ 4,051,866.650 5.4%
P.O. Box 1931
Nogales, AZ 85628
Sunclipse Inc. 4,191,584.710 5.6%
6600 Valley View Street
Buena Park, CA 90620
TREASURY ONLY FUND -- PACIFIC HORIZON SHARES
HARE & Co., Bank of New York and Short 22,854,225.010 12.1%
Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 101,186,129.680 53.4%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 59,850,049.120 31.6%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY ONLY FUND -- HORIZON SHARES
Bank of America Illinois 4,334,149.550 13.6%
231 S. LaSalle Street
Chicago, IL 60697
Bank of America NT&SA 22,854,051.990 71.5%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
</TABLE>
-106-
<PAGE> 562
<TABLE>
<S> <C> <C>
Los Angeles, CA 90051
City and County of San Francisco 4,100,243.250 12.8%
Mayors Office of Community
25 Van Ness Avenue, Suite 700
San Francisco, CA 94102
TREASURY ONLY FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 52,896,546.290 24.3%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 17,371,255.110 8.0%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
The Emerson U. and Erika J. Glazer Trust 12,364,024.280 5.7%
3 Del Amo Fashion Center
Torrance, CA 90503
GOVERNMENT -- PACIFIC HORIZON SHARES
Wall Data Inc. 14,657,467.680 9.2%
11332 NE 122nd Way
Kirkland, WA 98034
HARE & Co., Bank of New York and Short 8,707,595.120 5.5%
Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 93,865,900.070 59.1%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 24,813,941.710 15.6%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
GOVERNMENT FUND -- HORIZON SHARES
</TABLE>
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<TABLE>
<S> <C> <C>
Skinner Corporation 11,294,088.600 5.1%
1326 Fifth Avenue, Suite 711
Seattle, WA 98101
New York New York Hotel LLC 12,847,712.880 5.8%
3790 Las Vegas Boulevard South
Las Vegas, NV 89109
Sletton Construction of Nevada Inc. 12,607,585.140 5.7%
P.O. Box 93776
Las Vegas, NV 89193
GOVERNMENT FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 35,965,540.250 80.6%
Trust, Financial Management & Trust Services
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
Security Pacific Cash Management 6,619,300.000 14.8%
c/o Bank of America
1850 Gateway Blvd
Concord, CA 94520
TAX EXEMPT MONEY FUND -- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 124,277,308.400 94.6%
FBO Customers Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TAX EXEMPT MONEY FUND -- HORIZON SHARES
Bank of America NT&SA 308,877,964.040 94.5%
The Private Bank
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TAX EXEMPT MONEY FUND -- HORIZON SERVICE SHARES
BA Investment Services, Inc. 29,904,479.330 11.5%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
</TABLE>
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<TABLE>
<S> <C> <C>
Bank of America 117,932,621.380 65.1%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TAX EXEMPT MONEY FUND -- S SHARES
BA Investment Services, Inc. 35,815,756.430 100.0%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 300,327,896.900 54.2%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 232,178,555.240 41.9%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- HORIZON SERVICE SHARES
Bank of America NT&SA 326,393,595.930 55.0%
Attn: Common Trust Funds Unit
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 175,398,911.420 29.6%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- X SHARES
BA Investment Services, Inc. 25,836,568.320 100.0%
FBO Customers
Unit 17852
P.O. Box 7042
</TABLE>
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<TABLE>
<S> <C> <C>
San Francisco, CA 94120
CALIFORNIA TAX EXEMPT MONEY MARKET FUND
-- S SHARES
BA Investment Services, Inc. 227,376,082.980 100.0%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
INTERMEDIATE BOND FUND -- A SHARES
PACO -- Attn: Mutual Funds 544,191.036 12.1%
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 2,347,781.402 52.2%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
PACO 475,408.464 10.6%
P.O. Box 513577
Los Angeles, CA 90051
INTERMEDIATE BOND FUND -- K SHARES
Corelink Financial, Inc. 46,135.414 100.0%
P.O. Box 4054
Concord, CA 94524
INTERMEDIATE BOND FUND -- SRF SHARES
Seafirst Bank 3,080,718.572 100.0%
FBO Retirement Services
P.O. Box 84248
Seattle, WA 98124
CORPORATE BOND FUND -- A SHARES
PACO 206,707.063 8.1%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 477,339.651 18.8%
The Private Bank
Attn: Common Trust Funds Unit 38329
</TABLE>
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<TABLE>
<S> <C> <C>
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
FLEXIBLE INCOME (FORMERLY CORPORATE BOND) FUND -- K SHARES
Corelink Financial, Inc. 23,543.085 100.0%
P.O. Box 4054
Concord, CA 94524
U.S. GOVERNMENT SECURITIES FUND -- K SHARES
Corelink Financial, Inc. 116,153.211 100.0%
P.O. Box 4054
Concord, CA 94524
SHORT-TERM GOVERNMENT FUND -- A SHARES
Bank of America NT&SA 3,156,142.163 83.8%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
CALIFORNIA MUNICIPAL (FORMERLY, CALIFORNIA
TAX-EXEMPT) BOND FUND -- A SHARES
Bank of America NT&SA 3,044,994.685 9.6%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
CAPITAL INCOME FUND -- K SHARES
Corelink Financial, Inc. 150,245.252 88.5%
P.O. Box 4054
Concord, CA 94524
ASSET ALLOCATION FUND -- A SHARES
Corelink Financial, Inc. 260,091.341 8.1%
P.O. Box 4054
Concord, CA 94524
Bank of America NT&SA 272,916.571 8.5%
FBO PACO
Attn: Mutual Funds Unit
P.O. Box 3577
Terminal Annex
</TABLE>
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<TABLE>
<S> <C> <C>
Los Angeles, CA 90051
Vanguard Fiduciary Trust Company 184,535.325 5.8%
Kirkland and Ellis Defined
Contribution Retirement Plan
P.O. Box 2600
Valley Forge, PA 19482
ASSET ALLOCATION FUND -- K SHARES
Corelink Financial, Inc. 63,480.863 100.0%
P.O. Box 4054
Concord, CA 94524
ASSET ALLOCATION -- SRF SHARES
Seafirst Bank 11,668,940.795 100.0%
FBO Retirement Services
P.O. Box 84248
Seattle, WA 98124
AGGRESSIVE GROWTH FUND - A SHARES
PACO - Attn: Mutual Funds 491,251.531 5.3%
P.O. Box 513577
Los Angeles, CA 90051
AGGRESSIVE GROWTH FUND -- K SHARES
Corelink Financial Inc. 161,757.766 100.0%
P.O. Box 4054
Concord, CA 94524
BLUE CHIP FUND -- A SHARES
Bank of America NT&SA 901,809.695 7.6%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BLUE CHIP FUND -- K SHARES
Corelink Financial Inc. 250,051.579 99.5%
P.O. Box 4054
Concord, CA 94524
BLUE CHIP FUND -- SRF SHARES
Seafirst Bank 13,956,166.970 100.0%
FBO Retirement Services
P.O. Box 84248
</TABLE>
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<TABLE>
<S> <C> <C>
Seattle, WA 98124
INTERNATIONAL EQUITY FUND -- A SHARES
PACO 789,867.260 18.9%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 893,038.660 21.3%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
PACO 1,500,976.246 35.9%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
INTERNATIONAL EQUITY FUND -- K SHARES
Corelink Financial, Inc. 62,528.613 100.0%
P.O. Box 4054
Concord, CA 94524
</TABLE>
At June 5, 1998, no other person was known by the Company to hold of record or
beneficially more than 5% of the outstanding shares of any investment portfolio
of the Company.
The Prospectuses and this SAI omit certain information contained in the
Company's registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the SEC by
paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS
The Annual Reports for each Fund for their fiscal year ended February 28, 1998
accompany this SAI. The financial statements and notes thereto in each Annual
Report are incorporated into this
-113-
<PAGE> 569
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations rated "A-1". However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period. The "D" rating will also be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins
A-1
<PAGE> 570
in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
A-2
<PAGE> 571
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
securities rated "F1".
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
A-3
<PAGE> 572
"TBW-4" - This designation represents Thomson BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - Debt is more vulnerable to non-payment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to non-payment.
A-4
<PAGE> 573
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This
rating is used when payments on an obligation are not made on the date due, even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are
A-5
<PAGE> 574
speculative in a high degree; and "C" represents the lowest rated class of
bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of
investment risk and are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is very unlikely to
be adversely affected by foreseeable events.
A-6
<PAGE> 575
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of investment
risk and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to adverse changes in
circumstances or in economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "B" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
A-7
<PAGE> 576
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
A-8
<PAGE> 577
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
A-9
<PAGE> 578
APPENDIX B
As stated in the Prospectuses, the Funds, may enter into
futures contracts and options for hedging purposes. Such transactions are
described in this Appendix B.
I. INTEREST RATE FUTURES CONTRACTS
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a 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.
A 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 a Fund, through using
futures contracts.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by a 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 a 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 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
<PAGE> 579
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. A 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. A 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 a Fund
tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The investment adviser wishes to fix
the current market value of this portfolio security until some point in the
future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. Such 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.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of
interest rates and the equivalent futures market price could rise above 98. In
this case, the market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this increase would be
reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above
example might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A 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
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<PAGE> 580
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 a Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The investment adviser wishes to fix
the current market price (and thus 10% yield) of the long-term bond until the
time (four months away in this example) when it may purchase the bond. Assume
the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Fund might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to 105,
the equivalent futures market price for Treasury bonds might also rise from 98
to 103. In that case, the 5-point increase in the price that the Fund pays for
the long-term bond would be offset by the 5-point gain realized by closing out
the futures contract purchase.
The investment adviser could be wrong in its forecast of
interest rates; long-term interest rates might rise to above 10%; and the
equivalent futures market price could fall below 98. If short-term rates at the
same time fall to 10% or below, it is possible that the Fund would continue with
its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Fund would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the fund,
including those originally in the pool assigned to the particular long-term
bond, would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing out
the futures contract purchase. In each transaction, expenses would also be
incurred.
II. MUNICIPAL BOND INDEX FUTURES CONTRACTS
A municipal bond index assigns relative values to the bonds
included in the index and the index fluctuates with changes in the market values
of the bonds so included. The Chicago Board of Trade has designed a futures
contract based on the Bond Buyer Municipal Bond Index. This Index is composed of
a number of term revenue and general obligation bonds, and its composition is
updated regularly as new bonds meeting the criteria of the Index are issued and
existing bonds mature. The Index is intended to provide an accurate indicator of
trends and
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<PAGE> 581
changes in the municipal bond market. Each bond in the Index is independently
priced by six dealer-to-dealer municipal bond brokers daily. The prices are then
averaged and multiplied by a coefficient. The coefficient is used to maintain
the continuity of the Index when its composition changes. The Chicago Board of
Trade, on which futures contracts based on this Index are traded, as well as
other U.S. commodities exchanges, are regulated by the Commodity Futures Trading
Commission. Transactions on such exchange are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
The National Municipal Bond Fund will sell index futures
contracts in order to offset a decrease in market value of its fund securities
that might otherwise result from a market decline. The Fund may do so either to
hedge the value of its portfolio as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the National Municipal Bond Fund will purchase index futures
contracts in anticipation of purchases of securities. In a substantial majority
of these transactions, the National Municipal Bond Fund will purchase such
securities upon termination of the long futures position, but a long futures
position may be terminated without a corresponding purchase of securities.
Closing out a futures contract sale prior to the settlement
date may be effected by the National Municipal Bond Fund's entering into a
futures contract purchase for the same aggregate amount of the index involved
and the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the National Municipal Bond Fund is paid the difference and
thus realizes a gain. If the offsetting purchase price exceeds the sale price,
the National Municipal Bond Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
National Municipal Bond Fund's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Fund realizes a gain, and
if the purchase price exceeds the offsetting sale price, the National Municipal
Bond Fund realizes a loss.
Example of a Municipal Bond Index Futures Contract
Consider a portfolio manager holding $1 million par value of
each of the following municipal bonds on February 2 in a particular year.
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- ----- ------ ---------- ---- -----------
<S> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
-4-
<PAGE> 582
The current value of the fund is $5,003,750.
To hedge against a decline in the value of the fund, resulting
from a rise in interest rates, the portfolio manager can use the municipal bond
index futures contract. The current value of the Municipal Bond Index is 86-09.
Suppose the portfolio manager takes a position in the futures market opposite to
his or her cash market position by selling 50 municipal bond index futures
contracts (each contract represents $100,000 in principal value) at this price.
On March 23, the bonds in the portfolio have the following
values:
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
The bond prices have fallen, and the portfolio has sustained a
loss of $130,312. This would have been the loss incurred without hedging.
However, the Municipal Bond Index also has fallen, and its value stands at
83-27. Suppose now the portfolio manager closes out his or her futures position
by buying back 50 municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the
results of the hedge.
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long position in Sell 50 municipal Bond futures
municipal bonds contracts at 86-09
March 23 $4,873,438 long position in Buy Municipal Bond futures
municipal bonds contracts at 83-27
--------------------------- ------------------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset
the loss in the cash market, the $8,437 loss is significantly lower than the
loss which would have been incurred without hedging.
The numbers reflected in this appendix do not take into
account the effect of brokerage fees or taxes.
-5-
<PAGE> 583
III. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included in the index and
the index fluctuates with changes in the market values of the stocks included. A
stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value (which assigns
relative values to the common stocks included in the index) at the close of the
last trading day of the contract and the price at which the futures contract is
originally struck. No physical delivery of the underlying stocks in the index is
made. Some stock index futures contracts are based on broad market indices, such
as the Standard & Poor's 500 or the New York Stock Exchange Composite Index. In
contrast, certain exchanges offer futures contracts on narrower market indices,
such as the Standard & Poor's 100 or indices based on an industry or market
segment, such as oil and gas stocks. Futures contracts are traded on organized
exchanges regulated by the Commodity Futures Trading Commission. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
The Aggressive Growth Fund, Capital Income Fund, Blue Chip
Master Fund, Asset Allocation Fund and International Equity Fund will sell stock
index futures contracts in order to offset a decrease in market value of their
respective portfolio securities that might otherwise result from a market
decline. The Funds may do so either to hedge the value of their respective
portfolios as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Funds
will purchase stock index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Funds will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
In addition, the Aggressive Growth Fund, Capital Income Fund,
Blue Chip Fund, Asset Allocation Fund and International Equity Fund may utilize
stock index futures contracts in anticipation of changes in the composition of
their respective portfolio holdings. For example, in the event that a 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 Funds may also sell futures
contracts in connection with this strategy, in order to protect against the
possibility that the value of the securities to be sold as part of the
restructuring of their respective portfolios will decline prior to the time of
sale.
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
-6-
<PAGE> 584
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
- Day Hedge is Placed
Anticipate Buying $62,500 Aggressive Buying 1 Index Futures at 125
with Growth Fund Value of Futures = $62,500/Contract
- Day Hedge is Lifted
Buy Aggressive Growth Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
- Day Hedge is Placed
Anticipate Selling $1,000,000 Aggressive Sell 16 Index Futures at 125
Growth Fund Value of Futures = $1,000,000
- Day Hedge is Lifted
Aggressive Growth Fund - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that
is, market value decreased and a Portfolio had entered into an anticipatory
purchase hedge, or market value increased and a Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
-7-
<PAGE> 585
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
- Day Hedge is Placed
Anticipate Buying $62,500 Aggressive Buying 1 Index Futures at 125
Growth Fund Value of Futures = $62,500/Contract
- Day Hedge is Lifted
Buy Aggressive Growth Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Price = $2,500 Loss on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
- Day Hedge is Placed
Anticipate Selling $1,000,000 Aggressive Sell 16 Index Futures at 125
Growth Fund Value of Futures = $1,000,000
- Day Hedge is Lifted
Aggressive Growth Fund - Own Stock Buy 16 Index Futures at 130
with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
-8-
<PAGE> 586
IV. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Aggressive Growth Fund to hedge against exposure to fluctuations in exchange
rates between the U.S. dollar and other currencies arising from multinational
transactions.
V. MARGIN PAYMENTS
Unlike when a Fund purchases or sells a security, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a 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 a 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
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.
VI. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures
in the Funds 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
-9-
<PAGE> 587
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, a 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, a 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. 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 a 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 a 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 collateralized the position and thereby insure
that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the investment adviser may
still not result in a successful hedging transaction over a short time frame.
-10-
<PAGE> 588
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
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the 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 a Fund is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part of all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
VII. OPTIONS ON FUTURES CONTRACTS
Each 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
-11-
<PAGE> 589
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).
VIII. OTHER HEDGING TRANSACTIONS
The U.S. Government Securities Capital Income, Blue Chip,
Intermediate Bond, Asset Allocation and International Equity Funds presently
intend to use interest rate futures contracts, the Aggressive Growth, the Blue
Chip, Asset Allocation and International Equity Funds presently intend to use
stock index futures contract (and foreign currency futures contracts (and
related options) with respect to the Aggressive Growth and International Equity
Funds) in connection with their hedging activities. Nevertheless, each of these
Funds 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
Funds' hedging strategies if, in the judgment of the investment adviser,
transactions therein are necessary or advisable.
-12-
<PAGE> 590
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
ASSET ALLOCATION FUND
July 1, 1998
TABLE OF CONTENTS
Page
The Company............................................................ 2
Investment Objectives And Policies..................................... 2
Additional Purchase And Redemption Information......................... 23
Additional Information Concerning Taxes................................ 30
Management............................................................. 32
General Information.................................................... 56
Appendix A............................................................. A-1
Appendix B............................................................. B-1
This Statement of Additional Information applies to the A, B and K
Shares of the Pacific Horizon Asset Allocation Fund (the "Fund") of the Company.
This Statement of Additional Information is meant to be read in conjunction with
the Prospectus dated July 1, 1998, 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, B or K Shares of the Fund should be made
solely upon the information contained herein. Copies of the Prospectus relating
to the Fund may be obtained by calling Provident Distributors, Inc. ("PDI" or
the "Distributor") at 800-346-2087. Capitalized terms used but not defined
herein have the same meaning as in the Prospectus.
<PAGE> 591
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund commenced operations on January 24, 1994. Prior to June
23, 1997, the Asset Allocation Fund invested all of its assets in the Asset
Allocation Portfolio ("Master Portfolio") of Master Investment Trust, Series I
("Master Trust I"), which had an identical investment objective. On June 23,
1997, the Asset Allocation Fund withdrew its assets from the Master Portfolio
and invested them directly in securities. As of the date of this Statement of
Additional Information, no B Shares were offered or outstanding.
The Company also offers other investment portfolios which are
described in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Fund describes the investment objective of
the Fund. The following is a discussion of the various investments and
techniques employed by the Asset Allocation Fund. The following information
supplements and should be read in conjunction with the descriptions of the
investment objective and policies in the Prospectus for the Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in the Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions. For the fiscal year ended February 28,
1998, the portfolio turnover rate was 67% and for the fiscal years ended
February 28, 1997 and February 29, 1996, the portfolio turnover rates for the
Master Portfolio were 116% and 157%, respectively.
Subject to the general control of the Board of Directors, Bank of
America National Savings and Trust Association, L.P. ("Bank of America" or the
"investment adviser") is responsible for, makes decisions with respect to, and
places orders for, all purchases and sales of portfolio securities for the Asset
Allocation Fund.
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Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of portfolio securities for the fixed
income portion of the Fund are normally principal transactions without brokerage
commissions.
For the fiscal years and period indicated, Asset Allocation Fund
and the Master Portfolio paid the following brokerage commissions:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, 1998 February 28, 1997 February 29, 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset $125,211 $152,270* $175,960*
Allocation
- --------------------------------------------------------------------------------
</TABLE>
* The Fund invested its assets in the Master Portfolio.
In executing portfolio transactions and selecting brokers or
dealers, it is the Fund's policy to seek the best overall terms available. The
Investment Advisory Agreement between the Company and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Investment Advisory Agreement authorizes Bank of America, subject
to the approval of the Board of Directors of the Fund to cause the Fund to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America to the Fund or Company. Brokerage and
research services may include: (1) advice as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities or purchasers or sellers of securities; and (2)
analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment
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<PAGE> 593
discretion is exercised. Conversely, the Company or the Fund may be the primary
beneficiary of the brokerage or research services received as a result of
portfolio transactions effected for such other accounts or investment companies.
Brokerage and research services so received are in addition to and
not in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be useful
to Bank of America in serving the Company and other clients and, conversely,
services obtained by the placement of business of other clients may be useful to
Bank of America in carrying out its obligations to the Company. In connection
with its investment management services with respect to the Fund, Bank of
America will not acquire certificates of deposit or other securities issued by
it or its affiliates, and will give no preference to certificates of deposit or
other securities issued by Service Organizations. In addition, portfolio
securities in general will be purchased from and sold to affiliates of the
Company, Bank of America, the distributor and their affiliates acting as
principal, underwriter, syndicate member, market-maker, dealer, broker or in any
similar capacity, provided such purchase, sale or dealing is permitted under the
Investment Company Act of 1940 (the "1940 Act") and the rules thereunder.
The Fund, may participate, if and when practicable, in bidding for
the purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. The Fund will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Directors of the Fund, believes
such practice to be in the interest of the Fund.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Fund with those to be sold
or purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act or their parents
held by Pacific Horizon as of the close of its most recent fiscal year. As of
February 28, 1998: (a) the Treasury Fund held the following securities:
Repurchase Agreement with Morgan Stanley Dean Witter & Co. in the principal
amount of $145,000,000; Repurchase Agreement with Lehman Brothers, Inc. in the
principal amount of $50,000,000; Repurchase Agreement with Merrill Lynch
Securities, Inc. in the principal amount of $145,000,000; and Repurchase
Agreement with Goldman Sachs & Co. in the principal amount of $574,667; (b) the
Government Fund held the following securities: Repurchase
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Agreement with Morgan Stanley Dean Witter & Co. in the principal amount of
$20,000,000; Repurchase Agreement with Goldman Sachs & Co. in the principal
amount of $97,174,000; and Repurchase Agreement with Merrill Lynch Securities,
Inc. in the principal amount of $20,000,000; (c) the Prime Fund held the
following securities: Merrill Lynch & Co., Inc. commercial paper (2) in the
principal amounts of $25,000,000 and $100,000,000; Lehman Brothers Holdings,
Inc. commercial paper (2) in the principal amounts of $25,000,000 and
$50,000,000; Salomon Smith Barney Holdings Inc. commercial paper (5) in the
principal amounts of $25,000,000, $50,000,000, $50,000,000, $50,000,000 and
$24,775,000; Merrill Lynch & Co., Inc. daily variable rate obligations (2) in
the principal amounts of $25,000,000; Merrill Lynch & Co., Inc. weekly variable
rate obligation in the principal amount of $19,000,000; Dean Witter Discover &
Co. corporate obligation in the principal amount of $15,000,000; Goldman Sachs
Group L.P. master note in the principal amount of $400,000,000; Morgan Stanley
Group, Inc. master note in the principal amount of $300,000,000; Bear Stearns
Companies, Inc. daily variable rate obligations (2) in the principal amounts of
$75,000,000 and $60,000,000; Bear Stearns Companies, Inc. monthly variable rate
obligations (2) in the principal amounts of $25,000,000 and $18,000,000; Lehman
Brothers Holdings, Inc. daily variable rate obligation in the principal amount
of $50,000,000; Lehman Brothers Holdings, Inc. quarterly variable rate
obligations (2) in the principal amounts of $36,000,000 and $25,000,000;
Repurchase Agreement with Morgan Stanley Dean Witter & Co. in the principal
amount of $135,000,000; Repurchase Agreements (2) with Goldman Sachs & Co. in
the principal amounts of $118,567,000 and $325,000,000; (d) the Flexible Income
Fund held the following securities: Bear Stearns corporate obligation in the
principal amount of $400,000; Merrill Lynch & Co., Inc. corporate debt
obligation in the principal amount of $1,500,000; (e) the Intermediate Bond
Master Portfolio held the following securities: Bear Stearns & Company corporate
obligation in the principal amount of $1,500,000; Lehman Brothers Holdings
medium term note in the principal amount of $2,000,000; (f) the Asset Allocation
Fund held the following securities: Morgan Stanley Group, Inc. common stock in
the amount of $20,100; Paine Webber Group medium term note in the principal
amount of $1,250,000; (g) the Blue Chip Master Portfolio held the following
security: Morgan Stanley Dean Witter Discover & Co. common stock in the amount
of $12,299,844; (h) the International Equity Fund held the following security:
Repurchase Agreement with Paine Webber, Inc. in the amount of $5,784,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co.,
Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean
Witter Reynolds, Inc., and Paine Webber are considered to be regular brokers and
dealers of the Company.
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<PAGE> 595
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the descriptions of such
investments in the Prospectus.
Bank Certificates of Deposit, Bankers' Acceptances and Time
Deposits. Certificates of deposit, bankers' acceptances and time deposits are
eligible investments for the Fund as described in its Prospectus. Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' Acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of Deposit and Bankers
Acceptances may only be purchased from domestic or foreign banks and financial
institutions having total assets at the time of purchase in excess of $2.5
billion (including assets of both domestic and foreign branches). Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate. Obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank are not permissible investments for
the Fund.
Instruments issued by foreign banks or financial institutions may
be subject to investment risks that are different in some respects than the
risks associated with instruments issued by those U.S. domestic issuers. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which may
be made and interest rates which may be charged. In addition, the profitability
of the banking industry is dependent largely upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an
important part in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic
banks are, among other things, required to maintain specified levels of
reserves, limited in the amount which they can loan to a single borrower, and
subject to other regulations
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<PAGE> 596
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.
Commercial paper and short-term notes will consist of issues rated
at the time of purchase A-2 or higher by Standard & Poor's Ratings Group,
Division of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors Service,
Inc. ("Moody's"), or similarly rated by another nationally recognized
statistical rating organization ("NRSRO"); or if unrated, will be determined by
Bank of America to be of comparable quality under procedures established by the
Board of Directors of the Fund. These rating symbols are described in Appendix
A.
Other Investment Companies. In connection with the management of
its daily cash position, the Fund may invest in the securities of other
investment companies (including money market mutual funds advised by Bank of
America). The Fund is permitted to invest up to 5% of the value of its total
assets in the securities of another investment company; except with respect to
the investment in a money market mutual fund advised by Bank of America, the
Fund is permitted to invest the greater of 5% of its respective net assets or
$2.5 million. However, no more than 10% of the Fund's total assets may be
invested in the securities of other investment companies in the aggregate.
Securities of other investment companies will be acquired by the Fund within the
limits prescribed by the 1940 Act and the Fund's fundamental investment
limitations. As a shareholder of another investment company, the Fund would bear
along with other shareholders, its pro-rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that the Fund bears directly in connection
with its own operations. The 1940 Act generally prohibits the Fund from
investing more than 5% of the value of its total assets in any one investment
company, or more than 10% of the value of its total assets in investment
companies as a group, and also restricts its investment in any investment
company to 3% of the voting securities of such investment company. In addition,
no more than 10% of the outstanding voting stock of any one investment company
may be owned in the aggregate by the Fund and any other investment company
advised by the investment adviser.
Repurchase Agreements. The Fund is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to such
agreements, the Fund acquires securities from financial institutions such as
banks and broker-
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<PAGE> 597
dealers which are deemed to be creditworthy subject to the seller's agreement to
repurchase and the agreement of the Fund to resell such securities at a mutually
agreed upon date and price. Repurchase agreements maturing in more than seven
days are considered illiquid investments and investments in such repurchase
agreements along with any other illiquid securities will not exceed 15% of the
value of the net assets of the Fund. The Fund is not permitted to enter into
repurchase agreements with Bank of America or its affiliates, and will give no
preference to repurchase agreements with Service Organizations. The repurchase
price generally equals the price paid by the Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the underlying portfolio security). Securities subject to repurchase
agreements will be held by a custodian or sub-custodian of the Fund or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to deliver instruments the value of which is 102% of
the repurchase price (excluding accrued interest), provided that notwithstanding
such requirement, the adviser shall require that the value of the collateral,
after transaction costs (including loss of interest) reasonably expected to be
incurred on a default, shall be equal to or greater than the resale price
(including interest) provided in the agreement. If the seller defaulted on its
repurchase obligation, the Fund would suffer a loss because of adverse market
action or to the extent that the proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Bankruptcy
or insolvency of such a defaulting seller may cause the Fund's rights with
respect to such securities to be delayed or limited. Repurchase agreements are
considered to be loans by the Fund under the 1940 Act.
U.S. Government Obligations. The Fund is permitted to make
investments in U.S. Government obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes and bonds, and issues of such
entities as the Government National Mortgage Association, Export-Import Bank of
the United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and the Student Loan Marketing Association. Treasury bills
have maturities of one year or less, Treasury notes have maturities of one to
ten years and Treasury bonds generally have maturities of more than ten years.
Some of these obligations, such as those of the Government National Mortgage
Association, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the
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<PAGE> 598
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government sponsored instrumentalities if it
is not obligated to do so by law.
Variable and Floating Rate Instruments. As described in the
Prospectus, the Fund may acquire variable and floating rate instruments and
master demand notes. Such instruments are frequently not rated by credit rating
agencies. However, in determining the creditworthiness of unrated variable and
floating rate instruments and their eligibility for purchase by the Fund, Bank
of America will consider the earning power, cash flow and other liquidity ratios
of the issuers of such instruments (which include financial, merchandising, bank
holding and other companies) and will continuously monitor their financial
condition. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by the Fund. The absence of such
an active secondary market could make it difficult to dispose of a variable or
floating rate instrument in the event the issuer of the instrument defaulted on
its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Investments in illiquid variable and
floating rate instruments (instruments which are not payable upon seven days'
notice and do not have active trading markets) are subject to the Fund's
fundamental 15% of net assets limitation on illiquid securities. Variable and
floating rate instruments may be secured by bank letters of credit.
Reverse Repurchase Agreements. As described in the Prospectus, the
Fund is permitted to borrow funds for temporary purposes by entering into
reverse repurchase agreements with such financial institutions as banks and
broker-dealers in accordance with the investment limitations described therein.
Whenever the Fund enters into a reverse repurchase agreement, it will segregate
account liquid assets such as cash, U.S. Government securities or other liquid
high grade debt securities having a value equal to the repurchase price
(including accrued interest) and Bank of America will subsequently continuously
monitor the account for maintenance of such equivalent value. The Fund intends
to enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
Reverse repurchase agreements are considered to be borrowings by the Fund under
the 1940 Act.
Options Trading. The Fund may, under certain circumstances and in
accordance with investment limitations described in its prospectus, engage in
options trading. Such options may relate to U.S. and foreign securities or to
various stock indices. The Fund presently intends that the aggregate value of
its assets subject to options will not exceed 5% of the value of its net assets.
The investment policies of the Fund
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<PAGE> 599
provide that the aggregate value of the Fund's assets subject to options may not
exceed 25% of the value of its net assets.
Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Regardless of how much the market price
of the underlying security or index increases or decreases, the option buyer's
risk is limited to the amount of the original premium paid for the purchase of
the option. However, options may be more volatile than the underlying
instruments, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves. A listed call option for a particular security gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. In contrast to an option on a particular security, an option on
a stock index provides the holder with the right to make or receive a cash
settlement upon exercise of the option. The amount of this settlement will be
equal to the difference between the closing price of the index at the time of
exercise and the exercise price of the option expressed in dollars, times a
specified multiple. Unlisted options are not subject to the protections afforded
purchases of options listed by the Options Clearing Corporation, which performs
the obligations of its members who fail to do so in connection with the purchase
or sale of options. Furthermore, it is the position of the staff of the SEC that
over-the-counter options are illiquid. To the extent that the Fund invests in
options that are illiquid (including over-the-counter options), such investment
will be subject to the Fund's limitations on illiquid securities.
The Fund will continue to receive interest or dividend income on
the securities underlying such puts until they are exercised by it. Any losses
realized by the Fund in connection with its purchase of put options will be
limited to the premiums paid by the Fund for the options plus any transaction
costs. A gain or loss may be wholly or partially offset by a change in the value
of the underlying security which the Fund owns.
The Fund is permitted to write call options if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the 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
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<PAGE> 600
call option on an index, the option is covered if the Fund maintains with its
custodian cash or cash equivalents equal to the contract value. A call option is
also covered if the Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for the
premium, the covered option writer gives up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to an
option, the covered option writer has no control over when it may be required to
sell its securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer.
If the Fund desires to sell a particular security it owns, on
which it has written an option, the Fund will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, the Fund will enter into a "closing
purchase transaction" - the purchase of a call option on a security or stock
index with the same exercise price and expiration date as the call option which
it previously wrote on the same security or index.
When the Fund purchases a put or call option, the premium paid by
it is recorded as an asset of the Fund. When the Fund writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Fund is included in the liability section of the statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by 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
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<PAGE> 601
security is owned by the Fund. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, whether traded over-the-counter or on a national
securities exchange ("Exchange") may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an Exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Futures. The Fund may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options). A futures
contract is a bilateral agreement 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
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<PAGE> 602
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' ability to predict correctly movements in the direction of the stock
market or interest rates. There are several risks in connection with the use of
futures contracts by the Fund as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the futures contract may move more than or less than the price of
the securities being hedged. If the price of the futures contract moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, this advantage will be partially offset by the
loss on the futures contract. If the price of the futures contract moves more
than the price of the hedged securities, the Fund involved will experience
either a loss or gain on the futures contract which will not be completely
offset by movements in the price of the securities which are the subject of the
hedge.
It is also possible that, where the Fund has sold futures
contracts to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Fund may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value in its portfolio securities.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. Due to the possibility of price distortion in the futures market,
and because of the imperfect correlation between the movement in the cash market
and movements in the price of futures contracts, a correct forecast of general
market trends or interest rate movements by Bank of America may still not result
in a successful hedging transaction over a short time frame.
-13-
<PAGE> 603
Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures
contracts. Although the Fund intends to purchase or sell futures contracts only
on exchanges or boards of trade where there appear to be active secondary
markets, there is no assurance that a liquid secondary market on any exchange or
board of trade will exist for any particular contract or at any particular time.
In such event, it may not be possible to close a futures investment position,
and in the event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. The liquidity of a
secondary market in a futures contract may in addition be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which limit
the amount of fluctuation in a futures contract price during a single trading
day. Once the daily limit has been reached in the contract, no trades may be
entered into at a price beyond the limit, thus preventing the liquidation of
open futures positions.
Options on Futures Contracts. The acquisition of put and call
options on a futures contract will give the Fund the right (but not the
obligation), for a specified price, to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position of prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the Fund's assets.
By writing a call option, the Fund becomes obligated, in exchange for the
premium, to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, which may partially offset an increase in the price of
securities that the Fund intends to purchase. However, the Fund becomes
obligated to purchase a futures contract, which may have a value lower than the
exercise price. Thus, the loss incurred by the Fund in writing options on
futures is potentially unlimited and may exceed the amount of the premium
received. The Fund will incur transaction costs in connection with the writing
of options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on the same
series. There is no guarantee that such closing transactions can be effected. A
Fund's ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
For additional information concerning Futures and options thereon,
please see Appendix B to this Statement of Additional Information.
-14-
<PAGE> 604
Foreign Investments. The Fund may invest in securities of foreign
issuers that may or may not be publicly traded in the United States.
Investments in foreign securities involve certain inherent risks,
such as political or economic instability of the issuer or the country of issue,
the difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Foreign brokerage commissions and custodian
fees are generally higher than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation or confiscatory
taxation, or diplomatic developments which could affect investment in those
countries.
Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Fund
endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Fund is uninvested and
no return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio securities, or, if the Fund has entered into
a contract to sell the securities, could result in possible liability to the
purchaser. Individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth or gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
In considering whether to invest in the securities of a foreign
company, Bank of America considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within
-15-
<PAGE> 605
the U.S. and those within other countries, and also factors relating to the
general economic, governmental and social conditions of the country or countries
where the company is located. The extent to which the Fund will be invested in
foreign companies will fluctuate from time to time within the percentage limits
stated above depending on the investment adviser's assessment of prevailing
market, economic and other conditions.
Municipal Securities. The Fund may invest in Municipal Securities.
Municipal Securities are debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular federal income tax.
The Fund may purchase short-term Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes and other forms of short-term
tax-exempt loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. The Fund may also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's, S&P, Fitch IBCA, Inc. ("Fitch IBCA") and Duff & Phelps
Credit Rating Co. ("D&P") represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and Municipal Securities with the
same maturity, interest rate and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by the Fund, an
issue of Municipal Securities may cease to be rated or its rating may be
reduced. The investment adviser will consider such an event in determining
whether the Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
-16-
<PAGE> 606
upon enforcement of such obligations. The power or ability of an issuer to meet
its obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities issued after August 15, 1986 (August 31, 1986 in the case of certain
bonds), the issuer must comply with certain rules formerly applicable only to
"industrial development bonds" which, if the issuer fails to observe them, could
cause interest on the Municipal Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations a class of whose
securities is registered under the Securities Exchange Act of 1934.
From time to time, proposals have been introduced before Congress
for the purpose of restricting or eliminating the federal income tax exemption
for interest on Municipal Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the Fund's Prospectus under "Tax
Information.") Proposals to further restrict or eliminate the tax benefits of
municipal securities, while pending or if enacted, might materially adversely
affect the availability of Municipal Securities for investment by the Fund and
the liquidity and value of the Fund. In such an event, the Fund would
re-evaluate its investment objective and policies and consider changes in its
structure or possible dissolution.
When-Issued Securities and Forward Commitments. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When the Fund agrees to purchase securities on
a "when-issued," or "forward commitment" basis, its custodian will set aside
cash or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment. In such a case, the Fund may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of the
commitment. It may be expected that the net assets of the Fund will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. The Fund does not intend to engage in
these transactions for speculative purposes but primarily in order to hedge
against anticipated changes in interest rates. Because the Fund will set aside
cash or liquid portfolio securities to satisfy its purchase commitments in the
manner described, its liquidity and the ability of the investment adviser to
manage it may be affected in the event the forward commitments and
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<PAGE> 607
commitments to purchase when-issued securities ever exceeded 25% of the value of
the Fund's assets.
The Fund will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When the Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued
purchase or forward commitment transaction and any subsequent fluctuations in
their market value is taken into account when determining the market value of
the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Securities Lending. The Fund may lend securities as described in
its Prospectus. Such loans will be secured by cash or securities of the U.S.
Government and its agencies and instrumentalities. The collateral must be at all
times equal to at least the market value of the securities loaned and is "marked
to market" daily. The Fund will continue to receive interest or dividends on the
securities it loans, and will also earn interest on the investment of any cash
collateral. Although voting rights, or rights to consent, attendant to
securities loaned pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by a fund if a material event
affecting the investment is to occur.
Asset-Backed and Mortgage-Related Securities. The Asset Allocation
Fund may invest in asset-backed securities, including mortgage-backed securities
representing an undivided ownership interest in a pool of mortgages, such as
certificates of the Government National Mortgage Association ("GNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). These certificates are in most
cases pass-through instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees. The average life of a mortgage-backed security varies with
the underlying mortgage instruments, which have maximum maturities of 40 years.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of prepayments,
mortgage refinancings or foreclosure. Mortgage prepayment rates
-18-
<PAGE> 608
are affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments.
There are a number of important differences among the agencies,
instrumentalities and sponsored enterprises of the U.S. Government that issue
mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the GNMA include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by the FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Bank, and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
The Asset Allocation Fund may also invest in non-mortgage backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Non-mortgage backed securities may not be issued or guaranteed by
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<PAGE> 609
the U.S. Government or its agencies or instrumentalities; however, the payment
of principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in the respective obligations only by filing a financing statement and
by having the servicer of the obligations, which is usually the originator, take
custody thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most of the
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the cardholder.
The development of non-mortgage backed securities is at an early
stage compared to mortgage backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for mortgage backed
securities issued by certain private organizations and non-mortgage backed
securities is not as well developed as that for mortgage backed securities
guaranteed by government agencies or instrumentalities.
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<PAGE> 610
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include
bank certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by a
fund of the Company. The Fund may also invest in securities, interests or
obligations of companies or entities which have a deposit, loan, commercial
banking or other business relationship with Bank of America or any of its
affiliates (including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities purchased by a fund of the
Company).
OTHER INVESTMENT LIMITATIONS
The Fund's investment objective is non-fundamental which may be
changed without the vote of shareholders. The following are fundamental policies
that may not be changed with respect to the Fund without the affirmative vote of
the holders of the majority of the Fund's outstanding shares or outstanding
interests (as defined below under "General Information - Miscellaneous"). The
following enumerated additional fundamental policies may not be changed for the
Fund without such a vote of shareholders or interestholders.
THE ASSET ALLOCATION FUND MAY NOT:
1. Underwrite any issue of securities within the meaning of the
Securities Act of 1933 (the "1933 Act") except when it might technically be
deemed to be an underwriter either (a) in connection with the disposition of a
portfolio security, or (b) in connection with the purchase of securities
directly from the issuer thereof in accordance with its investment objective.
2. Purchase or sell real estate, except the Fund may purchase
securities of issuers which deal or invest in real estate and may purchase
securities which are secured by real estate or interests in real estate.
3. Purchase or sell commodities, except that the Fund may, to the
extent consistent with its investment objective, invest in securities of
companies that purchase or sell commodities or which invest in such programs,
and purchase and sell options, forward contracts, futures contracts, and options
on futures contracts. This limitation does not apply to foreign currency
transactions including without limitation forward currency contracts.
4. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that: (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any
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<PAGE> 611
state or territory of the United States, or any of their agencies,
instrumentalities or political subdivisions, and (b) notwithstanding this
limitation or any other fundamental investment limitation, assets may be
invested in the securities of one or more diversified management investment
companies to the extent permitted by the 1940 Act.
5. Make loans, except to the extent permitted by the 1940 Act.
6. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under the 1940 Act.
7. Purchase securities (except securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities) of any one issuer if, as
a result, more than 5% of its total assets would be invested in the securities
of such issuer or it would own more than 10% of the voting securities of such
issuer, except that (a) up to 25% of its total assets may be invested without
regard to these limitations; and (b) the Fund's assets may be invested in the
securities of one or more diversified, management investment companies to the
extent permitted by the 1940 Act.
In addition, the Asset Allocation Fund is subject to the following
non-fundamental policies and limitations, which may be changed without the vote
of shareholders:
THE ASSET ALLOCATION FUND MAY NOT:
1. Sell securities short, maintain a short position or purchase
securities on margin, except for such short-term credits as may be necessary for
the clearance of transactions. For this purpose, the deposit or payment by the
Fund for initial or maintenance margin in connection with futures contracts is
not considered to be the purchase or sale of a security on margin.
2. Purchase securities of other investment companies except as
permitted by the 1940 Act.
3. Write or sell puts, calls, straddles, spreads or combinations
thereof except that the Fund may acquire standby commitments and may enter into
futures contracts and options in accordance with its investment objective.
4. Invest more than 15% of its net assets in illiquid securities.
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
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<PAGE> 612
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how
such shares are priced, is included in the Prospectus.
VALUATION OF THE ASSET ALLOCATION FUND
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers. Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the particular Board. Debt securities with remaining maturities
of 60 days or less are valued on an amortized cost basis unless the Board
determines that such basis does not represent fair value at the time. Under this
method, such securities are valued initially at cost on the date of purchase or,
in the case of securities purchased with more than 60 days to maturity, are
valued at their market or fair value each day until the 61st day prior to
maturity. Thereafter, absent unusual circumstances, a constant proportionate
amortization of any discount or premium is assumed until maturity of the
security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely solely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the particular Board. Valuation of options is
described above under "Investment Objectives and Policies - Options Trading."
SUPPLEMENTARY PURCHASE INFORMATION - A SHARES
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges available to certain shareholders as described in the
Prospectus, the scale of sales loads applies to purchases made by any
"purchaser," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children; or a trustee or other fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) although more than one
beneficiary is involved; or "a qualified group" which has been in existence for
more than six months and has not been organized for the purpose of buying
redeemable securities of a registered investment company at a discount,
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<PAGE> 613
provided that the purchases are made through a central administrator or a single
dealer, or by other means which result in economy of sales effort or expense. A
"qualified group" must have more than 10 members, must be available to arrange
for group meetings between representatives of the Fund and the members, and must
be able to arrange for mailings to members at reduced or no cost to the
Distributor. The value of shares eligible for the Right of Accumulation
privilege may also be used as a credit toward completion of the Letter of Intent
privilege. Such shares will be valued at their offering price prevailing on the
date of submission of the Letter of Intent. Distributions on shares held in
escrow pursuant to the Letter of Intent privilege will be credited to the
shareholder, but such shares are not eligible for the Fund's Exchange Privilege.
The computation of the hypothetical offering price per share of an
A Share for the Fund based on the value of the Fund's net assets on February 28,
1998 and the Fund's A Shares outstanding on such date is as follows:
<TABLE>
<CAPTION>
Asset Allocation
Fund
----------------
<S> <C>
Net Assets $ 49,239,679
Outstanding Securities 2,299,985
Net Asset Value Per Share $ 21.41
Sales Charge, 4.50 percent
of offering price (4.71 percent
of net asset value per share) $ 1.01
Maximum Offering Price to Public $ 22.42
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION - A, B AND K SHARES
A, B and K Shares in the Fund for which orders for wire redemption
are received on a business day before the close of regular trading hours on the
New York Stock Exchange (currently 4:00 p.m. Eastern time) will be redeemed as
of the close of regular trading hours on such Exchange and the proceeds of
redemption will normally be wired in federal funds on the next business day to
the commercial bank specified by the investor on the Account Application (or
other bank of record on the investor's file with the Transfer Agent). To qualify
to use the wire redemption privilege, the payment for Fund shares must be drawn
on, and redemption proceeds paid to, the same bank and account as designated on
the Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the request
must be in writing and signature guaranteed. Shares for which orders for wire
redemption are received after the close of regular trading hours on the New York
Stock Exchange or on a non-business day will be redeemed as of the close of
trading on such Exchange on
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<PAGE> 614
the next day on which shares of the Fund are priced and the proceeds will
normally be wired in federal funds on the next business day thereafter.
Redemption proceeds will be wired to a correspondent member bank if the
investor's designated bank is not a member of the Federal Reserve System.
Immediate notification by the correspondent bank to the investor's bank is
necessary to avoid a delay in crediting the funds to the investor's bank
account. Proceeds of less than $1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Fund's Prospectus. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
SUPPLEMENTARY PURCHASE INFORMATION
In General. As described in the Prospectus, both A and B Shares
may be purchased directly by the public, by clients of Bank of America through
their qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") K Shares may only be purchased by: (a) businesses or other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Provident Distributors, Inc. and Bank of America,
respectively, or their affiliates; (c) accounts opened for IRA rollovers from a
401(k) plan in which the assets were held in any Pacific Horizon or Time Horizon
Fund and subsequent purchases into an IRA rollover account opened as described
above, so long as the original IRA rollover account remains open; (d) accounts
under Section 403(b)(7) of the Internal Revenue Code of 1986, as amended (the
"Code"); (e) deferred compensation plans under Section 457 of the Code; and (f)
certain other retirement plans. Bank of America and Service Organizations may
impose minimum customer account and other requirements in addition to those
imposed by the Fund and described in the Prospectus. Purchase orders will be
effected only on business days. SRF Shares of the Fund are available for
-25-
<PAGE> 615
the investment of retirement funds held in eligible retirement accounts as
described in a separate SRF Share Prospectus.
A Shares in the Fund are sold with a sales load, except for such
exemptions as noted in the Prospectus. These exemptions to the imposition of a
sales load on A Shares are due to the nature of the investors and/or the reduced
sales efforts that will be necessary in obtaining such investments. A Shares are
also subject to a shareholder servicing fee. B Shares are sold without a
front-end sales load, but are subject to a contingent deferred sales charge and
an ongoing distribution and shareholder servicing fee. K Shares are offered at
net asset value with neither a front-end sales charge nor a contingent deferred
sales charge. K Shares are subject to a distribution plan fee and an
administrative and shareholder services fee. SRF Shares in each Fund are sold
without a sales load. SRF Shares are subject to Shareholder Servicing fees.
Service Organizations may be paid by the Distributor at the Company's expense
for shareholder services. Depending on the terms of the particular account, Bank
of America, its affiliates, and Service Organizations also may charge their
customers fees for automatic investment, redemption and other services provided.
Such fees may include, for example, account maintenance fees, compensating
balance requirements or fees based upon account transactions, assets or income.
Bank of America or the particular Service Organization is responsible for
providing information concerning these services and any charges to any customer
who must authorize the purchase of Fund shares prior to such purchase.
Persons or organizations wishing to purchase Company shares
through their accounts at Bank of America or a Service Organization should
contact such entity directly for appropriate instructions.
Initial purchases of A, B and K shares into a new account may not
be made by wire. However, persons wishing to make a subsequent purchase of
Company shares into an already existing account by wire should telephone the
Transfer Agent at (800) 346-2087. The investor's bank must be instructed to wire
federal funds to the Transfer Agent, referring in the wire to the particular
fund in which such investment is to be made; the investor's portfolio account
number; and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for IRAs,
payment of which could require the liquidation of shares. All fees charged are
described in the appropriate form. Shares may be purchased in connection with
these plans only by direct remittance to the Transfer Agent. Purchases for IRA
accounts will be effective only when payments received by the Transfer Agent are
converted into federal funds. Purchases for these plans may not be made in
advance of receipt of funds.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will
-26-
<PAGE> 616
accept other suitable verification arrangements from foreign investors, such as
consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
Exchange Privileges. 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. In addition, shareholders of the Funds may exchange B Shares for Pacific
Horizon Shares of the Pacific Horizon Prime Fund without the payment of any
contingent deferred sales charge at the time the exchange is made. By use of the
exchange privilege, the investor authorizes the Transfer Agent to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself 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, F and
G below will be made on the basis of the relative net asset values per share of
the investment portfolios involved in the transaction.
A. A Shares of any investment portfolio purchased with a sales load,
as well as additional shares acquired through reinvestment of
dividends or distributions on such shares, may be exchanged
without a sales load for other A Shares of any other investment
portfolio in the Pacific Horizon Family of Funds or for like
shares of Time Horizon Funds.
B. B Shares acquired pursuant to an exchange transaction will
continue to be subject to a contingent deferred sales charge.
However, B Shares that have been acquired through an exchange of B
Shares may be exchanged for other B Shares or for like shares of
Time Horizon Funds without the payment of a contingent deferred
sales charge at the time of exchange. Except as noted in D below,
in determining the holding period for calculating the contingent
deferred sales charge
-27-
<PAGE> 617
payable on redemption of B Shares, the holding period of the
shares originally held will be added to the holding period of the
shares acquired through exchange.
C. B Shares may be exchanged for Y Shares of the Pacific Horizon
Prime Fund ("Y Shares") without paying a contingent deferred sales
charge. At the time of such an exchange, a shareholder's holding
period for calculating the contingent deferred sales charge
payable on redemption of B Shares of a Fund will cease to
accumulate. If the shareholder subsequently exchanges the shares
back into B Shares of a Fund, the holding period accumulation on
the shares will resume as of the time when the exchange was made
into the Y Shares. In the event that a shareholder wishes to
redeem Prime Shares acquired by exchange for B Shares of a Fund,
the contingent deferred sales charge applicable to the accumulated
B Shares of a Fund holding period prior to the exchange into the Y
Shares will be charged.
D. A or B 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
or B Shares, as the case may be, 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.
E. 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.
F. A Shares of any investment portfolio in the Pacific Horizon Family
of Funds purchased without a sales load may be exchanged without a
sales load for A Shares in any other portfolio in the Pacific
Horizon Family of Funds.
G. 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
-28-
<PAGE> 618
portfolio in the Pacific Horizon Family of Funds or for like
shares of the Time Horizon Funds.
Except as stated above, a sales load will be imposed when shares
of any investment portfolio in the Pacific Horizon Family of Funds that were
purchased or otherwise acquired without a sales load are exchanged for A Shares
of another investment portfolio in the Pacific Horizon Family or for like shares
of Time Horizon Funds which are sold with a sales load.
Exchange requests received on a business day prior to the time
shares of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day in
the manner described above.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of America
or a Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent is a day on which the New York Stock
Exchange is open for trading. In 1998, the holidays on which the New York Stock
Exchange is closed are: New Year's Day, Dr. Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the
date of payment for shares during any period when (a) trading on the New York
Stock Exchange is restricted by applicable rules and regulations of the SEC; (b)
the New York Stock Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or
-29-
<PAGE> 619
more upon 60 days' notice. The Company will not require a shareholder to redeem
shares of a Fund if the balance held of record by the shareholder is less than
$500 solely because of a decline in the net asset value of the Fund's shares.
The Company may also redeem shares involuntarily if such redemption is
appropriate to carry out the Company's responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in securities or
other property.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
The Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, the Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year the Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
Fund and would be eligible for the dividends received deduction in the case of
corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, the Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
net short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss, if any), subject to certain adjustments and excluding
the excess of net long-term capital gain for the taxable year over the net
short-term capital loss for such year, if any. The Fund will be taxed on its
undistributed investment company taxable income, if any. As stated, the Fund
intends to distribute at least 90% of its investment company taxable income, if
any, for each taxable year. To the extent such income is distributed by the Fund
(whether in cash or additional shares), it will be taxable to shareholders as
ordinary income.
Any distribution of the excess of net long-term capital gain over
net short-term capital loss is taxable to shareholders
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<PAGE> 620
as long-term capital gain, regardless of how long the shareholder has held the
Fund's shares and whether such gain is received in cash or additional Fund
shares. The Fund will designate such a distribution as a capital gain dividend
in a written notice mailed to shareholders after the close of the Fund's taxable
year. It should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for longer than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gain is taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specific percentages of their
ordinary taxable income and capital gain net income (excess of net capital gain
over net capital loss). The Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company either that they are subject to backup withholding or
that they are "exempt recipients."
OTHER INFORMATION
Depending upon the extent of activities in states and localities
in which its offices are maintained, in which its agents or independent
contractors are located or in which it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
Income distributions may be taxable to shareholders under state or
local law as dividend income even though all or a portion of such distributions
may be derived from interest on tax-exempt obligations or U.S. government
obligations which, if realized directly, would be exempt from such income taxes.
Shareholders are advised to consult their tax advisers because state and local
tax consequences may be different from the federal tax consequences described
above.
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally affecting purchasers of Fund shares. No attempt is made
to present a detailed explanation of the federal income tax
-31-
<PAGE> 621
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>
Robert E. Greeley 66 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) (since 1997);
Suite 900 Manager, Morgan Grenfell
San Francisco, CA 94104 Small Cap Fund (since 1986);
Trustee, Master Investment Trust
Series I (registered investment
company) (since 1993), former
Trustee, Master Investment Trust,
Series II (registered investment
company) (1993-1997), Trustee, Time
Horizon Funds (registered
investment company) (since 1995);
Trustee and President, Pacific
Innovations Trust (since 1996)
(registered investment company);
formerly Director, Bunker Hill
Income Securities, Inc. (from 1989
to 1994); Trustee, SunAmerica Fund
Group (previously Equitec Siebel
Fund Group) (registered investment
companies) (from 1984 to 1992);
formerly Director, Manager,
Corporate Investments, Hewlett
Packard Company (from 1979 to
1991).
Thomas M. Collins 63 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April, 1993);
Chairman of the Board and Trustee,
Master Investment Trust, Series I
(registered investment company)
(since 1993); President and
Chairman of the Board of Pacific
Horizon Funds, Inc. (1982 to August
31, 1995); Member and Fund Director
of the Advisory Board (since July
1993); former Chairman of
</TABLE>
-32-
<PAGE> 622
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
the Board, Trustee, Master
Investment Trust, Series II
(registered investment company)
1993 to April 1997; former
Director, Bunker Hill Income
Securities, Inc. (registered
investment company) through 1991.
Douglas B. Fletcher 73 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (regis-
Newport Beach, CA 92660-2629 tered investment
advisor) 1991 to date; Director,
FCA Securities, Inc. (registered
broker/dealer) November 1993 to
date; Partner, Newport Partners
(private venture capital firm),
1981 to date; Chairman of the Board
and Chief Executive Officer, First
Pacific Advisors, Inc. (registered
investment adviser) and seven
investment companies under its
management, prior to 1983; former
Allied Member, New York Stock
Exchange; Chairman of the Board of
FPA Paramount Fund, Inc. through
1984; Chairman, TIS Mortgage
Investment Company (real estate
investment trust) (since 1988);
Trustee and a former Vice Chairman
of the Board, Claremont McKenna
College; Chartered Financial
Analyst.
Cornelius J. Pings* 69 President, Association
1200 New York Avenue, NW of American Universities
Suite 550 (since February 1993);
Washington, DC 20005 Provost (from 1982 to January
1993) and Senior Vice President for
Academic Affairs (from 1981 to
January 1993), University of
Southern California; Trustee,
Master Investment Trust, Series I
(since 1995); former Trustee,
Master Investment Trust, Series II
(from 1995 to 1997); Director,
Farmers Group, Inc. (insurance
company) (since 1991).
William P. Carmichael 53 Senior Vice President, Sara Lee
808 S. Garfield Corporation (1991 to 1993);
Hinsdale, IL 60521 Treasurer, Senior Vice President
and Chief Financial Officer,
Beatrice Company (1987 to 1990);
Trustee, Time Horizon Fund
(registered investment Company)
(since 1995); Trustee, Pacific
</TABLE>
-33-
<PAGE> 623
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Innovations Trust (since 1997)
(registered investment company);
Trustee, 231 Funds (1993 to 1995)
(registered investment company).
Edward S. Bottum 63 Director Managing Director, Chase
c/o Chase Franklin Corporation Franklin Corporation (venture
100 S. Wacker Drive capital firm) (since 1990);
Suite 1140 Trustee, Time Horizon Funds
Chicago, IL 60606 (since 1995); Trustee and
Chairman, Pacific Innovations Trust
(since 1997) (registered investment
company); formerly Vice Chairman of
Continental Bank N.A. (retired
1990); formerly Trustee, 231 Funds
(February 1993 to August 1995).
Stephen M. Wynne 41 Vice President Executive Vice President
Executive and Chief Accounting
Vice President, Officer (since 1993) and
PFPC Inc. Senior Vice President
400 Bellevue Parkway and Chief Accounting
Wilmington, DE 19809 Officer (1991 to 1993), PFPC
Inc.; Executive Vice President,
PFPC International (since 1995);
Vice President and Chief
Accounting Officer, PNC
Institutional Management Corp.
(since 1987).
Robert Kelly 29 Assistant Accounting Manager, PFPC
80 Harcourt Street Treasurer International (since 1996);
Dublin, Ireland Accountant, Oppenheimer Funds,
Inc. (1992 to 1996).
Jay F. Nusblatt 36 Treasurer Vice President and
Vice President, Director of Fund
PFPC Inc. Accounting and
103 Bellevue Parkway Administration, PFPC
Wilmington, DE 19809 Inc. (since 1993); formerly
Assistant Vice President, Fund
Plan Services, Inc. (1989 to
1993).
W. Bruce McConnel, III 54 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath LLP.
Building, Suite 1100
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant Chief Counsel-Mutual
Chief Counsel-Mutual Secretary Funds, PNC Bank (since
Funds, 1994); Associate General
PNC Bank Counsel, The Boston
1600 Market Street, Company, Inc. (1992 to
28th Fl. 1994); General Counsel,
Philadelphia, PA 19103 SunAmerica Asset Management Inc.
(1986 to 1992).
</TABLE>
-34-
<PAGE> 624
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
J. Robert Dugan 32 Assistant Counsel-Mutual Funds,
Counsel-Mutual Funds, Secretary PNC Bank (since 1993);
PNC Bank Associate, Drinker
1600 Market Street Biddle & Reath LLP
28th Fl. (1990 to 1993).
Philadelphia, PA 19103
</TABLE>
* "Interested Person" as defined in the Investment Company Act of 1940.
Dr. Pings is an "interested person" solely by reason of his position as
President of the Company.
The Board has an audit committee, contract review committee, nominating
committee and valuation committee. The audit committee is responsible for
reviewing the results of the audit of the Company by its independent public
accountant. The contract review committee is responsible for reviewing the
performance of the Company's service providers in connection with the renewal of
the Company's service contracts. The nominating committee is responsible for
reviewing the credentials of proposed nominees for the Company's Board and for
selecting and nominating those directors who are not "interested persons" (as
defined in the 1940 Act) of the Company. The valuation committee is responsible
for handling issues arising out of the pricing of securities.
Each director is entitled to receive an annual fee of $50,000 plus
$1,000 for each day that a director participates in all or a part of a Board
meeting; the President receives an additional $40,000 per annum for his services
as Chairman of the Board; and Mr. Collins, a former director, in recognition of
his years of service as President and Chairman of the Board, received an
additional $40,000 per annum in recognition of his years of service to the
Company until February 28, 1998; 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. Each director is also reimbursed for out of pocket expenses
incurred as a director. The Funds, and each other fund of the Company, pays its
proportionate share of these amounts based on relative net asset values.
For the fiscal year ended February 28, 1998, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $393,644. Of that amount, $11,226 of directors'
compensation was allocated to the Fund. Each director is also reimbursed for
out-of-pocket expenses incurred as a director. Drinker Biddle & Reath LLP, of
which Mr. McConnel is a partner, receives legal fees as counsel to the Company.
As of the date of this Statement of Additional Information, the directors and
officers of the Company, as a
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<PAGE> 625
group, own less than 1% of the outstanding shares of each of the Company's
investment portfolios.
Under the retirement plan approved by the Board of Directors,
including a majority of its Directors who are not "interested persons" of the
Company, a Director in office for the entire period from February 28, 1994 to
March 18, 1998 who dies or resigns is entitled to receive ten annual payments
each equal to the greater of (i) the "Applicable Percentage" set forth below of
the annual Director's retainer that was payable by the Company during the year
of his/her death or resignation, or (ii) the Applicable Percentage of the annual
Director's retainer then in effect for Directors of the Company during the year
of such payment:
<TABLE>
<CAPTION>
Years of Service
after February 28, 1994 Applicable Percentage*
----------------------- ----------------------
<S> <C>
Fewer than 5 0**
5 but fewer than 6 50
6 but fewer than 7 60
7 but fewer than 8 70
8 but fewer than 9 80
9 but fewer than 10 90
10 or more 100
</TABLE>
Such Director is also entitled to receive an additional retirement
benefit following his death or resignation equal to an additional percentage of
the annual Director's retainer described above in this paragraph. The additional
percentage equals one-half of the difference between 100 percent and the
Director's Applicable Percentage. The Director's additional retirement benefit
is paid at the same time and in the same manner as the regular retirement
benefit.
- ------------------------
* For service that includes a fractional year, a Director's years of service is
rounded to the nearest quarter of a year of service, and the Director's
Applicable Percentage is rounded to the nearest 0.25%.
** A Director who either resigns in good standing or dies before completing five
years of service as a director is assigned an Applicable Percentage of 50
percent.
-36-
<PAGE> 626
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 since the Company's inception in 1982. The retirement benefit in which a
Director has become vested may not be reduced by later Board action.
In lieu of receiving ten annual payments, a Director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits to be paid by the Company within 45 days of
the death or resignation of the Director. The present value of such benefits
shall 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.
The obligation of the Company to pay benefits to a former Director
is neither secured nor funded by the Company but shall be binding upon its
successors in interest. The payment of benefits under the retirement plan has no
priority or preference over the lawful claims of the Company's creditors or
shareholders, and the right to receive such payments is not assignable or
transferable by a Director (or former Director) other than by will, by the laws
of descent and distribution, or by the Director's written designation of a
beneficiary.
The following table sets forth (i) the aggregate compensation
paid by the Company for the fiscal year ended February 28, 1998 to the Directors
and (ii) the aggregate compensation paid to such Directors for services on the
Company's Board and that of all other funds in the "Fund Complex" (as defined in
Schedule 14A under the Securities Exchange Act of 1934):
<TABLE>
<CAPTION>
====================================================================================================================================
NAME OF PERSON/ POSITION AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION FROM
COMPENSATION FROM RETIREMENT BENEFITS BENEFITS UPON REGISTRANT AND FUND
THE COMPANY ACCRUED AS PART OF RETIREMENT COMPLEX(2) PAID TO
FUND EXPENSES(1) DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward S. Bottum (3) Not Applicable Not Applicable Not Applicable $29,125
- ------------------------------------------------------------------------------------------------------------------------------------
William P. Carmichael (3) Not Applicable Not Applicable Not Applicable $27,625
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas M. Collins(4) $46,750 $16,199 $50,500 $53,500
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $36,750 $23,195 $37,500 $36,750
Vice Chairman of the Board
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley(5) $36,750 $16,220 $37,500 $72,750
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $35,750 $28,422 $ * (6) $40,250
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings(4) $69,250 $26,984 $40,500 $81,892
President and Chairman of
the Board
====================================================================================================================================
</TABLE>
- ----------
(1) For the fiscal year ended February 28, 1998, the Company accrued on the
part of all of the directors an aggregate of $284,393 in retirement benefits.
(2) The "Fund Complex" consists of the Company, Master Trust, Time Horizon
Funds, Pacific Innovations Trust and Seafirst Retirement Funds (which were
merged into the Company on June 23, 1997). Fees from the Time Horizon Funds are
for the period from March 1, 1997 to February 28, 1998.
(3) Messrs. Bottum and Carmichael currently serve as Trustees of the
Pacific Innovations Trust and Time Horizon Funds.
(4) Mr. Collins and Dr. Pings also serve as Trustee for Master Trust.
(5) Mr. Greeley currently also serves as Trustee for the Time Horizon
Funds, Pacific Innovations Trust and Master Trust.
(6) Mr. Hanson served as Director until July 1, 1998. On July 1, 1998:
Mr. Hanson was entitled to retirement benefits of $170,995 (0.002%), $53,533
(0.002%), $7,516 (0.002%), $8,456 (0.002%), $12,527 (0.002%), $25,054 (0.002%),
$1,253 (0.002%), $626 (0.002%), $1,253 (0.002%), $626 (0.002%), $313 (0.002%),
$3,758 (0.002%), $1,253 (0.002%), $626 (0.002%), $1,253 (0.002%), $626 (0.002%),
$313 (0.002%), $3,758 (0.002%), $6,890 (0.002%), $4,384 (0.002%), $3,758
(0.002%), $11,588 (0.002%) and $626 (0.001%) from the Prime, Treasury, Treasury
Only, Government, Tax-Exempt Money, California Tax-Exempt Money Market,
Intermediate Bond, Corporate Bond, U.S. Government Securities, Short-Term
Government, National Municipal Bond, California Tax-Exempt Bond, Capital
Income, Asset Allocation, Aggressive Growth, Blue Chip and International Equity
Funds, respectively. Bank of America has agreed to reimburse the Company
$100,136 in the aggregate relating to these benefits.
INVESTMENT ADVISER
Bank of America serves as investment adviser to the Asset
Allocation Fund since commencement of its operations. In the Investment Advisory
Agreement with the Fund, Bank of America has agreed to provide investment
advisory services as described in the Prospectus. Bank of America has also
agreed to pay all expenses incurred by it in connection with its activities
under its agreement other than the cost of securities, including brokerage
commissions, if any, purchased for the Fund. In rendering its advisory services,
Bank of America may utilize Bank of America' officers from one or more of the
departments of Bank of America which are authorized to exercise the fiduciary
powers of Bank of America with respect to the investment of trust assets. In
some cases, these officers may also serve as officers, and utilize the
facilities, of wholly owned subsidiaries and other affiliates of Bank of America
or its parent corporation. In addition, the agreement also provides that Bank of
America may, in its discretion, provide advisory services through its own
employees or employees of one or more of its affiliates that are under the
common control of Bank of America' parent, BankAmerica; provided such employees
are under the management of Bank of America.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and
NationsBank Corporation ("NationsBank")
-37-
<PAGE> 627
announced a definitive agreement to merge and form a new holding company to be
named BankAmerica Corporation (the "Merger"). The Merger is anticipated to close
by the end of 1998, however, it is subject to a number of approvals including
shareholder and regulatory approvals.
Prior to June 23, 1997 the Fund invested all of its assets in the
Master Portfolio. On June 23, 1997 the Fund withdrew its assets from the Master
Portfolio and invested them directly in securities. In addition, prior to June
23, 1997, Bank of America was entitled to receive an investment advisory fee at
the annual rate of 0.55% of the average daily net assets of the Master
Portfolio. During the period from June 24, 1997 through February 28, 1998 the
Fund paid Bank of America .40% of the average daily net assets of the Fund.
Effective March 1, 1998 for the services provided and expenses assumed pursuant
to the investment advisory agreement, the Company has agreed to pay Bank of
America fees, accrued daily and payable monthly, at the annual rate of .40% of
the Fund's net assets. From time to time, Bank of America may voluntarily waive
fees or reimburse the Fund for expenses.
Except as noted below, for the fiscal years indicated Bank of
America waived its entire advisory fee with respect to the Asset Allocation Fund
(Asset Allocation Master Portfolio for periods prior to June 23, 1997) as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Master $650,191(1) $1,046,406(1) $913,660(1)
Portfolio
- -----------------------------------------------------------------------
</TABLE>
- -------------------
(1.) For the fiscal years ended February 28, 1998, February 28, 1997 and
February 29, 1996, Bank of America waived $0, $735,797 and $720,259,
respectively, in advisory fees with respect to the Master Portfolio.
Additionally, for the fiscal years indicated Bank of America
assumed certain operating expenses of the Master Portfolio as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Master $0 $0 $0
Portfolio
- ------------------------------------------------------------------------
</TABLE>
The Investment Advisory Agreement between Bank of America and the
Company will be in effect until October 31, 1998,
-38-
<PAGE> 628
and will continue in effect with respect to the Fund from year to year
thereafter only so long as such continuation is approved at least annually by
(i) the Board of Directors of the Company or the vote of a "majority," as
defined in the 1940 Act, of the outstanding voting securities of the Fund, and
(ii) a majority of those directors of the Company who are not "interested
persons," as defined in the 1940 Act, of any party to the Investment Advisory
Agreement, acting in person at a meeting called for the purpose of voting on
such approval. The Investment Advisory Agreement will terminate automatically in
the event of its "assignment," as defined in the 1940 Act. In addition, the
Investment Advisory Agreement is terminable with respect to the Fund at any time
without penalty upon 60 days' written notice by the Board of Directors of the
Company, by vote of the holders of a majority of the Fund's outstanding voting
securities, or by Bank of America.
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Master
Portfolio.
The Investment Advisory Agreement for the Fund provides that Bank
of America shall not be liable for any error of judgment or mistake of law or
for any loss suffered in connection with the performance of the investment
advisory agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties or
from reckless disregard by it of its duties and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks
from engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board of Governors") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but do
not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent and custodian to such an investment company. In 1981,
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board of Governors did
not exceed its authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may perform the services for
the Portfolios contemplated by the particular Investment Advisory Agreement, the
Prospectuses, and this Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a
national bank may perform services comparable to those performed by Bank of
America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Portfolios or from continuing to purchase Fund shares for the accounts of its
customers. (For a discussion of the Glass-Steagall Act in connection with the
Company's Shareholder Service Plan, see "Plan Payments" in the Funds'
Prospectuses.)
On the other hand, as described herein, the Funds are
currently distributed by PDI. If current restrictions under the Glass-Steagall
Act preventing a bank from sponsoring, organizing, controlling, or distributing
shares of an investment company were relaxed, the Companies expect that Bank of
America would consider the possibility of offering to perform some or all of the
services now provided by PDI. From time to time, legislation modifying such
restriction has been introduced in Congress which, if enacted, would permit a
bank holding company to establish a non-bank subsidiary having the authority to
organize, sponsor and distribute shares of an investment company. If this or
similar legislation were enacted, the Companies expect that Bank of America's
parent bank holding company would consider the possibility of one of its
non-bank subsidiaries offering to perform some or all of the services now
provided by PDI. It is not possible, of course, to predict whether or in what
form such legislation might be enacted or the terms upon which Bank of America
or such a non-bank affiliate might offer to provide services for consideration
by a particular Company's Board of Directors/Trustees.
ADMINISTRATOR
Bank of America (the "Administrator") serves as the Fund's
administrator. For the period from March 1, 1997 through September 15, 1997, the
BISYS Group, Inc., through its wholly-owned subsidiary BISYS Fund Services, L.P.
(collectively "BISYS"), served as administrator of the Fund. Prior to November
1, 1996, Concord Holding Corporation, an indirect, wholly-owned subsidiary of
BISYS served as the Fund's and Master Portfolio's administrator ("Concord
Holding").
Unless sooner terminated, the Administration Agreement will
continue in effect until October 31, 1999 and thereafter for successive periods
of one year, provided that such continuance is specifically approved at least
annually (a) by a vote of a majority of those members of the Board of Directors
of the Company who are not parties to the administration agreement or
"interested persons" of any such party, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Board of Directors of the
Company or by vote of a "majority of the outstanding voting securities" of the
Fund. The Company's administration agreement is terminable at any time with
respect to the Fund, without cause and without payment of any penalty, by vote
of a majority of the Company's Board of Directors or by a vote of a majority of
the outstanding voting securities of the Fund upon 60 days' written notice to
the Administrator, or by the Administrator at any time, without
-39-
<PAGE> 629
payment of any penalty, upon 90 days' written notice to the Company. The
agreement will immediately terminate in the event of its "assignment."
The Company has agreed to pay the Administrator a fee for its
services as Administrator, computed daily and payable monthly, at the annual
rate of .15% of the average daily net assets of the Fund. The fee payable to the
Administrator is not subject to reduction as the value of the Fund's net assets
increases. From time to time, Bank of America may voluntarily waive fees or
reimburse the Fund for expenses. Prior to June 23, 1997, BISYS or Concord
Holding was entitled to receive an administration fee payable at the annual rate
of 0.15% of the Asset Allocation Fund's average daily net assets and 0.05% of
the Asset Allocation Master Portfolio's average daily net assets.
During the period September 15, 1997 through February 28, 1998,
the Fund paid Bank of America administration fees at the effective annual rate
of .15% of the average daily net assets of the Fund.
Except as noted below, for the fiscal years indicated, Bank of
America, BISYS or Concord Holding waived its entire administration fee with
respect to the Fund and the Master Portfolio as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Year Ended Year Ended
Year Ended February February
February 28, 1998 28, 1997 29, 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Allocation $258,691(2) $41,432(2) $19,909
Fund
- ------------------------------------------------------------------------------
Master Portfolio $ 33,080 $94,685(2) $83,060(3)
- ------------------------------------------------------------------------------
</TABLE>
- --------------------
(1.) For the fiscal year ended February 28, 1998, Bank of America waived $0
and $0 and BISYS waived $17,413 and $27,800 with respect to the Asset
Allocation Fund and Asset Allocation Master Portfolio, respectively.
(2.) For the fiscal year ended February 28, 1997, Bank of America, BISYS or
Concord Holding waived $41,432 and $66,954 with respect to the Asset
Allocation Fund and Asset Allocation Master Portfolio, respectively.
(3.) For the fiscal year ended February 29, 1996, Concord Holding waived
$65,491 in administration fees with respect to the Master Portfolio.
Additionally, for the fiscal years indicated, Bank of America,
BISYS or Concord Holding reimbursed the Fund for its operating expenses as
follows:
-40-
<PAGE> 630
<TABLE>
<CAPTION>
----------------------------------------------------
Year Ended Year Ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Allocation $0 $31,598 $192,545
Fund
- -------------------------------------------------------------------------
</TABLE>
The Administrator will bear all expenses in connection with the
performance of its services under the administration agreement with the
exception of the fees charged by PFPC, for certain fund accounting services
which are borne by the Fund. See "General Information--Custodian, Accounting
Agent and Transfer Agent" below. Expenses borne by the Fund include taxes,
interest, brokerage fees and commissions, if any, fees of Board members who are
not officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or the Administrator or their
subcontractors or any of their affiliates, SEC fees and state securities
registration and qualification fees, advisory fees, fees payable to shareholder
organizations, fees for special management services, administration fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, outside auditing and legal expenses, costs of maintaining
corporate existence, costs attributable to investor services, including without
limitation telephone and personnel expenses, costs of preparing and printing
prospectuses, or any supplement or amendment thereto, necessary for the
continued effective registration of shares under the 1933 Act or state
securities laws, costs of printing and distributing any Prospectus, supplement
or amendment thereto for existing shareholders, cost of shareholders' reports
and corporate meetings and any extraordinary expenses. Certain shareholder
servicing fees in connection with the Company's shares are also paid by the
Company. See "Distributor and Plan Payments."
The administration agreement provides that the Administrator shall
not be liable for any error of judgment or mistake of law or any loss suffered
by the Fund in connection with the performance of the administration agreement,
except a loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from the reckless disregard by it of its
obligations and duties under the administration agreement.
The Administrator may from time to time employ such person or
persons as it may believe to be particularly fitted to assist in the performance
of the administration agreement; provided, however, that the compensation of
such person or persons shall be paid by the Administrator and the Administrator
shall be as fully responsible to the Company for the acts and omissions of any
subcontractor as it is for its own acts and omissions. PFPC provides the Fund
with certain accounting services pursuant to a separate fund accounting services
agreement with the Administrator. Under the fund accounting
-41-
<PAGE> 631
services agreement, PFPC has agreed to provide certain accounting, bookkeeping,
pricing, dividend and distribution calculation services with respect to the
Fund. The monthly fees charged by PFPC under the fund accounting services
agreement are borne by the Fund.
The Administrator has also entered into an agreement with PFPC to
provide certain sub-administration services to the Fund as described in the
Prospectus. The monthly fees charged by PFPC for these services under the
sub-administration agreement are borne by the Administrator.
PFPC International Ltd. may assign its rights and delegate its
duties under its Administration and Accounting Services Agreement to any
wholly-owned direct or indirect subsidiary of PNC Bank, N.A. or PNC Bank Corp.,
provided, however that PFPC International Ltd. shall be as fully responsible to
Master Trust for the acts and omissions of any delegate as PFPC International
Ltd. is for its own acts and omissions.
DISTRIBUTOR AND PLAN PAYMENTS
Provident Distributors, Inc. acts as distributor of the shares of
the Company. Shares are sold on a continuous basis by the Distributor. Prior to
September 15, 1997, Concord Financial Group, Inc. ("CFG"), a wholly owned
subsidiary of BISYS, acted as distributor for the Fund.
The Distributor has agreed to use its best efforts to effect sales
of shares of the Fund although it is not obliged to sell any certain number of
shares. The distribution agreement became effective September 15, 1997 and,
unless sooner terminated, shall continue in effect with respect to the Fund
until October 31, 1999. Thereafter, if not terminated, the distribution
agreement shall continue automatically for successive terms of one year,
provided that such continuance is specifically approved at least annually by (a)
a vote of a majority of those members of the Board of Directors of the Company
who are not parties to the distribution agreement or "interested persons" of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Fund as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Directors of the
Company or by a vote of a "majority of the outstanding voting securities" of the
Fund on 60 days' written notice to the Distributor, or by the Distributor at any
time, without the payment of any penalty, on 90 days' written notice to the
Company. The agreement will automatically and immediately terminate in the event
of its "assignment."
For the fiscal years indicated PDI or CFG received sales loads in
connection with the purchase of shares of the Fund as follows:
-42-
<PAGE> 632
<TABLE>
<CAPTION>
--------------------------------------------------------
Amount Of Amount of Total
Total Sales Total Sales Load
Load Sales Load Retained By
Received By Retained Affiliates Of
PDI or CFG By PDI or CFG Bank of America
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ended $ 92,800 $10,024 $80,281
February 28, 1998
- --------------------------------------------------------------------------------
Fiscal Year Ended $421,000 $47,026 $373,436
February 28, 1997
- --------------------------------------------------------------------------------
Fiscal Year Ended $642,818(1) $69,818 $569,332
February 29, 1996
================================================================================
</TABLE>
- --------------------
(1) Balance was paid to selling dealers.
The following table shows all sales loads, commissions and other
compensation received by PDI or CFG directly or indirectly from the Fund during
its fiscal year ended February 28, 1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Brokerage
Net Compensation Commissions
Underwriting on Redemption In Connection
Discounts and and With Fund Other
Commissions(1) Repurchase Transactions Compensation(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset
Allocation
Fund $10,024 $ 0 $ 0 $85,196
- --------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Represents amounts received from front-end sales charge on A
Shares.
(2) Represents the total of (i) amounts paid to Bank of America,
BISYS or Concord for administrative services provided to the
Fund (see "Management of the Company-Administrator" above)
and (ii) payments made under the Shareholder Services Plan,
Distribution Plan and Administrative and Shareholder
Services Plan (see discussion in next section) and retained
by CFG.
The Shareholder Services Plan. Pacific Horizon has adopted
separate Shareholder Services Plans (the "Plans") for SRF Shares and A Shares,
under which SRF Shares and A Shares of each Fund reimburse the Distributor for
shareholder servicing fees the Distributor pays to Service Organizations. The
fees paid under the Shareholder Services Plan for A Shares are in addition to
the sales loads on A Shares described above and in the Prospectus. Under the
Plans for A and SRF Shares, the Company pays the Distributor, with respect to
the Fund, for (a) non-distribution
-43-
<PAGE> 633
shareholder services provided by the Distributor to Service Organizations and/or
the beneficial owners of Fund shares, including, but not limited to shareholder
servicing provided by the Distributor at facilities dedicated for Company use,
provided such shareholder servicing is not duplicative of the servicing
otherwise provided on behalf of the Fund, and (b) fees paid to Service
Organizations (which may include the Distributor itself) for the provision of
support services for shareholders for whom the Service Organization is the
dealer of record or holder of record or with whom the Service Organization has a
servicing relationship ("Clients").
Support services provided by Service Organizations may include,
among other things: (i) establishing and maintaining accounts and records
relating to Clients that invest in Fund shares; (ii) processing dividend and
distribution payments from the Fund on behalf of Clients; (iii) providing
information periodically to Clients regarding their positions in shares; (iv)
arranging for bank wires; (v) responding to Client inquiries concerning their
investments in Fund shares; (vi) providing the information to the Fund necessary
for accounting or subaccounting; (vii) if required by law, forwarding
shareholder communications from the Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (viii) assisting in processing exchange and redemption
requests from Clients; (ix) assisting Clients in changing dividend options,
account designations and addresses; and (x) providing such other similar
services.
The Plan provides that the Distributor is entitled to receive
payments for expenses on a monthly basis, at an annual rate not exceeding .25%
of the average daily net assets of the SRF Shares or A Shares of the Fund, as
the case may be, during such month for shareholder servicing expenses. The
calculation of the Fund's average daily net assets for these purposes does not
include assets held in accounts opened via a transfer of assets from trust and
agency accounts of Bank of America. Further, payments made out of or charged
against the assets of the Fund must be in payment for expenses incurred on
behalf of the Fund.
If in any month the Distributor expends or is due more monies than
can be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while the Plan is in effect
until such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under the Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under a Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
-44-
<PAGE> 634
For the fiscal year ended February 29, 1998, the A Shares of the
Fund were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Amount of
Amount of Total
Total Shareholder
Shareholder Service Fee
Total Service Fee Paid To Bank
Shareholder Paid To of America and its
Service Fee PDI or CFG affiliates
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Asset $103,328 $3,724 $86,340
Allocation
Fund
- --------------------------------------------------------------------------
</TABLE>
(1) $401 was paid to PDI and $3,323 was paid to CFG.
For the fiscal year ended February 28, 1997, the A Shares of the
Fund were charged the following amounts pursuant to the Plan:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Amount of
Amount of Amount of Total
Total Total Shareholder
Shareholder Shareholder Service Fee
Total Service Fee Service Fee Paid to
Shareholder Paid To PDI Paid To Bank Affiliates of
Service Fee or CFG of America Bank of America
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $68,548 $2,735 $0 $64,576
Allocation
Fund
- --------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 29, 1996, the A Shares of the
Fund were charged the following amounts pursuant to the Shareholder Service
Plan:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Amount of
Amount of Amount of Total
Total Total Shareholder
Shareholder Shareholder Service Fee
Total Service Fee Service Fee Paid to
Shareholder Paid To Paid To Bank Affiliates of
Service Fee PDI or CFG of America Bank of America
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $33,182 $0 $0 $0
Allocation [$33,182
Fund waived]
- --------------------------------------------------------------------------------------
</TABLE>
Payments for shareholder service expenses under the Plans are not
subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the Plan, the
Distributor provides that a report of the amounts expended under the Plan, and
the purposes
-45-
<PAGE> 635
for which such expenditures were incurred, will be made to the Board of
Directors for its review at least quarterly. In addition, the Plan provides that
the selection and nomination of the directors of the Company who are not
"interested persons" thereof have been committed to the discretion of the
directors who are neither "interested persons" (as defined in the 1940 Act) of
the Company nor have any direct or indirect financial interest in the operation
of the Plan (or related servicing agreements) (the "Non-Interested Plan
Directors").
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of A Shares. These fees
would be in addition to any amounts which might be received under the Plan.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
The Company's Board of Directors has concluded that the Plan will
benefit the Fund and its A shareholders. The Plan is subject to annual
reapproval by a majority of the Non-Interested Plan Directors and is terminable
at any time with respect to the Fund by a vote of a majority of such Directors
or by vote of the holders of a majority of the A Shares of the Fund. Any
agreement entered into pursuant to the Plan with a Service Organization is
terminable with respect to the Fund without penalty, at any time, by vote of a
majority of the Non-Interested Plan Directors, by vote of the holders of a
majority of the A Shares of the Fund, by the Distributor or by the Service
Organization. Each agreement will also terminate automatically in the event of
its assignment.
The Distribution and Services Plan and Distribution Plan and
Administrative and Shareholder Services Plan. The Distributor is also entitled
to payment from the Company for distribution and service fees pursuant to the
Distribution and Services Plan adopted on behalf of the B Shares and for
distribution fees pursuant to the Distribution Plan adopted on behalf of K
Shares. Under the Distribution and Services Plan and Distribution Plan, the
Company may pay the Distributor for: (a) direct out-of-pocket promotional
expenses incurred by the Distributor in advertising and marketing B and K
Shares; (b) expenses incurred in connection with preparing, printing, mailing,
and distributing or publishing advertisements and sales literature for B and K
Shares; (c) expenses incurred in connection with printing and mailing
Prospectuses and Statements of Additional Information to other than current B
and K shareholders; (d) periodic payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, "a Distribution Organization") with respect to a Fund's B and
K Shares beneficially owned by customers for whom the Distribution Organization
is the Distribution Organization of record or holder of record of such B and K
Shares; (e) the direct or indirect cost of financing the payments or expenses
included in (a) and (d)
-46-
<PAGE> 636
above; or (f) for such other services as may be construed, by any court or
governmental agency or commission, including the SEC, to constitute distribution
services under the 1940 Act or rules and regulations thereunder. With respect to
B and 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 Distribution and Services Plan with respect to B
Shares and Administrative and Shareholder Services Plan with respect to K
Shares, the Company may also pay securities dealers, brokers, financial
institutions or other industry professionals, such as investment advisors,
accountants, and estate planning firms (severally, a "Service Organization") for
support services provided with respect to its Client's B and K Shares.
Administrative and shareholder services provided may include some or all of the
following: (i) processing dividend and distribution payments from a Fund on
behalf of its Clients; (ii) providing statements periodically to its Clients
showing their positions in B and K Shares; (iii) arranging for bank wires; (iv)
responding to routine client inquiries concerning their investment; (v)
providing the information to the Fund necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its Clients;
(vii) aggregating and processing purchase, exchange, and redemption requests
from its Clients and placing net purchase, exchange, and redemption orders for
its Clients; (viii) establishing and maintaining accounts and records relating
to Clients; (ix) assisting Clients in changing dividend options, account
designations and addresses; or (x) other similar services if requested by the
Company.
The Distribution and Services Plan provides that the Distributor
is entitled to receive payments on a monthly basis at an annual rate not
exceeding 1.00% of the average daily net assets during such month of the
outstanding B Shares. Not more than 0.25% of such net assets will be used to
compensate service organizations for personal services provided to B
Shareholders, and/or the maintenance of such shareholders' accounts and not more
than 0.75% of such net assets of B Shares will be used for promotional and other
primary distribution activities.
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
-47-
<PAGE> 637
annual rate of 1.00% of the average daily net assets of the Fund's K Shares.
However, it is expected that during the current Fiscal Year, such fees will not
exceed 0.75% of the average net assets of the K Shares.
Payments made out of or charged against the assets of a particular
class of shares of the Fund must be in payment for expenses incurred on behalf
of that class.
Payments for distribution expenses under the Distribution Plan and
Distribution and Services Plan (collectively, the "12b-1 Plans") 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
Plans provide that a written report of the amounts expended under the 12b-1
Plans, and the purposes for which such expenditures were incurred, will be made
to the Board of Directors for its review at least quarterly. In addition, the
12b-1 Plans provide that it may not be amended to increase materially the costs
which the Fund may bear for distribution pursuant to the 12b-1 Plans without
shareholder approval and that other material amendments of the 12b-1 Plans 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 Plans, or in any agreements entered into in connection with the
12b-1 Plans, 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 Plans and the Administrative and
Shareholder Services Plan will benefit the Fund and its B and K shareholders.
The 12b-1 Plans 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 B and K Shares of the Fund. Any agreement entered into pursuant to
the 12b-1 Plans and the Administrative and Shareholder Services Plan with a
Service Organization is terminable with respect to the Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Directors, by vote of
the holders of a majority of the outstanding B and K Shares of the Fund, or by
the Service Organization. Each
-48-
<PAGE> 638
agreement will also terminate automatically in the event of its assignment.
If in any month the Distributor expends or is due more monies than
can be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while a Plan is in effect
until such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under a Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under a Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
For the fiscal year ended February 28, 1998, the K Shares of the
Fund were charged the following amounts pursuant to the Administrative and
Shareholder Service Plan:
<TABLE>
<CAPTION>
--------------------------------------------------------
Amount of
Amount of Total
Total Administrative
Administrative and
Total and Shareholder
Administrative Shareholder Service Fee
and Service Fee Paid To Bank
Shareholder Paid To of America
Service Fee PDI or CFG and Affiliates
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Asset $2,466 $464 $0
Allocation
Fund
- ------------------------------------------------------------------------
</TABLE>
(1) $464 was paid to BISYS and $0 was paid to CFG.
For the fiscal year ended February 28, 1998, the K Shares of the
Fund were charged the following amounts pursuant to the Distribution Plan:
<TABLE>
<CAPTION>
-------------------------------------------------
Amount of
Total 12b-1
Amount of Fee Paid To
Total 12b-1 Bank of
Total Fee Paid To America
12b-1 Fee PDI or CFG and Affiliates
- -----------------------------------------------------------------
<S> <C> <C> <C>
Asset $4,923 $929 $0
Allocation
Fund
- -----------------------------------------------------------------
</TABLE>
(1) $0 was paid to PDI and $929 was paid to BISYS.
-49-
<PAGE> 639
For the fiscal year ended February 28, 1997, the K Shares of the
Fund were charged the following amounts pursuant to the Administrative
Shareholder Service Plan:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Amount of
Total
Amount of Amount of Administrative
Total Total and
Administrative Administrative Shareholder
Total and and Service Fee
Administrative Shareholder Shareholder Paid to
and Service Fee Service Fee Affiliates of
Shareholder Paid To Paid To Bank Bank of
Service Fee CFG of America America
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $1506 $0 $0 $0
Allocation
Fund
- -------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 28, 1997, the K Shares of the
Fund were charged the following amounts pursuant to the Distribution Plan:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Amount of Amount of
Amount of Total 12b-1 Total 12b-1
Total 12b-1 Fee Paid To Fee Paid to
Total Fee Paid To Bank of Affiliates of
12b-1 Fee CFG America Bank of America
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset $1,000 $1,000 $0 $0
Allocation [$499 waived]
Fund
- --------------------------------------------------------------------------------------
</TABLE>
No K Shares were outstanding for the fiscal year ended February
28, 1996.
During the fiscal year ended February 28, 1998, all amounts paid
under the Distribution Plan were paid as compensation to broker/dealers.
YIELD AND TOTAL RETURN
From time to time, the yields and the total returns of the Fund
may be quoted in and compared to other mutual funds with similar investment
objectives in advertisements, shareholder reports or other communications to
shareholders. The Fund may also include calculations in such communications that
describe hypothetical investment results. (Such performance examples will be
based on an express set of assumptions and are not indicative of the performance
of the Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment
-50-
<PAGE> 640
are reinvested by being paid in additional Fund shares, any future income or
capital appreciation of the Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund), as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, Treasury bills and shares of the Fund. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. From time to
time, the investment adviser may enter into alliances with retirement plan
sponsors, including The Legend Group, and the Fund may in its advertisements and
sales literature include a discussion of certain attributes and benefits to be
derived from its relationship which such retirement plan sponsors. With proper
authorization, the Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information with
respect to the Fund is generally available by calling (800) 346-2087.
Yield Calculations. The yield for the respective share classes of
the Fund is calculated by dividing the net investment income per share (as
described below) earned by the Fund during a 30-day (or one month) period by the
maximum offering price per share (including the maximum front-end sales charge
of an A Share) on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period with respect to
a particular class is based on the average daily number of shares outstanding in
the class during the period entitled to receive dividends and includes dividends
and interest earned during the period attributable to that class minus expenses
accrued for the period
-51-
<PAGE> 641
attributable to that class, net of reimbursements. This calculation can be
expressed as follows:
a-b
Yield = 2 [(----- + 1)(6 power) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during
the period (variable "a" in the formula), dividend income on equity securities
is recognized by accruing 1/360 of the stated dividend rate of the security each
day. Except as noted below, interest earned on debt obligations is calculated by
computing the yield to maturity of each obligation based on the market value of
the obligation (including actual accrued interest) at the close of business on
the last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is held. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market values of such debt obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current
-52-
<PAGE> 642
market value that are less than the then-remaining portion of the original issue
discount (market premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations
which are expected to be subject to monthly payments of principal and interest
("pay downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) the Fund may elect either (i) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any, if the weighted average maturity date is not
available, or (ii) not to amortize discount or premium on the remaining
security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned income
is the net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. The Fund's maximum offering price per
share for purposes of the formula includes the maximum sales load imposed by the
Fund on A Shares - currently 4.50% of the per share offering price.
Based on the foregoing calculations, the 30-day yields of the A
Shares of the Fund (after fee waivers and expense reimbursements) for the 30 day
period ended February 28, 1998 was 2.22%.
Based on the foregoing calculations, the 30-day yields of the K
Shares of the Fund (after fee waivers and expense reimbursements) for the 30-day
period ended February 28, 1998 was 1.85%.
Total Return Calculations. The Fund computes its average annual
total returns separately for its separate share classes by determining the
average annual compounded rates of return during specified periods that equate
the initial amount invested in a particular share class to the ending redeemable
value of such investment in the class. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV (1/n power)
T = [(----) - 1]
P
-53-
<PAGE> 643
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.
-54-
<PAGE> 644
Based on the foregoing calculations, the 1) average annual total
returns, and 2) the aggregate total returns for the A Shares of the Fund for the
year or period indicated were as follows:
<TABLE>
<CAPTION>
-------------------------------------
Average Total Returns
-------------------------------------
Period From
Commencement
One-Year Of Operations(1)
Period Ended Through
February 28, February 28,
1998 1998
- ----------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund 17.55% 14.78%
- ----------------------------------------------------
</TABLE>
- --------------------
(1) The Fund commenced investment operations on January 18, 1994.
<TABLE>
<CAPTION>
------------------------------------
Aggregate Total Returns
------------------------------------
Period From
Commencement
One-Year Of Operations
Period Ended Through
February 28, February 28,
1998 1998
- ---------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund (after
fee waivers) 17.55% 76.38%
- ---------------------------------------------------
</TABLE>
Based on the foregoing calculations, the 1) average annual total
returns, and 2) the aggregate total returns for the K Shares of the Fund for the
year or period indicated was as follows:
-55-
<PAGE> 645
<TABLE>
<CAPTION>
-------------------------------------
Average Total Returns
-------------------------------------
Period From
Commencement
One-Year Of Operations
Period Ended Through
February 28, February 28,
1998 1998
- ------------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund (after
fee waivers) 22.10% 15.83%
- ------------------------------------------------------
</TABLE>
- ------------------------
* The Fund commenced operations on January 18, 1994.
<TABLE>
<CAPTION>
-------------------------------------
Aggregate Total Returns
-------------------------------------
Period From
Commencement
One-Year Of Operations
Period Ended Through
February 28, February 28,
1998 1998
- ------------------------------------------------------
<S> <C> <C>
Asset
Allocation
Fund* (after
fee waivers) 22.10% 83.16%
- ------------------------------------------------------
</TABLE>
- -------------------
The Fund may also advertise total return data without reflecting sales
charges in accordance with the rules of the SEC. Quotations which do
not reflect the sales load will, of course, be higher than quotations
which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized
as a Maryland corporation on October 27, 1982. The Company's Charter authorizes
the Board of Directors to issue up to four hundred billion full and fractional
common shares. Pursuant to the authority granted in the Charter, the Board of
Directors has authorized the issuance of twenty-two classes of stock, Classes A
through W Common Stock, $.001 par value per share, representing interests in
twenty-two separate investment portfolios. Class O represents interests in the A
Shares of the Asset Allocation Fund, Class O -- Special Series 3 represents
-56-
<PAGE> 646
interests in the B Shares of the Asset Allocation Fund; Class O -- Special
Series 5 represents interests in the K Shares of the Asset Allocation Fund and
Class O -- Special Series 7 represents interests in the SRF Shares of the Asset
Allocation Fund. The Company's charter also authorizes the Board of Directors to
classify or reclassify any particular class of the Company's shares into one or
more series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectus, the Company's shares will be fully paid
and non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share held,
and fractional votes for fractional shares held, and will vote in the aggregate
and not by class or series except as otherwise required by the 1940 Act or other
applicable law or when permitted by the Board of Directors. Shares have
cumulative voting rights to the extent they may be required by applicable law.
Rule 18f-2 under the 1940 Act provides that any matter required to
be submitted to the holders of the outstanding voting securities of an
investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each fund affected by the matter. The Fund is affected by a matter unless it
is clear that the interests of each of the Company's funds in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under Rule 18f-2 the approval of an investment advisory agreement or 12b-1
distribution plan or any change in a fundamental investment policy would be
effectively acted upon with respect to the Fund only if approved by a majority
of the outstanding shares of the Fund. However, the 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
-57-
<PAGE> 647
The Company has appointed PNC Bank, National Association, 1600
Market Street, Philadelphia, PA 19103 ("PNC") as custodian for the Fund. PFPC,
Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, DE 19809,
provides the Fund with certain accounting services pursuant to a Fund Accounting
Services Agreement with the Administrator. Both PNC and PFPC, which is located
at 103 Bellevue Parkway, Wilmington, Delaware 19809, are wholly owned
subsidiaries of PNC Bancorp., a bank holding company. Under the fund accounting
services agreement, PFPC has agreed to provide certain accounting, bookkeeping,
pricing, dividend and distribution calculation services with respect to the
Company. The monthly fees charged by PFPC under the fund accounting servicing
agreement are borne by the Fund. As custodian of the assets of the Fund, PNC (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds and
disburses portfolio securities; (iii) makes receipts and disbursements of money,
(iv) collects and receives income and other payments and distributions on
account of portfolio securities, (v) responds to correspondence from security
brokers and others relating to their respective duties and (vi) makes periodic
reports concerning its respective duties.
Effective October 25, 1997, PFPC Inc., P.O. Box 8968, Wilmington,
Delaware 19899-8968 serves as transfer and dividend disbursing agent for the
Fund. Prior thereto, BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219, a wholly owned subsidiary of BISYS, served as transfer and dividend
disbursing agent for the Fund.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
the Company, is a partner), 1345 Chestnut Street, Philadelphia, PA 19107, serves
as counsel to the Company and will pass upon the legality of the shares offered
hereby.
INDEPENDENT ACCOUNTANTS
Pricewaterhouse Coopers, representing the combined firms of Price
Waterhouse LLP and Coopers & Lybrand L.L.P., independent accountants, with
offices at 1177 Avenue of the Americas, New York, New York, has been selected as
independent accountants of the Fund for the fiscal year ended February 28, 1998.
REPORTS
Shareholders will receive unaudited semi-annual reports describing
the Fund's investment operations, and annual financial statements together with
the reports of the Fund, audited by the independent accountants.
MISCELLANEOUS
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares or interests of
the Fund means, with respect to the
-58-
<PAGE> 648
approval of an investment advisory agreement, a distribution plan or a change in
fundamental investment policy, the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares or interests of the Fund or (b) 67% of the
shares or interests of the Fund present at a meeting at which more than 50% of
the outstanding shares or interests of the Fund are represented in person or by
proxy.
PRINCIPAL HOLDERS OF SECURITIES
As of June 5, 1998, the officers and directors of the Company collectively owned
less than 1% of the outstanding shares of any class of the Funds.
As of June 5, 1998, the following entities were known by the Funds to own 5% or
more of the outstanding shares of any class of the Funds:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF OUTSTANDING
SHARES HELD SHARES OF CLASS
-------------------- ---------------
<S> <C> <C>
PRIME FUND -- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 2,112,267,667.780 80.6%
</TABLE>
-59-
<PAGE> 649
<TABLE>
<S> <C> <C>
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 259,888,898.200 9.9%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
PRIME FUND -- HORIZON SHARES
Bank of America NT&SA 815,409,324.970 31.3%
Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
William Barron Hilton 311,526,000.000 11.9%
Charitable Remainder Trust
9336 Civic Center Drive
Beverly Hills, CA 90210
PRIME FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 934,160,388.770 25.0%
Financial Management and Trust Services
P.O. Box 513577 -- Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 310,996,075.190 8.3%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
Security Pacific Cash Management 708,728,100.000 19.0%
c/o Bank of America
1850 Gateway Blvd.
Concord, CA 94520
PRIME FUND -- X SHARES
BA Investment Services, Inc. 528,249,277.05 50.9%
FBO Customers
Unit 17852
</TABLE>
-60-
<PAGE> 650
<TABLE>
<S> <C> <C>
P.O. Box 7042
San Francisco, CA 94120
PRIME FUND -- Y SHARES
BA Arizona 8,049,762.200 5.5%
2044 Franklin Street
Oakland, CA 94612
Bank of America-California 7,500,000.000 5.1%
2044 Franklin Street
Oakland, CA 94612
Karsten Manufacturing Corporation 8,149,580.350 5.6%
2201 West Desert Cove
Phoenix, AZ 85029
PRIME FUND -- S SHARES
BA Investment Services, Inc. 803,285,361.970 99.2%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY FUND -- PACIFIC HORIZON SHARES
HARE & Co., Bank of New York 64,553,129.890 20.9%
and Short Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 192,584,335.900 62.4%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY FUND -- HORIZON SHARES
Bank of America NT&SA 227,462,997.510 32.4%
Private Banking
Attn: Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
HARE & Co 164,326,526.330 23.4%
c/o Bank of New York
</TABLE>
-61-
<PAGE> 651
<TABLE>
<S> <C> <C>
One Wall Street, 5th Floor
New York, NY 10286
KPMG Peat Marwick LLP 51,000,000.000 7.3%
3 Chestnut Ridge Road
Montvale, NJ 07645
Los Angeles Department of Airports 42,557,369.150 6.1%
515 South Flower Street
Los Angeles, CA 90071
Century Theatres Inc. 47,096,226.750 6.7%
150 Pelican Way
San Rafael, CA 94901
TREASURY FUND -- HORIZON SERVICE SHARES
Security Pacific Cash Management 199,484,100.000 11.3%
c/o Bank of America
1850 Gateway Blvd.
Concord, CA 94520
Bank of America FM&TS 368,064,376.550 20.8%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TREASURY FUND -- X SHARES
BA Investment Services, Inc. 12,694,320.760 5.3%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
Bank of America California 32,000,000.000 13.5%
2044 Franklin Street
Oakland, CA 94612
TREASURY FUND -- Y SHARES
Bank of America California 5,000,000.000 6.6%
2044 Franklin Street
Oakland, CA 94612
BA Arizona 7,700,404.480 10.2%
2044 Franklin Street
</TABLE>
-62-
<PAGE> 652
<TABLE>
<S> <C> <C>
Oakland, CA 94612
BA Nevada 6,071,336.580 8.0%
2044 Franklin Street
Oakland, CA 94612
CCC TA Welfare Benefit Trust 5,736,144.850 7.6%
2950 E. Rochelle Ave
Las Vegas, NV 89121
Collectron AZ 4,051,866.650 5.4%
P.O. Box 1931
Nogales, AZ 85628
Sunclipse Inc. 4,191,584.710 5.6%
6600 Valley View Street
Buena Park, CA 90620
TREASURY ONLY FUND -- PACIFIC HORIZON SHARES
HARE & Co., Bank of New York and Short 22,854,225.010 12.1%
Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 101,186,129.680 53.4%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 59,850,049.120 31.6%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY ONLY FUND -- HORIZON SHARES
Bank of America Illinois 4,334,149.550 13.6%
231 S. LaSalle Street
Chicago, IL 60697
Bank of America NT&SA 22,854,051.990 71.5%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
</TABLE>
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<TABLE>
<S> <C> <C>
Los Angeles, CA 90051
City and County of San Francisco 4,100,243.250 12.8%
Mayors Office of Community
25 Van Ness Avenue, Suite 700
San Francisco, CA 94102
TREASURY ONLY FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 52,896,546.290 24.3%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 17,371,255.110 8.0%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
The Emerson U. and Erika J. Glazer Trust 12,364,024.280 5.7%
3 Del Amo Fashion Center
Torrance, CA 90503
GOVERNMENT -- PACIFIC HORIZON SHARES
Wall Data Inc. 14,657,467.680 9.2%
11332 NE 122nd Way
Kirkland, WA 98034
HARE & Co., Bank of New York and Short 8,707,595.120 5.5%
Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 93,865,900.070 59.1%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 24,813,941.710 15.6%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
GOVERNMENT FUND -- HORIZON SHARES
</TABLE>
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<TABLE>
<S> <C> <C>
Skinner Corporation 11,294,088.600 5.1%
1326 Fifth Avenue, Suite 711
Seattle, WA 98101
New York New York Hotel LLC 12,847,712.880 5.8%
3790 Las Vegas Boulevard South
Las Vegas, NV 89109
Sletton Construction of Nevada Inc. 12,607,585.140 5.7%
P.O. Box 93776
Las Vegas, NV 89193
GOVERNMENT FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 35,965,540.250 80.6%
Trust, Financial Management & Trust Services
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
Security Pacific Cash Management 6,619,300.000 14.8%
c/o Bank of America
1850 Gateway Blvd
Concord, CA 94520
TAX EXEMPT MONEY FUND -- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 124,277,308.400 94.6%
FBO Customers Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TAX EXEMPT MONEY FUND -- HORIZON SHARES
Bank of America NT&SA 308,877,964.040 94.5%
The Private Bank
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TAX EXEMPT MONEY FUND -- HORIZON SERVICE SHARES
BA Investment Services, Inc. 29,904,479.330 11.5%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
</TABLE>
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<TABLE>
<S> <C> <C>
Bank of America 117,932,621.380 65.1%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TAX EXEMPT MONEY FUND -- S SHARES
BA Investment Services, Inc. 35,815,756.430 100.0%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 300,327,896.900 54.2%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 232,178,555.240 41.9%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- HORIZON SERVICE SHARES
Bank of America NT&SA 326,393,595.930 55.0%
Attn: Common Trust Funds Unit
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 175,398,911.420 29.6%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- X SHARES
BA Investment Services, Inc. 25,836,568.320 100.0%
FBO Customers
Unit 17852
P.O. Box 7042
</TABLE>
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<TABLE>
<S> <C> <C>
San Francisco, CA 94120
CALIFORNIA TAX EXEMPT MONEY MARKET FUND
-- S SHARES
BA Investment Services, Inc. 227,376,082.980 100.0%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
INTERMEDIATE BOND FUND -- A SHARES
PACO -- Attn: Mutual Funds 544,191.036 12.1%
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 2,347,781.402 52.2%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
PACO 475,408.464 10.6%
P.O. Box 513577
Los Angeles, CA 90051
INTERMEDIATE BOND FUND -- K SHARES
Corelink Financial, Inc. 46,135.414 100.0%
P.O. Box 4054
Concord, CA 94524
INTERMEDIATE BOND FUND -- SRF SHARES
Seafirst Bank 3,080,718.572 100.0%
FBO Retirement Services
P.O. Box 84248
Seattle, WA 98124
CORPORATE BOND FUND -- A SHARES
PACO 206,707.063 8.1%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 477,339.651 18.8%
The Private Bank
Attn: Common Trust Funds Unit 38329
</TABLE>
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<TABLE>
<S> <C> <C>
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
FLEXIBLE INCOME (FORMERLY CORPORATE BOND) FUND -- K SHARES
Corelink Financial, Inc. 23,543.085 100.0%
P.O. Box 4054
Concord, CA 94524
U.S. GOVERNMENT SECURITIES FUND -- K SHARES
Corelink Financial, Inc. 116,153.211 100.0%
P.O. Box 4054
Concord, CA 94524
SHORT-TERM GOVERNMENT FUND -- A SHARES
Bank of America NT&SA 3,156,142.163 83.8%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
CALIFORNIA MUNICIPAL (FORMERLY, CALIFORNIA
TAX-EXEMPT) BOND FUND -- A SHARES
Bank of America NT&SA 3,044,994.685 9.6%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
CAPITAL INCOME FUND -- K SHARES
Corelink Financial, Inc. 150,245.252 88.5%
P.O. Box 4054
Concord, CA 94524
ASSET ALLOCATION FUND -- A SHARES
Corelink Financial, Inc. 260,091.341 8.1%
P.O. Box 4054
Concord, CA 94524
Bank of America NT&SA 272,916.571 8.5%
FBO PACO
Attn: Mutual Funds Unit
P.O. Box 3577
Terminal Annex
</TABLE>
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<TABLE>
<S> <C> <C>
Los Angeles, CA 90051
Vanguard Fiduciary Trust Company 184,535.325 5.8%
Kirkland and Ellis Defined
Contribution Retirement Plan
P.O. Box 2600
Valley Forge, PA 19482
ASSET ALLOCATION FUND -- K SHARES
Corelink Financial, Inc. 63,480.863 100.0%
P.O. Box 4054
Concord, CA 94524
ASSET ALLOCATION -- SRF SHARES
Seafirst Bank 11,668,940.795 100.0%
FBO Retirement Services
P.O. Box 84248
Seattle, WA 98124
AGGRESSIVE GROWTH FUND - A SHARES
PACO - Attn: Mutual Funds 491,251.531 5.3%
P.O. Box 513577
Los Angeles, CA 90051
AGGRESSIVE GROWTH FUND -- K SHARES
Corelink Financial Inc. 161,757.766 100.0%
P.O. Box 4054
Concord, CA 94524
BLUE CHIP FUND -- A SHARES
Bank of America NT&SA 901,809.695 7.6%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BLUE CHIP FUND -- K SHARES
Corelink Financial Inc. 250,051.579 99.5%
P.O. Box 4054
Concord, CA 94524
BLUE CHIP FUND -- SRF SHARES
Seafirst Bank 13,956,166.970 100.0%
FBO Retirement Services
P.O. Box 84248
</TABLE>
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<TABLE>
<S> <C> <C>
Seattle, WA 98124
INTERNATIONAL EQUITY FUND -- A SHARES
PACO 789,867.260 18.9%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 893,038.660 21.3%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
PACO 1,500,976.246 35.9%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
INTERNATIONAL EQUITY FUND -- K SHARES
Corelink Financial, Inc. 62,528.613 100.0%
P.O. Box 4054
Concord, CA 94524
</TABLE>
At June 5, 1998, no other person was known by the Company to hold of record or
beneficially more than 5% of the outstanding shares of any investment portfolio
of the Company.
The Prospectuses and this SAI omit certain information contained in the
Company's registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the SEC by
paying the charges prescribed under its rules and regulations.
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FINANCIAL STATEMENTS
The Annual Report for the Fund for the fiscal year ended February
28, 1998 (the "Annual Report") accompanies this Statement of Additional
Information. The financial statements and notes thereto in the Annual Report are
incorporated in this Statement of Additional Information by reference, and have
been audited by Price Waterhouse LLP, whose report thereon also appears in such
Annual Report and is also incorporated herein by reference. No other parts of
the Annual Report are incorporated by reference herein. Such financial
statements have been incorporated herein in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment is strong. Within
this category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations
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not having an original maturity in excess of one year, unless explicitly noted.
The following summarizes the rating categories used by Moody's for commercial
paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
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"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1."
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
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<PAGE> 664
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
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"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC," and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - Debt is more vulnerable to non-payment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating
is used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected
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<PAGE> 666
returns due to non-credit risks. Examples of such obligations are: securities
whose principal or interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings
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of projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial
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<PAGE> 668
commitments. This capacity is very unlikely to be adversely affected by
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", and "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD," and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
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<PAGE> 669
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
-80-
<PAGE> 670
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
-81-
<PAGE> 671
APPENDIX B
As stated in the Prospectuses, the Fund may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Appendix B.
I. INTEREST RATE FUTURES CONTRACTS
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, 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 a 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 cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing
B-1
<PAGE> 672
out a futures contract sale is effected by the Fund's entering into a futures
contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund is paid the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the closing
out of a futures contract purchase is effected by the Fund's entering into a
futures contract sale. If the offsetting sale price exceeds the purchase price,
the Fund realizes a gain, and if the purchase price exceeds the offsetting sale
price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. The Fund would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. The Fund may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. The Fund would engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in the
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The investment adviser wishes to fix
the current market value of this portfolio security until some point in the
future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. The Fund might enter into futures contract
sales of Treasury bonds for an equivalent of 98. If the market value of the
portfolio security does indeed decline from 100 to 95, the equivalent futures
market price for the Treasury bonds might also decline from 98 to 93.
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
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<PAGE> 673
more than 93 or to less than 93 because of the imperfect correlation between
cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of interest
rates and the equivalent futures market price could rise above 98. In this case,
the market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above
example might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. The Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that
the Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The investment adviser wishes to fix
the current market price (and thus 10% yield) of the long-term bond until the
time (four months away in this example) when it may purchase the bond. Assume
the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Fund might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to 105,
the equivalent futures market price for Treasury bonds might also rise from 98
to 103. In that case, the 5-point increase in the price that the Fund pays for
the long-term bond would be offset by the 5-point gain realized by closing out
the futures contract purchase.
The investment adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98.
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<PAGE> 674
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. MUNICIPAL BOND INDEX FUTURES CONTRACTS
A municipal bond index assigns relative values to the bonds
included in the index and the index fluctuates with changes in the market values
of the bonds so included. The Chicago Board of Trade has designed a futures
contract based on the Bond Buyer Municipal Bond Index. This Index is composed of
a number of term revenue and general obligation bonds, and its composition is
updated regularly as new bonds meeting the criteria of the Index are issued and
existing bonds mature. The Index is intended to provide an accurate indicator of
trends and changes in the municipal bond market. Each bond in the Index is
independently priced by six dealer-to-dealer municipal bond brokers daily. The
prices are then averaged and multiplied by a coefficient. The coefficient is
used to maintain the continuity of the Index when its composition changes. The
Chicago Board of Trade, on which futures contracts based on this Index are
traded, as well as other U.S. commodities exchanges, are regulated by the
Commodity Futures Trading Commission. Transactions on such exchange are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
Example of a Municipal Bond Index Futures Contract
Consider a portfolio manager holding $1 million par value of each
of the following municipal bonds on February 2 in a particular year.
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<PAGE> 675
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
The current value of the portfolio is $5,003,750.
To hedge against a decline in the value of the portfolio,
resulting from a rise in interest rates, the portfolio manager can use the
municipal bond index futures contract. The current value of the Municipal Bond
Index is 86-09. Suppose the portfolio manager takes a position in the futures
market opposite to his or her cash market position by selling 50 municipal bond
index futures contracts (each contract represents $100,000 in principal value)
at this price.
On March 23, the bonds in the portfolio have the following values:
<TABLE>
<S> <C>
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
</TABLE>
The bond prices have fallen, and the portfolio has sustained a
loss of $130,312. This would have been the loss incurred without hedging.
However, the Municipal Bond Index also has fallen, and its value stands at
83-27. Suppose now the portfolio manager closes out his or her futures position
by buying back 50 municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the
results of the hedge.
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
--------------------- ----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset the
loss in the cash market, the $8,437 loss is
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<PAGE> 676
significantly lower than the loss which would have been incurred without
hedging.
The numbers reflected in this appendix do not take into account
the effect of brokerage fees or taxes.
III. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included in
the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures 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 portfolios as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Fund will purchase stock index futures contracts in anticipation
of purchases of securities. In a substantial majority of these transactions, the
Fund will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
In addition, the Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Fund may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
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<PAGE> 677
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).
B-7
<PAGE> 678
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Asset Allocation Fund Futures
--------------------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Asset Allocation Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Asset Allocation Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
</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>
Asset Allocation Fund Futures
--------------------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Asset Allocation Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Asset Allocation Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</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.
B-8
<PAGE> 679
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Asset Allocation Fund Futures
--------------------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Asset Allocation Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Asset Allocation 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>
Asset Allocation Fund Futures
--------------------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Asset Allocation Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Asset Allocation Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
IV. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Aggressive Growth Fund to hedge against exposure to fluctuations in exchange
rates between the U.S. dollar and other currencies arising from multinational
transactions.
V. MARGIN PAYMENTS
Unlike when the Fund purchases or sells a security, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the
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<PAGE> 680
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
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.
VI. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures in
the Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, the Fund involved
will experience either a loss or gain on the future which will not be completely
offset by movements in the price of the securities which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a
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<PAGE> 681
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. It is also possible that, where the Fund
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of securities held in the Fund may decline. If
this occurred, the Fund would lose money on the future and also experience a
decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by the
Fund, an amount of cash and cash equivalents, equal to the market value of the
futures contracts, will be deposited in a segregated account with the Fund's
custodian and/or in a margin account with a broker to collateralize the position
and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest
B-11
<PAGE> 682
rate movements by the investment adviser may still not result in a successful
hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by the Fund is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part of all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
VII. 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
B-12
<PAGE> 683
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).
VIII. OTHER HEDGING TRANSACTIONS
The Fund presently intends to use interest rate futures contracts
and, additionally the Fund presently intends to use stock index futures contract
in connection with its hedging activities. Nevertheless, the Fund is authorized
to enter into hedging transactions in any other futures or options contracts
which are currently traded or which may subsequently become available for
trading. Such instruments may be employed in connection with the Fund's hedging
strategies if, in the judgment of the investment adviser, transactions therein
are necessary or advisable.
IX. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held
by a Portfolio at the close of the 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
B-13
<PAGE> 684
the length of time the Fund holds the futures contract or option ("the 40-60
rule"). The amount of any capital gain or loss actually realized by the Fund in
a subsequent sale or other disposition of those futures contracts or options
will be adjusted to reflect any capital gain or loss taken into account by the
Fund in a prior year as a result of the constructive sale of the contracts or
options. With respect to futures contracts to sell, which will be regarded as
parts of a "mixed straddle" because their values fluctuate inversely to the
values of specific securities held by the Fund, losses as to such contracts to
sell will be subject to certain loss deferral rules which limit the amount of
loss currently deductible on either part of the straddle to the amount thereof
which exceeds the unrecognized gain (if any) with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which also will be applicable, the holding period of the securities forming part
of the straddle (if they have not been held for the long-term holding period)
will be deemed not to begin prior to termination of the straddle. With respect
to certain futures contracts and related options, deductions for interest and
carrying charges will not be allowed. Notwithstanding the rules described above,
with respect to futures contracts to sell which are properly identified as such,
the Fund may make an election which will exempt (in whole or in part) those
identified futures contracts from being treated for federal income tax purposes
as sold on the last business day of the Fund's taxable year, but gains and
losses will be subject to such short sales, wash sales and loss deferral rules
and the requirement to capitalize interest and carrying charges. Under Temporary
Regulations, the Fund would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, the 40-60 rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50 percent of any net gain may be treated as
long-term and no more than 40 percent of any net loss may be treated as
short-term.
With respect to the Fund or 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,
B-14
<PAGE> 685
regulated futures contracts and non-equity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the marking-to-market rules, unless an
election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the marking-to-market or loss deferral rules
under the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that such Funds may make or may enter
into will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
Qualification as a regulated investment company under the Code
requires that each Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of each
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is treated
for this purpose as derived with respect to the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust.
B-15
<PAGE> 686
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1998
This Statement of Additional Information ("SAI") provides information about the
Pacific Horizon Prime, Treasury, Government, Treasury Only, Tax-Exempt Money,
and California Tax-Exempt Money Market Funds (the "Funds"). This information is
in addition to the information that is contained in the Funds' Prospectuses
dated July 1, 1998 (the "Prospectuses").
This SAI is not a prospectus. It should be read in conjunction with the
Prospectuses and the Funds' Annual Reports dated February 28, 1998. The
financial statements and notes contained in each Annual Report are incorporated
by reference into this SAI. Copies of the Funds' Prospectuses and Annual Reports
may be obtained free of charge by writing or telephoning:
PACIFIC HORIZON FUNDS, INC.
P.O. BOX 8968
WILMINGTON, DELAWARE 19899-8968
1-800-346-2087
<PAGE> 687
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Organization and Classification ......................................... 3
Non-Primary Investment Strategies and Related Risks ..................... 3
Fundamental Policies .................................................... 4
Non-Fundamental Policies ................................................ 6
Temporary Defensive Positions ........................................... 7
Management of the Funds ................................................. 7
Investment Adviser ...................................................... 13
Administrator ........................................................... 16
Special Management Services Plan ........................................ 20
Shareholder Services Plan ............................................... 23
Distributor ............................................................. 23
Custodian ............................................................... 27
Transfer Agent .......................................................... 27
Counsel ................................................................. 27
Independent Accountants ................................................. 27
Portfolio Transactions .................................................. 27
Net Asset Value ......................................................... 30
Supplementary Purchase and Redemption Information ....................... 32
Taxes ................................................................... 36
Yield Information ....................................................... 40
Description of Shares ................................................... 42
Reports ................................................................. 46
Miscellaneous ........................................................... 46
Principal Holders of Securities ......................................... 46
Financial Statements and Experts ........................................ 57
Appendix A .............................................................. A-1
Appendix B .............................................................. B-1
</TABLE>
<PAGE> 688
ORGANIZATION AND CLASSIFICATION
The Funds are series of Pacific Horizon Funds, Inc., which is an open-end
investment management company organized as a Maryland corporation on October 27,
1982. With the exception of the California Tax-Exempt Money Market Fund, which
is a non-diversified investment portfolio, all of the Funds are diversified
investment portfolios.
NON-PRIMARY INVESTMENT STRATEGIES AND RELATED RISKS
The chart below shows the non-primary investment strategies which may be
utilized by each Fund in order to achieve its investment goal.
<TABLE>
<CAPTION>
Tax-
Exempt California Tax-
Prime Treasury Government Treasury Money Exempt Money
The Fund May: Fund Fund Fund Only Fund Fund Market Fund
- -------------------------- -------- ----------- ---------------- --------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
invest in variable or X X X X X X
floating rate instruments
invest in stripped X X X X X X
securities
make interest bearing X
savings deposits in
commercial banks (up
to 5% of total assets)
enter into repurchase X X X X X X
and reverse repurchase (Reverse
agreements Repurchase
Agreements
Only)
purchase restricted X
securities
purchase securities on a X X X X X X
when-issued, forward
commitment or delayed
settlement basis
invest up to 10% of net X X X X X X
assets in illiquid
investments
</TABLE>
3
<PAGE> 689
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Stand by Commitments X X
lend securities to X X X
institutional investors
(not in excess of 33% of
the value of the Fund's
total assets)
invest in foreign bank X
and foreign corporate
issuer securities
</TABLE>
The following is a general list of the types of risks that may apply to a given
fund.
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
FOREIGN SECURITY RISK The risk of losses due to political, regulatory, economic,
social or other uncontrollable forces in a foreign country.
INTEREST RATE RISK The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
LEVERAGE RISK Associated with securities or practices (such as when-issued and
forward commitment transactions) that multiply small market movements into
larger changes in value.
LIQUIDITY RISK The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
MARKET RISK The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
PREPAYMENT RISK The risk that a debt security may be paid off and proceeds
invested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
VALUATION RISK The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
FUNDAMENTAL POLICIES
The following policies are fundamental to each Fund and may not be changed
without a vote of
4
<PAGE> 690
the majority of the shareholders of each Fund. A change to a Fundamental
limitation requires the affirmative vote of the holders of a "majority of the
outstanding shares" of a Fund (as defined by the Investment Company Act of
1940). See "Miscellaneous" for an explanation of this voting requirement.
None of the Funds may:
1. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the Investment Company
Act of 1940 (the "1940 Act").
2. Underwrite any issue of securities within the meaning of the Securities
Act of 1933, except when it might be technically deemed to be an
underwriter either (a) in connection with the disposition of a portfolio
security, or (b) in connection with the purchase of securities directly
from the issuer thereof in accordance with its investment objective.
3. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to obligations issued or guaranteed by the
U.S. government, any state or territory of the United States, or any
of their agencies, instrumentalities or political subdivisions, and
(b) not withstanding this limitation or any other Fundamental
investment limitation, assets may be invested in the securities of one
or more diversified management investment companies to the extent
permitted by the 1940 Act.
Notwithstanding the above limitation, there is no limitation with respect
to investments by any of the Funds in repurchase agreements, domestic
bank obligations and certain bank obligations considered to be issued by
domestic banks pursuant to regulations or pronouncements of the U.S.
Securities and Exchange Commission or its staff.
Notwithstanding the above limitation, the Prime Fund will invest more
than 25% of its assets in the banking and finance industry.
4. Purchase or sell real estate, except a Fund may purchase securities of
issuers which deal or invest in real estate and may purchase securities
which are secured by real estate or interests in real estate.
5. Purchase or sell commodities, except that a Fund may, to the extent
consistent with its investment objective, invest in securities of
companies that purchase or sell commodities or which invest in such
programs, and purchase and sell options, forward contracts, futures
contracts and options on futures contracts. This limitation does not
apply to foreign currency transactions including without limitation
forward currency contracts.
6. Make loans, except to the extent permitted by the 1940 Act.
5
<PAGE> 691
7. A Fund may not purchase securities (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities)
of any one issuer if as a result more than 5% of its total assets
would be invested in securities of such issuer or it would own more
than 10% of the voting securities of such issuer except that (a) up to
25% of the Fund's total assets may be invested without regard to this
limitation; and (b) a Fund's assets may be invested in the securities
of one or more diversified management investment companies to the
extent permitted by the 1940 Act.
Notwithstanding the foregoing restriction, each of the Funds, as a
non-fundamental policy, may invest without regard to the 5% limitation in
securities subject to certain guarantees and certain money market Fund
securities in accordance with Rule 2a-7 under the 1940 Act or any
successor rule, and as otherwise permitted in accordance with Rule 2a-7
or any successor rule. (Limitation number 7 does not apply to the
California Tax-Exempt Money Market Fund.)
NON-FUNDAMENTAL POLICIES
The following policies are non-Fundamental to each Fund and may be changed
without a vote of shareholders.
None of the Funds may:
1. Sell securities short, maintain a short position, or purchase securities
on margin, except for such short-term credits as are necessary for the
clearance of transactions. For this purpose, a deposit or payment by a
Fund for initial or maintenance margin in connection with futures
contracts is not considered to be the purchase or sale of a security on
margin.
2. Purchase securities of companies for the purpose of exercising control.
3. Purchase securities of other investment companies except as permitted
under the 1940 Act.
4. Write or sell puts, calls, straddles, spreads or combinations thereof,
except that a Fund may acquire standby commitments and may enter into
futures contracts and options in accordance with its investment
objectives.
5. Invest more than 10% of its net assets in illiquid securities.
In addition, the California Tax-Exempt Money Market Fund may not purchase
the securities of any issuer (except securities issued by the U.S.
Government, its agencies or instrumentalities) if as a result more than
5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that (a) up to 50% of the value of the
Fund's total assets may be invested without regard to this 5% limitation
provided that no more than 25% of the value of the Fund's total assets
are invested in the securities of any one issuer; (b) a Fund's assets may
be invested in the securities of one
6
<PAGE> 692
or more diversified management investment companies to the extent
permitted by the 1940 Act and (c) the 5% limitation may be temporarily
exceeded provided that the discrepancy is eliminated as of the end of
the quarter or within 30 days thereafter.
Notwithstanding the foregoing restriction, the California Tax-Exempt
Money Market Fund may invest without regard to the 5% limitation in
securities subject to certain guarantees and certain money market Fund
securities in accordance with Rule 2a-7 under the 1940 Act or any
successor rule, and as otherwise permitted in accordance with Rule 2a-7
or any successor rule.
TEMPORARY DEFENSIVE POSITIONS
The Tax-Exempt Money and California Tax-Exempt Money Market Funds may invest in
taxable obligations or hold uninvested cash reserves for temporary defensive
purposes or if the investment adviser does not feel that suitable tax-exempt
obligations are available.
SEE APPENDIX B FOR DESCRIPTIONS OF THE SECURITIES DISCUSSED IN THE PROSPECTUS
AND THE SAI.
MANAGEMENT OF THE FUNDS
The business of the Funds is managed under the direction of its Board of
Directors.
The directors and officers of the Company, their addresses, ages, and principal
occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ------------------- --- ------------- -----------------------
<S> <C> <C> <C>
Thomas M. Collins 63 Director Of counsel, law firm of McDermott & Trayner; Partner
McDermott & Trayner of the law firm of Musick, Peeler & Garrett (until
225 S. Lake Avenue April, 1993); Chairman of the Board and Trustee,
Suite 410 Master Investment Trust, Series I (registered
Pasadena, CA 91101-3005 investment company) (since 1993); Member, Fund
Directions Advisory Board (since July 1993);
President and Chairman of the Board of Pacific
Horizon Funds, Inc. (1982 to August 31, 1995);
former Chairman of the Board and Trustee, Master
Investment Trust, Series II (registered investment
company) 1993 to 1997; former Director, Bunker Hill
Income Securities, Inc. (registered investment
company) through 1991.
</TABLE>
7
<PAGE> 693
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ------------------- --- ------------- -----------------------
<S> <C> <C> <C>
Douglas B. Fletcher 73 Director Chairman of the Board and Chief Executive Officer,
Fletcher Capital Fletcher Capital Advisors, Incorporated, (registered
Advisors Incorporated investment advisor) since 1991; Director, FCA
4 Upper Newport Plaza Securities, Inc. (registered broker/dealer) since
Suite 100 1993; Partner, Newport Partners (private venture
Newport Beach, capital firm), since 1981; Chairman of the Board and
CA 92660-2629 Chief Executive Officer, First Pacific Advisors,
Inc. (registered investment adviser) and seven
investment companies under its management, prior to
1983; former Allied Member, New York Stock Exchange;
Chairman of the Board of FPA Paramount Fund, Inc.
through 1984; Chairman, TIS Mortgage Investment
Company (real estate investment trust) (since 1988);
Trustee and a former Vice Chairman of the Board,
Claremont McKenna College; Chartered Financial
Analyst.
Robert E. Greeley 66 Director Chairman, Page Mill Asset Management (a private
Page Mill Asset investment company) since 1987; Trustee and President,
Management Pacific Innovations Trust (registered investment
433 California Street company) (since 1996); Trustee, Time Horizon Funds
Suite 900 (registered investment company) since 1995; Manager,
San Francisco, CA 94104 Corporate Investments, Hewlett Packard Company from
1979 to 1991; Trustee, Master Investment Trust,
Series I (since 1993); Director, Morgan Grenfell Small
Cap Fund (since 1986); former Director, Bunker Hill
Income Securities, Inc. (1989 to 1994); former Trustee,
SunAmerica Fund Group (previously Equitec Siebel Fund
Group) from 1979 to 1991; former Trustee, Master
Investment Trust, Series II from 1993 to February 1997
(registered investment companies).
William P. Carmichael 53 Director Senior Vice President, Sara Lee Corporation (1991 to
808 S. Garfield 1993); Treasurer, Senior Vice President and Chief
Hinsdale, IL 60521 Financial Officer, Beatrice Company (1987 to 1990);
Trustee, Pacific Innovations Trust
</TABLE>
8
<PAGE> 694
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ------------------- --- ------------- -----------------------
<S> <C> <C> <C>
(since 1997)(registered investment company);
Trustee-Time Horizon Funds (registered investment
company) (since 1995); Trustee, 231 Funds (1993 to
1995)(registered investment company).
Edward S. Bottum 64 Director Managing Director, Chase Franklin Corporation
c/o Chase Franklin (venture capital firm) (since 1990); Director, Kellwood
Corporation Corporation (women's apparel manufacturer) Trustee, Time
100 S. Wacker Drive Horizon Funds (since 1995); Trustee and Chairman,
Suite 1140 Pacific Innovations Trust (since 1997)(registered
Chicago, IL 60606 investment company); formerly Vice Chairman of
Continental Bank N.A. (retired 1990); formerly
Trustee, 231 Funds (February 1993 to August 1995).
Cornelius J. Pings* 69 Chairman of President, Association of American Universities,
Association of American the Board and since February 1993; Director, Farmers Group, Inc.
Universities President (insurance company) since 1991; Provost, 1982 to
1200 New York Avenue, NW January 1993, Senior Vice President for Academic
Suite 550 Affairs, 1981 to January 1993, University of
Washington, DC 20005 Southern California; Trustee, Master Investment
Trust, Series I (since 1995); former Trustee, Master
Investment Trust, Series II (October 1995 to
February 1997).
Stephen M. Wynne 41 Vice President Executive Vice President and Chief Accounting
Executive Vice Officer (since 1993) and Senior Vice President and
President, PFPC Inc. Chief Accounting Officer (1991 to 1993), PFPC Inc.;
400 Bellevue Parkway Executive Vice President, PFPC International (since
Wilmington, DE 19809 1995); Vice President and Chief Accounting Officer,
PNC Institutional Management Corp. (since 1987).
Jay F. Nusblatt 36 Treasurer Vice President and Director of Fund Accounting and
Vice President, Administration, PFPC Inc. (since 1993); formerly
PFPC Inc. Assistant Vice President, Fund/Plan Services, Inc.
103 Bellevue Parkway (1989 to 1993).
Wilmington, DE 19809
</TABLE>
9
<PAGE> 695
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ------------------- --- ------------- -----------------------
<S> <C> <C> <C>
W. Bruce McConnel, III 55 Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
1345 Chestnut Street
Philadelphia
National Bank
Building, Suite 1100
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant Chief Counsel-Mutual Funds, PNC Bank (since 1994);
Chief Counsel Secretary Associate General Counsel, The Boston Company, Inc.
-Mutual Funds, (1992 to 1994); General Counsel, SunAmerica Asset
PNC Bank Management Inc. (1986 to 1992).
1600 Market Street,
28th Fl.
Philadelphia, PA 19103
J. Robert Dugan 32 Assistant Counsel-Mutual Funds, PNC Bank (since 1993);
Counsel-Mutual Funds, Secretary Associate, Drinker Biddle & Reath LLP (1990 to 1993).
PNC Bank
1600 Market Street,
28th Fl.
Philadelphia,
PA 19103
</TABLE>
- --------------
* Mr. Pings is an "interested director" of the Company by reason of his
position as President of the Company.
The Board has an audit committee, contract review committee, nominating
committee and valuation committee. The audit committee is responsible for
reviewing the results of the audit of the Company by its independent public
accountant. The contract review committee is responsible for reviewing the
performance of the Company's service providers in connection with the renewal of
the Company's service contracts. The nominating committee is responsible for
reviewing the credentials of proposed nominees for the Company's Board and for
selecting and nominating those directors who are not "interested persons" (as
defined in the 1940 Act) of the Company. The valuation committee is responsible
for handling issues arising out of the pricing of securities.
Each director is entitled to receive an annual retainer of $50,000 plus $1,000
for each day that a director participates in all or a part of a Board meeting.
The President receives an additional $40,000 per annum for his services as
President. Each member of a committee of the Board is entitled to receive $1,000
for each committee meeting they participate in (whether or not held on the same
day as a Board meeting). 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. Each director is also reimbursed for out-of-pocket expenses
incurred as a director.
Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal
fees as counsel to the Company.
Under a retirement plan approved by the Board of Directors, including a majority
of its directors who are not "interested persons" of the Company, a director who
has been in office for the entire
10
<PAGE> 696
period between February 28, 1994 and March 18, 1998, dies or resigns after five
years of service is entitled to receive ten annual payments each equal to the
greater of: (i) the "Applicable Percentage" set forth below of the annual
Director's retainer that was payable by the Company during the year of his death
or resignation, or (ii) the Applicable Percentage of the annual Director's
retainer then in effect for Directors of the Company during the year of such
payment.
<TABLE>
<CAPTION>
Years of Service Applicable
After February 28, 1994 Percentage*
----------------------- -----------
<S> <C>
Fewer than 5............................. 0**
5 but fewer than 6....................... 50
6 but fewer than 7....................... 60
7 but fewer than 8....................... 70
8 but fewer than 9....................... 80
9 but fewer than 10...................... 90
10 or more............................... 100
</TABLE>
- ----------
* For service that includes a fractional year, a Director's years of service is
rounded to the nearest quarter of a year of service, and the Director's
Applicable Percentage is rounded to the nearest 0.25%.
** A Director who either resigns in good standing or dies before completing five
years of service as a Director is assigned an Applicable Percentage of 50
percent.
Such Director is also entitled to receive an additional retirement benefit
following his death or resignation equal to an additional percentage of the
annual Director's retainer described above in this paragraph. The additional
percentage equals one-half of the difference between 100 percent and the
Director's Applicable Percentage. The Director's additional retirement benefit
is paid at the same time and in the same manner as the regular retirement
benefit. 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 since the Company's inception in 1982. The retirement
benefit in which a Director has become vested may not be reduced by later Board
action.
In lieu of receiving ten annual payments, a director may elect to receive
substantially equivalent benefits through a single-sum cash payment of the
present value of such benefits paid by the Company within 45 days of the death
or resignation of the director. The present value of such benefits is to be
calculated (i) based on the retainer that was payable by the Company during the
year of the director's death or resignation (and not on any retainer payable to
directors thereafter), and (ii) using the interest rate in effect as of the date
of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans.
The obligation of the Company to pay benefits to a former director is neither
secured nor funded
11
<PAGE> 697
by the Company but shall be binding upon its successors in interest. The payment
of benefits under the retirement plan has no priority or preference over the
lawful claims of the Company's creditors or shareholders, and the right to
receive such payments is not assignable or transferable by a director (or former
director) other than by will, by the laws of descent and distribution, or by the
director's written designation of a beneficiary.
The following chart provides certain information as of February 28, 1998 about
the compensation received by: 1) directors and/or officers of the Company, and
2) directors and/or trustees of the Fund Complex*:
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE RETIREMENT TOTAL
COMPENSATION BENEFITS ESTIMATED COMPENSATION
FROM PACIFIC ACCRUED AS ANNUAL FROM FUND
NAME OF PERSON/ HORIZON PART OF FUND BENEFITS UPON COMPLEX* PAID
POSITION FUNDS, INC. EXPENSES RETIREMENT TO DIRECTORS
- ----------------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Edward S. Bottum*** $ 0 $ 0 $ 0 $29,125
William P. Carmichael*** $ 0 $ 0 $ 0 $27,625
Thomas M. Collins $46,750 $16,199 $50,500 $53,500
Director
Douglas B. Fletcher $36,750 $23,195 $37,500 $26,750
Vice Chairman of the Board
Robert E. Greeley $36,750 $16,220 $37,500 $72,750
Director
Kermit O. Hanson $35,750 $28,422 ** $40,250
Director
Cornelius J. Pings $69,250 $26,984 $40,500 $81,892
President and Chairman of the
Board
</TABLE>
- ----------
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds
(which were merged into the Company on June 23, 1997), Master Investment
Trust, Series I, Time Horizon Funds and Pacific Innovations Trust.
** Mr. Hanson retired as Director on July 1, 1998. On that date, Mr.
Hanson was entitled to retirement benefits of $170,995 (0.002%),
$53,533 (0.002%), $7,516 (0.002%), $8,456 (0.002%), $12,527 (0.002%),
$25,054 (0.002%), $1,253 (0.002%), $626 (0.002%), $1,253 (0.002%), $626
(0.002%), $313 (0.002%), $3,758 (0.002%), $6,890 (0.002%), $4,384
(0.002%), $3,758 (0.002%), $11,588 (0.002%), and $626 (0.001%) from the
Prime, Treasury, Treasury Only, Government, Tax-Exempt Money,
California Tax-Exempt Money Market, Intermediate Bond, Flexible Income
(formerly, Corporate Bond), U.S. Government
12
<PAGE> 698
Securities, Short-Term Government, National Municipal Bond, California
Municipal Bond (formerly, California Tax-Exempt Bond), Capital Income,
Asset Allocation, Aggressive Growth, Blue Chip and International Equity
Funds, respectively. Bank of America has agreed to reimburse the Company
$100,136 in the aggregate relating to these benefits. The foregoing
retirement benefits will be payable to Mr. Hanson promptly after his
successor is elected.
*** Messrs. Bottum and Carmichael were not members of the Board on
February 28, 1998.
With respect to the non-money market Funds of the Company, members of the
Company's Board of Directors and their spouses, former members of the Board of
Directors with the designation of director emeritus and their spouses; and U.S.
based employees and retirees 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 may purchase
A shares of the non-money market Funds without paying a load.
INVESTMENT ADVISER
Bank of America NT&SA ("Bank of America") is the successor by merger to Security
Pacific National Bank ("Security Pacific"), which previously served as
investment adviser to each of the Funds, other than the Government and Treasury
Only Funds, since the commencement of their operations. Bank of America has
approximately $67 billion in assets under management. Bank of America is a
wholly-owned, indirect subsidiary of BankAmerica Corporation, a registered bank
holding company. As investment adviser, Bank of America manages the Funds'
investments and is responsible for all purchases and sales of securities. Bank
of America has also agreed to pay all expenses incurred by it in connection with
its activities under its agreement other than the cost of securities, including
brokerage commissions, if any, purchased for the Company. In rendering its
advisory services, Bank of America may utilize Bank of America officers from one
or more of the departments of Bank of America 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 or other affiliates of Bank of
America or its parent corporation.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation
("NationsBank") announced a definitive agreement to merge and form a new holding
company to be named BankAmerica Corporation (the "Merger"). The Merger is
anticipated to close by the end of 1998, however, it is subject to a number of
approvals including shareholder and regulatory approvals.
For the investment advisory services provided by Bank of America, the Company
has agreed to pay Bank of America fees, which are accrued daily and paid
monthly, at the following annual rates:
.10% of the first $3 billion of each Fund's net assets, plus
.09% of the next $2 billion of each Fund's net assets, plus
.08% of each Fund's net assets over $5 billion.
The investment advisory fees for each Fund are paid by each class based on such
class' net assets relative to the entire Fund's net assets.
13
<PAGE> 699
The investment adviser may, from time to time and at its discretion, agree to
limit the investment advisory fee by waiving fees or reimbursing the Company for
expenses. For the fiscal year ended February 28, 1998, the investment advisory
fee for the Government Fund was limited to .05% of the Fund's net assets. Any
such limitation may be terminated at the option of the investment adviser.
The charts below show the investment advisory fees for each Fund for the last
three fiscal years (each ending on the last day of February) along with any
credits that reduced the investment advisory fees. The fees shown were paid by
the Funds to Bank of America.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------
PRIME FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
- ---------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory Fees Accrued $3,964,899 $5,792,971 $7,234,054
Investment Advisory Fees Waived 0 0 0
Net Amount of Investment Advisory Fees
Paid by the Fund $3,964,899 $5,792,971 $7,234,054
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------
GOVERNMENT FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
- --------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory Fees Accrued $672,197 $539,047 $460,253
Investment Advisory Fees Waived $276,490 $335,332 $210,869
Net Amount of Investment Advisory Fees
Paid by the Fund $395,707 $203,715 $249,384
</TABLE>
For the fiscal year ended February 29, 1996 Bank of America reimbursed operating
expenses of $4,778 with respect to the Government Fund.
14
<PAGE> 700
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TAX-EXEMPT ---------------------------------------------------------
MONEY FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
---------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory Fees Accrued $439,603 $444,648 $636,863
Investment Advisory Fees Waived 0 0 0
Net Amount of Investment Advisory Fees
Paid by the Fund $439,603 $444,648 $636,863
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
TREASURY ONLY FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
- ------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory Fees Accrued $341,008 $487,156 439,545
Investment Advisory Fees Waived 0 0 0
Net Amount of Investment
Advisory Fees Paid by the Fund $341,008 $487,156 $439,545
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
TREASURY FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory Fees Accrued $2,446,958 $2,861,734 $2,708,981
Investment Advisory Fees Waived 0 0 0
Net Amount of Investment
Advisory Fees Paid by the Fund $2,446,958 $2,861,734 $2,708,981
</TABLE>
15
<PAGE> 701
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
CALIFORNIA TAX-EXEMPT MONEY -----------------------------------------------------------
MARKET FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
- -------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory Fees Accrued $508,348 $849,799 $1,149,877
Investment Advisory Fees Waived 0 0 0
Net Amount of Investment
Advisory Fees Paid by the Fund $508,348 $849,799 $1,149,877
</TABLE>
ADMINISTRATOR
Bank of America (the "Administrator" or "BOA") serves as administrator to the
Funds. Prior to September 15, 1997, The BISYS Group, Inc., through its wholly-
owned subsidiary BISYS Fund Services, L.P. ("BISYS"), served as the Company's
administrator. Prior to November 1, 1996, Concord Holding Corporation
("Concord") an indirect, wholly-owned subsidiary of BISYS served as
administrator.
Pursuant to its agreement, the Administrator has agreed to provide facilities,
equipment and personnel to carry out administrative services, including
coordination of reports to shareholders of the Funds and the Securities and
Exchange Commission; calculation of the net asset value of the Funds' shares and
dividends and capital gains distributions to shareholders; payment of the costs
of maintaining the Funds' offices; preparation of tax returns; provision of
internal legal and accounting compliance services; maintenance (or oversight of
the maintenance by others approved by the Board of Directors) of the Funds'
books and records; and the provision of various services for shareholders who
have made a minimum initial investment of at least $500,000, including the
provision of a facility to receive purchase and redemption orders for the
accounts of such shareholders. The Administrator will bear all expenses in
connection with the performance of its services under the Administration
Agreement for the Funds with the exception of fees charged by The Bank of New
York ("BONY") for certain fund accounting services which are borne by the Funds.
The Administrator may from time to time employ such person or persons as it may
believe to be particularly fitted to assist in the performance of the
administration agreement; provided, however, that the compensation of such
person or persons shall be paid by the Administrator and the Administrator shall
be as fully responsible to the Company for the acts and omissions of any
subcontractor as it is for its own acts and omissions. BONY provides the Funds
with certain accounting services pursuant to a fund accounting services
agreement with the Administrator.
16
<PAGE> 702
Under the fund accounting services agreement, BONY has agreed to provide certain
accounting, bookkeeping, pricing, dividend and distribution calculation services
with respect to the Funds. The monthly fees charged by BONY under the Fund
accounting services agreement are borne by the Funds. The Administrator has also
entered into an agreement with PFPC Inc. to provide certain sub-administration
services to the Funds, including, among other things, assisting in the
developing and monitoring of compliance procedures, participating in periodic
updating of the Funds' prospectus and SAI, providing periodic reports to the
Company's Board of Directors and providing certain record-keeping services. The
monthly fees charged by PFPC Inc. for these services under the
sub-administration agreement are borne by the Administrator.
For its services under the administration agreement, the Administrator is
entitled to receive an administration fee, computed daily and paid monthly, at
the following annual rates:
.10% of the first $7 billion of each Fund's net assets, plus
.09% of the next $3 billion of each Fund's net assets, plus
.08% of each Fund's net assets over $10 billion.
The administration fees for each Fund are paid by each class based on such
class' net assets relative to the entire Fund's net assets.
The Administrator may, from time to time and at its discretion, agree to limit
the administration fee by waiving fees or reimbursing the Company for expenses.
Any such limitation may be terminated at the option of the Administrator. Any
such limitations effected in the past three fiscal years are shown in the charts
below.
The charts below show the Fund administration fees for each Fund for the last
three fiscal years (each ending on the last day of February) along with any
credits that reduced the administration fees.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
PRIME FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
- ---------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees Accrued $4,062,578 $6,236,990 BOA: $3,929,655
BISYS: $4,008,360
Administration Fees Waived 0 0 0
Net Amount of Administration $4,062,578 $6,236,990 BOA: $3,929,655
Fees Paid by the Fund BISYS: $4,008,360
Administrator During this BISYS/
Fiscal Year BISYS/Concord BISYS/Concord Bank of America
Other Expenses Reimbursed by
the Administrator $ 235,000 0 0
</TABLE>
17
<PAGE> 703
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
TREASURY FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees Accrued $2,447,372 $2,863,262 BOA: $1,359,676
BISYS: $1,352,662
Administration Fees Waived 0 0 0
Net Amount of Administration $2,447,372 $2,863,262 BOA: $1,359,676
Fees Paid by the Fund BISYS: $1,352,662
Administrator During this BISYS/Concord BISYS/Concord BISYS/
Fiscal Year Bank of America
Other Expenses Reimbursed by
the Administrator $ 95,000 0 0
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
TAX-EXEMPT MONEY FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
-------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees Accrued $439,603 $444,648 BOA: $322,955
BISYS: $313,908
Administration Fees Waived 0 0 0
Net Amount of Administration $439,603 $444,648 BOA: $322,955
Fees Paid by the Fund BISYS: $313,908
Administrator During this BISYS/Concord BISYS/Concord BISYS/
Fiscal Year Bank of America
Other Expenses Reimbursed by
the Administrator 0 0 0
</TABLE>
18
<PAGE> 704
<TABLE>
<CAPTION>
CALIFORNIA TAX FISCAL YEAR ENDED
-EXEMPT MONEY ---------------------------------------------------------------
MARKET FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees $508,348 $849,799 BOA:$575,370
Accrued BISYS:$574,507
Administration Fees 0 0 0
Waived
Net Amount of $508,348 $849,799 BOA:$575,370
Administration Fees BISYS:$574,507
Paid by the Fund
Administrator During BISYS/Concord BISYS/Concord BISYS/
this Fiscal Year Bank of America
Other Expenses $5,000 0 0
Reimbursed by the
Administrator
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
GOVERNMENT FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees Accrued $672,197 $539,047 BOA:$210,009
BISYS:$250,244
Administration Fees Waived $182,262 0 0
Net Amount of $489,935 $539,047 BOA:$210,009
Administration BISYS:$250,244
Fees Paid by the Fund
Administrator During this Concord BISYS/Concord BISYS/
Fiscal Year Bank of America
Other Expenses Reimbursed 0 0 0
by the Administrator
</TABLE>
19
<PAGE> 705
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
TREASURY ONLY FUND FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees Accrued $341,008 $487,156 BOA:$190,516
BISYS:$249,029
Administration Fees Waived 0 0 0
Net Amount of Administration $341,008 $487,156 BOA:$190,516
Fees Paid by the Fund BISYS:$249,029
Administrator During this Concord BISYS/Concord BISYS/
Fiscal Year Bank of America
Other Expenses Reimbursed by the 0 0 0
Administrator
</TABLE>
SPECIAL MANAGEMENT SERVICES PLAN
The Company has adopted a Special Management Services Plan for Pacific Horizon
Shares. Under the Special Management Services Plan, securities dealers,
financial institutions and other industry professionals that are shareholders or
dealers of record or which have a servicing relationship ("Shareholder
Organizations") with beneficial owners of a Fund's Pacific Horizon Shares have
agreed to provide the following support services to their clients: aggregating
and processing purchase and redemption requests for Pacific Horizon Shares and
placing net purchase and redemption orders; providing a service that invests the
assets of shareholder accounts in Pacific Horizon Shares pursuant to specific or
pre-authorized instructions; processing dividend payments; providing statements
periodically to shareholders showing their positions in Pacific Horizon Shares;
providing subaccounting or the information necessary for subaccounting; if
required by law, forwarding shareholder communications (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to shareholders; forwarding shareholders proxy
statements and proxies containing any proposals regarding the Special Management
Services Plan or related agreements; developing and monitoring investor programs
offered from time to time; providing dedicated walk-in and telephone facilities
to handle shareholder inquiries and serve shareholder needs; providing and
maintaining specialized systems for automatic investments; maintaining the
registration or qualification of Pacific Horizon Shares for sale under state
securities laws; paying for the operation of arrangements that facilitate
same-day purchases by shareholders; assuming the expenses of payments made to
third parties for services provided in connection with the investments of their
customers in Pacific Horizon Shares; and providing various other services (such
as the provision of a facility to receive purchase and redemption orders) for
shareholders who have made a minimum initial investment of less than $500,000.
20
<PAGE> 706
In consideration of the services provided pursuant to the Special Management
Services Plan, Shareholder Organizations are entitled to receive a fee, computed
daily and paid monthly at the annual rate of up to 0.32% of the average daily
net asset value of each Fund's Pacific Horizon Shares (0.35% for the California
Tax-Exempt Money Market Fund) beneficially owned by clients of such Shareholder
Organizations. The Special Management Services Plan provides that a written
report of the amounts expended under such plan, and the purposes for which such
expenditures were incurred, will be made to the Board of Directors for its
review at least quarterly.
The charts below show the fees paid by each Fund pursuant to the Special
Management Services Plan (formerly the Special Management Services Agreement)
for the last fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
PRIME FUND FEBRUARY 28, 1998
- ---------- -----------------
<S> <C>
Amount Paid to $ 22,110
BISYS/Concord
Amount Paid to PDI $ 12,453
Amount Paid to Bank $6,742,687
of America and
affiliates
Total Amount Paid by $7,285,114
the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TREASURY FUND FEBRUARY 28, 1998
- ------------- -----------------
<S> <C>
Amount Paid to $ 5,446
BISYS/Concord
Amount Paid to PDI $ 4,853
Amount Paid to Bank $ 789,384
of America and
affiliates
Total Amount Paid by $1,088,447
the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TAX-EXEMPT MONEY FUND FEBRUARY 28, 1998
- --------------------- -----------------
<S> <C>
Amount Paid to $ 2,939
BISYS/Concord
Amount Paid to PDI $ 2,580
Amount Paid to Bank $377,885
of America and
affiliates
Total Amount Paid by $384,228
the Fund
</TABLE>
21
<PAGE> 707
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT FISCAL YEAR ENDED
MONEY MARKET FUND FEBRUARY 28, 1998
- --------------------- -----------------
<S> <C>
Amount Paid to $ 5,548
BISYS/Concord ($ 525 waived)
Amount Paid to PDI $ 2,304
($ 218 waived)
Amount Paid to Bank $1,676,744
of America and ($ 158,626 waived)
affiliates
Total Amount Paid by $1,851,005
the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
GOVERNMENT FUND FEBRUARY 28, 1998
--------------- -----------------
<S> <C>
Amount Paid to $ 159
BISYS/Concord
Amount Paid to PDI $ 139
Amount Paid to Bank $427,718
of America and
affiliates
Total Amount Paid by $455,016
the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TREASURY ONLY FUND FEBRUARY 28, 1998
- ------------------ -----------------
<S> <C>
Amount Paid to $ 25
BISYS/Concord
Amount Paid to PDI $ 36
Amount Paid to Bank $607,979
of America and
affiliates
Total Amount Paid by $667,711
the Fund
</TABLE>
22
<PAGE> 708
SHAREHOLDER SERVICES PLAN
The Company has adopted a Shareholder Services Plan for Horizon Service Shares.
Under that Plan, Shareholder Organizations, which may include Bank of America
and its affiliates, provide support services to their customers ("Customers")
who are beneficial owners of Horizon Service Shares in return for payment by the
respective Fund of up to .25% (on an annualized basis) of the average daily net
asset value of the Horizon Service Shares beneficially owned by Customers of the
Shareholder Organizations.
Holders of a Fund's Horizon Service Shares will bear all fees paid to
Shareholder Organizations for their services with respect to such shares. During
the fiscal year ended February 28, 1998, the Prime, Treasury, Government,
Treasury Only, Tax-Exempt Money and California Tax-Exempt Money Market Funds
made payments under the Shareholder Services Plan at an effective annual rate of
.25% of the average net asset value of each Fund's Horizon Service Shares.
The services provided by Shareholder Organizations may include the following:
aggregating and processing purchase and redemption requests from Customers for
Horizon Service Shares and placing net purchase and redemption orders with the
Distributor; providing Customers with a service that invests the assets of their
accounts in Horizon Service Shares pursuant to specific or preauthorized
instructions; processing dividend payments from a Fund on behalf of Customers;
providing information periodically to Customers regarding their position in
Horizon Service Shares; arranging for bank wires; responding to Customer
inquiries regarding services performed by the Shareholder Organizations;
providing sub-accounting with respect to Horizon Service Shares beneficially
owned by Customers or the information necessary for sub-accounting; forwarding
shareholder communications from a Fund to Customers; and other similar services
if requested by a Fund.
For the fiscal year ended February 28, 1998 shareholder service fee payments to
Shareholder Organizations totaled $8,141,653, $4,075,595, $646,192, $508,971,
$464,176, and $1,340,735 with respect to Horizon Service Shares of the Prime
Fund, Treasury Fund, Government Fund, Treasury Only Fund, Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund, respectively. Of these amounts, for
the fiscal year ended February 28, 1998, $7,381,916, $3,668,245, $586,936,
$432,402, $422,932 and $1,187,827 were paid to Bank of America and its
affiliates with respect to Horizon Service Shares of the Prime Fund, Treasury
Fund, Government Fund, Treasury Only Fund, Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund.
DISTRIBUTOR
Provident Distributors, Inc. ("PDI" or the "Distributor") (located at Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428) acts as the
exclusive distributor of the shares of each of the Funds pursuant to a
distribution agreement with the Company. Shares are sold on a continuous basis
by the Distributor.
The Distributor has agreed to use its best efforts to effect sales of shares of
the Funds although it is not obliged to sell any certain number of shares. No
compensation is payable by the Funds to
23
<PAGE> 709
the Distributor for its distribution services.
THE DISTRIBUTION AND SERVICES PLAN. The Distributor is entitled to payment from
the Company for distribution and service fees pursuant to the Distribution and
Services Plan (the "12b-1 Plan") adopted on behalf of the X Shares, S Shares and
Y Shares. Under the 12b-1 Plan, the Company on behalf of the Prime, Treasury and
California Tax-Exempt Money Market Funds may pay the Distributor for the
following items (the number beside each item represents the dollar amount paid
for each item for the fiscal year ended February 28, 1998): (a) direct
out-of-pocket promotional expenses incurred by the Distributor in advertising
and marketing X Shares, S Shares and Y Shares $0 (X Shares-Prime Fund), $0 (X
Shares-Treasury Fund) and $0 (X Shares-California Tax-Exempt Money Market Fund)
$0 (S Shares Prime Fund), $0 (S Shares - California Tax-Exempt Money Market
Fund), $0 (S Shares - Tax-Exempt Money Fund), $0 (Y Shares - Prime Fund) and $0
(Y Shares - Treasury Fund); (b) expenses incurred in connection with preparing,
printing, mailing, and distributing or publishing advertisements and sales
literature for X Shares, S Shares and Y Shares $0 (X Shares-Prime Fund), $0 (X
Shares-Treasury Fund) and $0 (X Shares-California Tax-Exempt Money Market Fund)
$0 (S Shares - Prime Fund), $0 (S Shares - California Tax-Exempt Money Market
Fund), $0 (S Shares - Tax-Exempt Money Fund), $0 (Y Shares - Prime Fund) and $0
(Y Shares - Treasury Fund); (c) expenses incurred in connection with printing
and mailing Prospectuses and Statements of Additional Information to other than
current X, S or Y shareholders $0 (X Shares-Prime Fund), $0 (X Shares-Treasury
Fund) and $0 (X Shares-California Tax-Exempt Money Market Fund) $0 (S Shares -
Prime Fund), $0 (S Shares - California Tax-Exempt Money Market Fund), $0 (S
Shares - Tax-Exempt Money Fund), $0 (Y Shares - Prime Fund) and $0 (Y Shares -
Treasury Fund); (d) periodic payments or commissions to one or more Service
Organizations with respect to a Fund's X Shares, S Shares and Y Shares
beneficially owned by customers for whom the Service Organization is the Service
Organization of record or holder of record of such X Shares, S Shares or Y
Shares $1,352,274 (X Shares-Prime Fund), $188,860 (X Shares-Treasury Fund) and
$109,431 (X Shares-California Tax-Exempt Money Market Fund) $518,688 (S Shares -
Prime Fund), $145,386 (S Shares - California Tax-Exempt Money Market Fund),
$22,826 (S Shares - Tax-Exempt Money Fund), $299,538 (Y Shares - Prime Fund) and
$185,411 (Y Shares - Treasury Fund); (e) the direct or indirect cost of
financing the payments or expenses included in (a) and (d) above $0 (X
Shares-Prime Fund), $0 (X Shares-Treasury Fund) and $0 (X Shares-California
Tax-Exempt Money Market Fund) $0 (S Shares - Prime Fund), $0 (S Shares -
California Tax-Exempt Money Market Fund), $0 (S Shares - Tax-Exempt Money Fund),
$0 (Y Shares - Prime Fund) and $0 (Y Shares - Treasury Fund); or (f) for such
other services as may be construed, by any court or governmental agency or
commission, including the U.S. Securities and Exchange Commission, to constitute
distribution services under the 1940 Act.
Pursuant to the 12b-1 Plan, the Company may also pay for administrative support
services
24
<PAGE> 710
provided with respect to Service Organization customers ("Clients") holding X
Shares, S Shares and Y Shares. Administrative services provided may include some
or all of the following: (i) processing dividend and distribution payments from
a Fund on behalf of its Clients; (ii) providing information periodically to its
Clients showing their positions in X Shares, S Shares and Y Shares; (iii)
arranging for bank wires; (iv) responding to routine Client inquiries concerning
their investment in X Shares, S Shares and Y Shares; (v) providing the
information to the Funds necessary for accounting or sub-accounting; (vi) if
required by law, forwarding shareholder communications from a Fund (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to its Clients; (vii) aggregating and
processing purchase and redemption requests from its Clients and placing net
purchase and redemption orders for its Clients; (viii) establishing and
maintaining accounts and records relating to Clients that invest in X Shares, S
Shares and Y Shares; (ix) assisting Clients in changing dividend options,
account designations and addresses; (x) developing, maintaining and operating
systems necessary to support sweep accounts; or (xi) other similar services if
requested by the Company.
The 12b-1 Plan for X Shares, S Shares and Y Shares provides that the Distributor
is entitled to receive payments on a monthly basis at an annual rate not
exceeding 0.55%, 1.00% and 1.00% of the average daily net assets during such
month of the outstanding X Shares, S Shares and Y Shares, respectively, to which
such 12b-1 Plan relates. Not more than 0.25% of such net assets will be used to
compensate Service Organizations for personal services provided to X, S and Y
shareholders and/or the maintenance of such shareholders' accounts and not more
than 0.30%, 0.75% and 0.75% of such net assets of the X, S and Y shareholders,
respectively, will be used for promotional and other primary distribution
activities. The 12b-1 Plan reimburses the distributor only for expenses
incurred.
Payments made out of or charged against the assets of a particular class of
shares of a particular Fund must be in payment for expenses incurred on behalf
of that class.
Payments for distribution expenses under the 12b-1 Plan are subject to Rule
12b-1 (the "Rule") under the 1940 Act. The Rule defines distribution expenses to
include the cost of "any activity which is primarily intended to result in the
sale of [Company] shares." The Rule provides, among other things, that an
investment company may bear such expenses only pursuant to a plan adopted in
accordance with the Rule. In accordance with the Rule, the 12b-1 Plan provides
that a written report of the amounts expended under the 12b-1 Plan, and the
purposes for which such expenditures were incurred, will be made to the Board of
Directors for its review at least quarterly. In addition, the 12b-1 Plan
provides that it may not be amended to increase materially the costs which
shares of a Fund may bear for distribution pursuant to the 12b-1 Plan without
shareholder approval and that other material amendments of the 12b-1 Plan must
be approved by a majority of the Board of Directors, and by a majority of the
directors who are neither "interested persons" (as defined in the 1940 Act) of
the Company nor have any direct or indirect financial interest in the operation
of the 12b-1 Plan, or in any agreements entered into in connection with the
12b-1 Plan, by vote cast in person at a meeting called for the purpose of
considering such amendments (the "Non-Interested Plan Directors"). The selection
and nomination of the directors of the Company who are not "interested persons"
of the Company
25
<PAGE> 711
have been committed to the discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a reasonable
likelihood that the 12b-1 Plan will benefit the Funds and their X, S and Y
shareholders. The 12b-1 Plan is subject to annual reapproval by a majority of
the Company's Board of Directors, including a majority of the Non-Interested
Plan Directors and is terminable without penalty at any time with respect to any
Fund by a vote of a majority of the Non-Interested Plan Directors or by vote of
the holders of a majority of the outstanding X Shares, S Shares or Y Shares of
the Fund involved. Any agreement entered into pursuant to the 12b-1 Plan with a
Service Organization is terminable with respect to any Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Directors, by vote of
the holders of a majority of the outstanding X Shares, S Shares or Y Shares of
such Fund, or by the Service Organization. Each agreement will also terminate
automatically in the event of its assignment.
For the fiscal year ended February 28, 1998, 12b-1 fee payments to Service
Organizations totaled $1,352,274, $188,860 and $109,431 with respect to X Shares
of the Prime Fund, Treasury Fund and California Tax-Exempt Money Market Fund,
respectively. For the fiscal year ended February 28, 1998, Shareholder Service
fee payments to Service Organizations totaled $1,126,895, $157,400 and $91,193
with respect to X Shares of the Prime Fund, Treasury Fund and California
Tax-Exempt Money Market Fund, respectively. Of these amounts, for the fiscal
year ended, February 28, 1998, $2,468,893, $345,956 and $200,624 were paid to
Bank of America and its Affiliates with respect to the X Shares of the Prime
Fund, Treasury Fund and California Tax-Exempt Money Market Fund, respectively.
For the fiscal year ended February 28, 1998, 12b-1 fee payments (net of fee
waivers) to Service Organizations totaled $468,627, $150,355 and $22,820 with
respect to S Shares of the Prime Fund, California Tax-Exempt Money Market Fund
and Tax-Exempt Money Fund, respectively. For that same period, Bank of America
waived $772,551, $218,079 and $34,227 of distribution expenses for the Prime
Fund, California Tax-Exempt Money Market Fund and Tax-Exempt Money Market Fund,
respectively. For the fiscal year ended February 28, 1998, Shareholder Service
fee payments earned by Service Organizations totaled $482,149, $116,192 and
$19,016 with respect to S Shares of the Prime Fund, California Tax-Exempt Money
Market Fund and Tax-Exempt Money Fund, respectively. Of these amounts, for the
fiscal year ended, February 28, 1998, $950,478, $266,540 and $41,836 were paid
to Bank of America and its Affiliates with respect to the S Shares of the Prime
Fund, California Tax-Exempt Money Market Fund and Tax-Exempt Money Fund,
respectively.
For the fiscal year ended February 28, 1998, 12b-1 fee payments to Service
Organizations totaled $299,538 and $185,411 with respect to Y Shares of the
Prime Fund and Treasury Fund, respectively. For the fiscal year ended February
28, 1998, Shareholder Service fee payments to Service Organizations total
$99,846 and $61,805 with respect to Y Shares of the Prime Fund and Treasury
Fund, respectively. Of these amounts, for the fiscal year ended, February 28,
1998, $399,384 and $246,527 were paid to Bank of America and its
26
<PAGE> 712
Affiliates with respect to the Y Shares of the Prime Fund and Treasury Fund,
respectively.
CUSTODIAN
The Company has appointed The Bank of New York, 90 Washington Street, New York,
New York 10286, as custodian for the Funds. The Bank of New York also provides
the Company with certain accounting, bookkeeping, pricing, and dividend and
distribution calculation services pursuant to a Fund accounting services
agreement with the Administrator. The Company and The Bank of New York have
appointed Bank of America to act as sub-custodian pursuant to a sub-custodian
agreement. As sub-custodian of the Company's assets, Bank of America (i)
maintains a separate account or accounts in the name of the Company, (ii) holds
and disburses portfolio securities on account of the Company, (iii) makes
receipts and disbursements of money on behalf of the Company, (iv) collects and
receives all income and other payments and distributions on account of the
Company's portfolio securities held by Bank of America, (v) responds to
correspondence from security brokers and others relating to its duties, and (vi)
makes periodic reports to the Company's Board of Directors concerning its duties
thereunder. Under the sub-custodian agreement, the Company will reimburse Bank
of America for its costs and expenses in providing services thereunder. Bank of
America is the successor to Security Pacific under the sub-custodian agreement.
For the fiscal years ended February 29, 1996, February 28, 1997 and February 28,
1998, Bank of America, in its capacity as sub-custodian, did not hold any of the
Company's assets and, accordingly, received no fees.
TRANSFER AGENT
PFPC Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968, serves as transfer
and dividend disbursing agent ("Transfer Agent") for the Company.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary of the
Company, is a partner), 1345 Chestnut Street, Philadelphia National Bank
Building, Philadelphia, Pennsylvania 19107, serves as counsel to the Company and
will pass upon the legality of the shares offered hereby. O'Melveny and Meyers
LLP, 400 South Hope Street, Los Angeles, California 90071, acts as special
California counsel for the Company and has reviewed the portions of the
Prospectuses and Statement of Additional Information for the California
Tax-Exempt Money Market Fund concerning California taxes and the description of
the special considerations relating to California Municipal Securities.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, representing the combined firms of Price Waterhouse LLP
and Coopers and Lybrand LLP, effective July 1, 1998, has been selected as
independent accountants of each Fund for the fiscal year ending February 28,
1998.
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of Directors, Bank of
America is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities for each Fund. Securities
purchased and sold by each Fund are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. During their
last three
27
<PAGE> 713
fiscal periods, the Prime Fund, Treasury Fund, Government Fund, Treasury Only
Fund, Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund did not
pay any brokerage commissions. The cost of securities purchased by the Funds
from underwriters generally includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers, it is the
Company's policy to seek the best overall terms available. The investment
advisory agreement between the Company and Bank of America provides that, in
assessing the best overall terms available for any transaction, Bank of America
shall consider factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In addition, the
investment advisory agreement authorizes Bank of America, subject to the
approval of the Company's Board of Directors, to cause the Company to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America to the particular Fund and the Company.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities, and
(2) analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
The directors will periodically review the commissions paid by the Company to
consider whether the commissions, if any, paid over representative periods of
time appear to be reasonable in relation to the benefits inuring to the Company.
It is possible that certain of the supplementary research or other services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Company
or any given Fund may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
Brokerage or research services so received are in addition to and not in lieu of
services required to be performed by Bank of America and do not reduce the
advisory fee payable to Bank of America by the Company. Such services may be
useful to Bank of America in serving both the Company and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to Bank of America in carrying out its obligations
to the Company. The Company will not acquire certificates of deposit or other
securities issued by Bank of America or its affiliates. In addition, portfolio
securities in general will be purchased from and sold to Bank of America, PDI
and their affiliates acting as principal underwriter, syndicate member,
market-maker, dealer, broker or in any other similar capacity, provided such
purchase, sale or dealing is permitted under the 1940 Act and the rules
thereunder.
A Fund's annual portfolio turnover rate is calculated by dividing the lesser of
purchases or sales
28
<PAGE> 714
of portfolio securities for the year by the monthly average value of the Fund's
portfolio securities. The calculation excludes all securities the maturities of
which at the time of acquisition were thirteen months or less. There is not
expected to be any portfolio turnover for the Funds for regulatory reporting
purposes.
A Fund may participate, if and when practicable, in bidding for the purchase of
securities directly from an issuer in order to take advantage of the lower
purchase price available to members of a bidding group. Any such Fund will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Directors, believes such practice
to be in the Fund's interest.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Directors or Bank of America, pursuant to
guidelines established by the Board, will promptly consider such an event in
determining whether the Fund involved should continue to hold the obligation,
but will only continue to hold the obligation if retention is in accordance with
the interests of the Fund and applicable regulations of the SEC. In addition, it
is possible that unregistered securities purchased by a Fund in reliance upon
Rule 144A under the Securities Act of 1933 could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a period, uninterested in purchasing these securities.
To the extent permitted by law, Bank of America may aggregate the securities to
be sold or purchased for a Fund with those to be sold or purchased for other
investment companies or common trust Funds in order to obtain best execution.
The Company is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
the Company as of the close of its most recent fiscal year. As of February 28,
1998:
(a) the Treasury Fund held the following securities: Repurchase Agreement with
Morgan Stanley Dean Witter & Co. in the principal amount of $145,000,000;
Repurchase Agreement with Goldman Sachs & Co., in the principal amount of
$574,667,000; Repurchase Agreement with Lehman Brothers, Inc. in the principal
amount of $50,000,000; and Repurchase Agreement with Merrill Lynch Securities,
Inc. in the principal amount of $145,000,000; (b) the Government Fund held the
following securities: Repurchase Agreement with Morgan Stanley Dean Witter & Co.
in the principal amount of $20,000,000; Repurchase Agreement with Goldman Sachs
& Co. in the principal amount of $97,174,000; and Repurchase Agreement with
Merrill Lynch Securities, Inc. in the principal amount of $20,000,000; (c) the
Prime Fund held the following securities: Lehman Brothers Holdings, Inc. weekly
variable rate obligation in the principal amount of $50,000,000; Lehman Brothers
Holdings, Inc. commercial paper in the principal amount of $25,000,000; Merrill
Lynch & Co., Inc. commercial paper in the principal amount of $100,000,000;
Merrill Lynch & Co., Inc. commercial paper in the principal amount of
$25,000,000; Bear Stearns Companies, Inc. daily variable rate obligation in the
principal amount of $75,000,000; Bear Stearns Companies, Inc. daily variable
rate obligation in the principal amount of $60,000,000; Bear Stearns Companies,
Inc. monthly variable rate obligation in the
29
<PAGE> 715
principal amount of $25,000,000; Bear Stearns Companies, Inc. monthly variable
rate obligation in the principal amount of $18,000,000; Lehman Brothers
Holdings, Inc. daily variable rate obligation in the principal amount of
$50,000,000; Lehman Brothers Holding, Inc. quarterly variable rate obligation in
the principal amount of $25,000,000; Lehman Brothers Holdings, Inc. quarterly
variable rate obligation in the principal amount of $36,000,000; Merrill Lynch &
Co. daily variable rate obligation in the principal amount of $25,000,000;
Merrill Lynch & Co. daily variable rate obligation in the principal amount of
$25,000,000; Merrill Lynch & Co. weekly variable rate obligation in the
principal amount of $19,000,000; Dean Witter corporate obligation in the
principal amount of $15,000,000; Goldman Sachs Group L.P. master note in the
principal amount of $400,000,000; Morgan Stanley Group, Inc. master note in the
principal amount of $300,000,000; Morgan Stanley Dean Witter & Co. Repurchase
Agreement in the principal amount of $180,000,000; Goldman Sachs & Co.
Repurchase Agreement in the principal amount of $118,567,000; and Goldman Sachs
& Co. Repurchase Agreement in the principal amount of $325,000,000; (d) the
Flexible Income (formerly, Corporate Bond) Fund held the following securities:
Bear Stearns corporate obligation in the principal amount of $400,000; and
Merrill Lynch & Co. corporate obligation in the principal amount of $1,500,000;
(e) the Intermediate Bond Master Portfolio held the following securities: Bear
Stearns & Company corporate obligation in the principal amount of $1,500,000;
and Lehman Brothers Holdings medium term note in the principal amount of
$2,000,000; (f) the Asset Allocation Fund held the following securities: Morgan
Stanley Group, Inc. common stock in the amount of $1,400,719; Bear Stearns & Co.
medium term note in the principal amount of $1,100,000; and PaineWebber Group,
Inc. medium term note in the principal amount of $1,250,000; (g) the Blue Chip
Master Portfolio held the following security: Morgan Stanley Dean Witter
Discover & Co. common stock in the amount of $12,299,844; and (h) the
International Equity Fund held the following security: Repurchase Agreement with
Paine Webber, Inc. in the principal amount of $5,784,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co., Inc.,
Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean
Witter Reynolds, Inc. and Paine Webber are considered to be regular brokers
and dealers of the Company.
NET ASSET VALUE
IN GENERAL. Each class' net asset value per share is calculated by dividing the
total value of the assets attributable to the class, less the value of any
liabilities applicable to the class, by the total number of outstanding shares
of that class. Each class' net asset value is calculated separately from each of
the other of the Company's class' net asset value. "Assets belonging to" a Fund
consist of the consideration received upon the issuance of shares representing
interests in the Fund together with all income, earnings, profits and proceeds
derived from the investment thereof, any proceeds from the sale, exchange or
liquidation of such investments, any Funds or payments derived from any
re-investment of such proceeds, and a portion of any general assets of the
Company not belonging to a particular Fund. Each Fund is charged with the direct
expenses of that Fund and with a share of the general expenses of the Company.
The determinations by the Board of Directors as to direct and allocable expenses
and the allocable portion of general assets with respect to the various
portfolios are conclusive. The expenses that are charged to a Fund are borne
equally by each share of the Fund except for payments to Shareholder
Organizations that are borne solely by Horizon Service Shares and certain
payments to Distribution or Service Organizations, including Bank of America
NT&SA and BA Investment Services, Inc. ("BAIS"), that are borne solely by
Pacific Horizon Shares, X Shares, Y
30
<PAGE> 716
Shares and S Shares and Rule 12b-1 fees that are borne solely by X Shares, Y
Shares and S Shares of the Funds.
A "business day" for purposes of processing share purchases and redemptions
received by the transfer agent is a day on which both the Funds' custodian and
the New York Stock Exchange are open for trading, except a "business day" does
not include Columbus Day or Veteran's Day. In 1998 the holidays on which the New
York Stock Exchange is closed are: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
AMORTIZED COST METHOD. The Funds use the amortized cost method of valuation in
computing the net asset value of their shares for purposes of sales and
redemptions. Under this method a Fund values each of its portfolio securities at
cost on the date of purchase and thereafter assumes a constant proportionate
amortization of any discount or premium until maturity of the security. As a
result the value of a portfolio security for purposes of determining net asset
value normally does not change in response to fluctuating interest rates. While
the amortized cost method seems to provide certainty in portfolio valuation it
may result in periods during which values, as determined by amortized cost, are
higher or lower than the amount such Fund would receive if it sold its portfolio
securities. The market value of the securities in the Funds can be expected to
vary inversely with changes in prevailing interest rates. Thus, if interest
rates have increased from the time a security was purchased, such security, if
sold, might be sold at a price less than its amortized cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its amortized cost. In
either instance, if the security is held to maturity, no gain or loss will be
realized.
In connection with their use of amortized cost valuation, the Funds limit the
dollar-weighted average maturity of their portfolios to not more than 90 days
and do not purchase any instrument with a remaining maturity of greater than 397
calendar days, except for certain qualifying variable or floating rate
instruments whose maturities may be longer. The Company's Board of Directors has
also established, pursuant to rules promulgated by the SEC, procedures that are
intended to stabilize each Fund's net asset value per share for purposes of
sales and redemptions at $1.00. Such procedures include the determination, at
such intervals as the Board deems appropriate, of the extent, if any, to which a
Fund's net asset value per share calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds 1/2 of 1% the
Board will promptly consider what action, if any, should be initiated. If the
Board believes that the amount of any deviation may result in material dilution
or other unfair results to investors or existing shareholders, it will take such
steps as it considers appropriate to eliminate or reduce to the extent
reasonably practicable any such dilution or unfair results. These steps may
include selling portfolio instruments prior to maturity, shortening a Fund's
average portfolio maturity, withholding or reducing dividends, reducing the
number of a Fund's outstanding shares without monetary consideration or
determining net asset value per share by using available market quotations. If a
Fund reduces the number of its outstanding shares without monetary consideration
it will mail written notice to shareholders at least three business days before
the redemption and in the notice will state the reason for the redemption and
the fact that the redemption may result in a capital loss to shareholders.
31
<PAGE> 717
The Funds' administrator may use a pricing service to value certain portfolio
securities where the prices provided are believed by the administrator pursuant
to guidelines adopted by the Board of Directors to reflect the fair value of
such securities. In valuing a Fund's securities, the pricing service would
normally take into consideration such factors as yield, risk, quality, maturity,
type of issue, trading characteristics, special circumstances and other factors
it deems relevant in determining valuations for normal institutional-sized
trading units of debt securities and would not rely on quoted prices. The
methods used by the pricing service and the valuations so established will be
utilized under the general supervision of the Company's Board of Directors.
Additionally, in determining market-based net asset value per share all
portfolio securities for which market quotations (or appropriate substitutes
that reflect current market conditions) are not readily available shall be
valued at their fair value as determined by the valuation committee in
accordance with procedures established by the Board of Directors.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION
PACIFIC HORIZON SHARES
Initial purchases of Pacific Horizon Shares into a new account may not be made
by wire. However, persons wishing to make a subsequent purchase of Pacific
Horizon Shares into an already existing account by wire should telephone the
Transfer Agent at (800) 346-2087. The investor's bank must be instructed to wire
federal funds to the Transfer Agent, referring in the wire to the particular
Fund in which such investment is to be made; the investor's portfolio account
number; and the investor's name.
Shares may be purchased in connection with IRAs only by direct remittance to the
Transfer Agent. Purchases for IRA accounts will be effective only when payments
received by the Transfer Agent are converted into federal funds. Purchases for
these plans may not be made in advance of receipt of funds. The Transfer Agent
may charge a fee to act as custodian for IRAs, payment of which could require
the liquidation of shares. Pacific Horizon Shares or Y Shares of the Prime Fund
acquired through an exchange of Class B shares of an investment portfolio of the
Time Horizon Funds or the Company, respectively, liquidated by the Transfer
Agent as fees for custodial services to IRA accounts will not be subject to the
contingent deferred sales load. All fees charged are described in the
appropriate form.
Pacific Horizon Shares for which orders for wire redemption are received on a
business day before 2:30 p.m. (Eastern Time) with respect to the Prime Fund,
Treasury Fund or Government Fund, 11:30 a.m. (Eastern Time) with respect to the
Treasury Only Fund, 10:30 a.m. (Eastern Time) with respect to the California
Tax-Exempt Money Market Fund or 12:00 noon (Eastern time) with respect to the
Tax-Exempt Money Fund, will be redeemed as of such time and the proceeds of
redemption (less any applicable contingent deferred sales load charged on
Pacific Horizon Shares or Y Shares of the Prime Fund acquired through an
exchange of Class B shares of an investment portfolio of the Time Horizon Funds
or the Company, respectively,) will normally be wired in Federal Funds on the
same business day to the commercial bank specified by the investor on the
Account Application (or other bank of record on the investor's file with the
Transfer Agent). To qualify to use the wire redemption privilege, payment for
shares must be drawn on, and redemption proceeds paid to, the same bank and
account as designated on the
32
<PAGE> 718
Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the request
must be in writing and signature guaranteed. Pacific Horizon Shares for which
orders for wire redemption are received on a business day after the respective
times stated above or on a non-business day will be redeemed as of the next
determination of net asset value for the Fund involved and the proceeds of
redemption (less any applicable contingent deferred sales load charged on
Pacific Horizon Shares of the Prime Fund acquired through an exchange of Class B
shares of an investment portfolio of the Time Horizon Funds) will normally be
wired in federal funds on the next business day after receipt of the redemption
request. Redemption proceeds (less any applicable contingent deferred sales load
charged on Pacific Horizon Shares or Y Shares of the Prime Fund acquired through
an exchange of Class B shares of an investment portfolio of the Time Horizon
Funds or the Company, respectively) 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 Pacific Horizon Funds, Inc., c/o
PFPC Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968. Such request must be
signed by each shareholder, with each signature guaranteed as described in the
Funds' 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.
Investors redeeming by check generally will be subject to the same rules and
regulations that commercial banks apply to checking accounts, although the
election of this privilege creates only a shareholder-transfer agent
relationship with the Transfer Agent. An investor may deliver checks directly to
the Transfer Agent, PFPC Inc., P.O. Box 8968, Wilmington, Delaware 19899-8968,
in which case the proceeds will be mailed, wired or made available at the
Transfer Agent on the next business day. The check delivered to the Transfer
Agent must be accompanied by a properly executed stock power form on which the
investor's signature is guaranteed as described in the Funds' Prospectus.
Because dividends accrue daily and because a contingent deferred sales load may
be applicable, checks should not be used to close an account. Check redemption
may be modified or terminated at any time by the Company or the Transfer Agent
upon notice to shareholders.
For processing redemptions, the Transfer Agent may request further documentation
from corporations, executors, administrators, trustees or guardians. The
Transfer Agent will accept other suitable verification arrangements from foreign
investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade Privilege,
any request for a wire redemption will be effected as a TeleTrade transaction
through the Automated Clearing House (ACH) system unless more prompt transmittal
specifically is requested. Redemption
33
<PAGE> 719
proceeds of a TeleTrade transaction will be on deposit in the investor's account
at the ACH member bank normally two business days after receipt of the
redemption request.
Pacific Horizon Shares or Y Shares of the Prime Fund acquired through an
exchange of Class B shares of an investment portfolio of the Time Horizon Funds
or the Company, respectively, are subject to a contingent deferred sales load
upon redemption. For purposes of computing the contingent deferred sales load,
the length of time of ownership will be measured from the date of the original
purchase of Class B shares and will not include any period of ownership of the
Pacific Horizon Shares or Y Shares of the Prime Fund.
Exchange Privilege. Shareholders in the Pacific Horizon Family of Funds have an
exchange privilege whereby they may exchange all or part of their Pacific
Horizon Shares for shares of other investment portfolios in the Pacific Horizon
Family of Funds or for like shares of any investment portfolio of Time Horizon
Funds. Holders of Class B Shares of a Pacific Horizon non-money market Fund may
exchange such Class B Shares for Y Shares of the Prime Fund without payment of
any contingent deferred sales charge at the time the exchange is made. In
addition, holders of Class B shares of an investment portfolio of Time Horizon
Funds may exchange such Class B shares for Pacific Horizon Shares of the Pacific
Horizon Prime Fund without the payment of any contingent deferred sales load at
the time the exchange is made. By use of the exchange privilege, the investor
authorizes the Transfer Agent to act on telephonic, telegraphic or written
exchange instructions from any person representing himself to be the investor
and believed by the Transfer Agent to be genuine. The Transfer Agent's records
of such instructions are binding. The exchange privilege may be modified or
terminated at any time upon notice to shareholders. For federal income tax
purposes, exchange transactions are treated as sales on which a purchaser will
realize a capital gain or loss depending on whether the value of the shares
exchanged is more or less than his basis in such shares at the time of the
transaction.
Exchange transactions described in Paragraphs A, B, C, D and E below will be
made on the basis of the relative net asset values per share of the investment
portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales load, as
well as additional shares acquired through reinvestment of dividends
or distributions on such shares, may be exchanged without a sales
load for shares of any other investment portfolio in the Pacific
Horizon Family of Funds or Time Horizon Funds.
B. Pacific Horizon Shares or Y Shares of the Prime Fund ("Prime
Shares") acquired pursuant to an exchange transaction with Class
B shares of an investment portfolio of Time Horizon Funds or the
Company, respectively, will continue to be subject to a
contingent deferred sales load. However, Prime Shares that had
been acquired through an exchange of Class B shares of an
investment portfolio of the Time Horizon Funds or the Company may
be exchanged for other Class B shares without the payment of a
contingent deferred sales load at the time of exchange. In
determining the holding period for calculating the contingent
deferred sales load payable on redemption of Class B shares, the
holding period of
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<PAGE> 720
the shares originally held will be added to the holding period of
the shares acquired through exchange unless the Class B shares have
been exchanged for Prime Shares.
C. Shares of any investment portfolio in the Pacific Horizon Family of
Funds or Time Horizon Funds acquired by a previous exchange
transaction involving shares on which a sales load has directly or
indirectly been paid (e.g. shares purchased with a sales load or
issued in connection with an exchange transaction involving shares
that had been purchased with a sales load), as well as additional
shares acquired through reinvestment of dividends or distributions
on such shares, may be redeemed and the proceeds used to purchase
without a sales load shares of any other investment portfolio. To
accomplish an exchange transaction under the provisions of this
Paragraph, investors must notify the Transfer Agent of their prior
ownership of shares and their account number.
D. Shares of any investment portfolio in the Pacific Horizon Family of
Funds may be exchanged without a sales load for shares of any other
investment portfolio in the Family that is offered without a sales
load.
E. Shares of any investment portfolio in the Pacific Horizon Family of
Funds purchased without a sales load may be exchanged without a
sales load for shares in any other portfolio where the investor
involved maintained an account in the Pacific Horizon Family of
Funds before April 20, 1987 or was the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its
reorganization into the Company's Corporate Bond Fund.
Except as stated above, a sales load will be imposed when shares of any
investment portfolio in the Pacific Horizon Family of Funds that were purchased
or otherwise acquired without a sales load are exchanged for shares of another
investment portfolio in the Pacific Horizon Family (or for shares of any
investment portfolio of Time Horizon Funds) which are sold with a sales load.
Exchange requests received on a business day prior to the time shares of the
investment portfolios involved in the request are priced will be processed on
the date of receipt. "Processing" a request means that shares in the investment
portfolio from which the shareholder is withdrawing an investment will be
redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day in
the manner described above.
PACIFIC HORIZON SHARES, X SHARES, Y SHARES AND S SHARES
Persons wishing to purchase Pacific Horizon Shares through their accounts at
Bank of America NT&SA or a Service Organization should contact such entity
directly for appropriate instructions. Persons purchasing X Shares through Bank
of America NT&SA's 401(k) Program
35
<PAGE> 721
should contact their representative. Persons wishing to establish a Sweep
Account at BAIS, with respect to X Shares, a Sweep Account at Bank of America
NT&SA or its banking or brokerage affiliates, with respect to S Shares or Y
Shares or at certain other Service Organizations, with respect to X Shares, Y
Shares and S Shares, should contact BAIS, Bank of America NT&SA, its banking or
brokerage affiliates or a Service Organization directly for appropriate
instructions. Depending on the terms of the Sweep Account, Bank of America
NT&SA, its banking or brokerage affiliates, or BAIS may charge their customers
fees for automatic investment, redemption and other services provided. Such fees
may include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income. Bank of
America NT&SA, its banking or brokerage affiliates, BAIS or the particular
Service Organization is responsible for providing information concerning these
services and any charges to any customers who must authorize the purchase of
shares prior to such purchase.
ALL FUNDS
The Company may suspend the right of redemption or postpone the date of payment
for shares during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Company may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.)
The Company's Charter permits its Board of Directors to require a shareholder to
redeem involuntarily shares in a Fund if the balance held of record by the
shareholder drops below $500 and such shareholder does not increase such balance
to $500 or more upon 60 days' notice. The contingent deferred sales load with
respect to Pacific Horizon and Y Shares of the Prime Fund acquired through an
exchange of B Shares of an investment portfolio of the Time Horizon or Pacific
Horizon Funds, respectively, is not charged on involuntary redemptions. The
Company will not require a shareholder to redeem shares of a Fund if the balance
held of record by the shareholder is less than $500 solely because of a decline
in the net asset value of the shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the 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 readily marketable securities or other
property. In such an event, a shareholder would incur transaction costs in
selling the securities or other property. The Company has committed that it will
pay all redemption requests by a shareholder of record in cash, limited in
amount with respect to each shareholder during any ninety-day period to the
lesser of $250,000 or 1% of the net asset value at the beginning of such period.
TAXES
The following is only a summary of certain considerations generally affecting
the Funds and their shareholders. No attempt is made to present a detailed
explanation of the tax treatment of
36
<PAGE> 722
the Funds or their shareholders, and this discussion is not intended as a
substitute for careful tax planning. Investors are advised to consult their tax
advisers with specific reference to their own tax situations.
FEDERAL - ALL FUNDS
Each Fund will be treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
"regulated investment company." By following this policy, each Fund expects to
eliminate or reduce to a nominal amount the federal income taxes to which it may
be subject. If for any taxable year a Fund does not qualify for the special
federal tax treatment afforded regulated investment companies, all of the Fund's
taxable income would be subject to tax at regular corporate rates (without any
deduction for distributions to shareholders). In such event, the Fund's dividend
distributions (including amounts derived from interest on Municipal Securities
in the case of the Tax-Exempt Money Fund and California Tax-Exempt Money Market
Fund) to shareholders would be taxable as ordinary income to the extent of the
current and accumulated earnings and profits of the particular Fund and would be
eligible for the dividends received deduction in the case of corporate
shareholders.
Qualification as a regulated investment company under the Code requires, among
other things, that each Fund distribute to its shareholders an amount equal to
at least the sum of 90% of its investment company taxable income, if any, and
90% of its tax-exempt income, if any, net of certain deductions for each taxable
year. In general, a Fund's investment company taxable income will be its taxable
income, subject to certain adjustments and excluding the excess of any net
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. A Fund will be taxed on its undistributed
investment company taxable income, if any.
At February 28, 1998, the Prime Fund, Treasury Fund, Government Fund, Treasury
Only Fund, Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund,
had unused capital loss carryovers of approximately $3,400,158 (of which
$674,982 will expire in 2002 and $2,725,176 will expire in 2003), $56,882 (of
which 47,456 will expire in 2002 and $9,426 will expire in 2006), $915,766
(which will expire in 2003), $23,888 (which will expire in 2003), $186,496 (of
which $14,011 will expire in 2000), $71,218 will expire in 2002, $19,132 will
expire in 2003, $36,425 will expire in 2004, $30,577 will expire in 2005 and
$15,133 will expire in 2006), $56,138 (of which $4,266 will expire in 2004 and
$51,872 will expire in 2006), respectively, available for federal income tax
purposes to be applied against future capital gains, if any.
FEDERAL - TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
The policy of the Tax-Exempt Money Fund and the California Tax-Exempt Money
Market Fund is to pay each year as exempt-interest dividends substantially all
the respective Fund's municipal securities interest income net of certain
deductions. An exempt-interest dividend is any dividend or part thereof (other
than a capital gains dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by the Fund during the taxable
year over any amounts disallowed as deductions under Sections 265 and
37
<PAGE> 723
171(a)(2) of the Code. The percentage of total dividends paid for any taxable
year which qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund for such year. In order for the
Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund to pay
exempt-interest dividends for any taxable year, at the close of each quarter of
each Fund's taxable year at least 50% of the aggregate value of each Fund's
assets must consist of exempt-interest obligations.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
As a regulated investment company, the California Tax-Exempt Money Market Fund
will be relieved of liability for California state franchise and corporate
income tax to the extent its taxable income is distributed to its shareholders.
The California Tax-Exempt Money Market Fund will be taxed on its undistributed
taxable income. If for any year the California Tax-Exempt Money Market Fund does
not qualify as a regulated investment company, all of its taxable income
(including interest income on California Municipal Securities for franchise tax
purposes only) may be subject to California state franchise or income tax at
regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of a regulated investment company, or series thereof,
consists of obligations the interest on which, if held by an individual, is
exempt from taxation by California ("California Exempt Securities"), then the
regulated investment company, or series of that company, will be qualified to
pay dividends exempt from California state personal income tax to its
non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Securities are
generally limited to California Municipal Securities and certain U.S. Government
and U.S. Possession obligations. "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which is
owned by the holders of an exclusive class or series of stock of the company.
The California Tax-Exempt Money Market Fund intends to qualify under the above
requirements so that it can pay California exempt-interest dividends. If the
California Tax-Exempt Money Market Fund does not so qualify, no part of its
respective dividends to shareholders will be exempt from the California state
personal income tax.
Within sixty days after the close of its taxable year, the California Tax-Exempt
Money Market Fund will notify its respective shareholders of the portion of the
dividends paid by the Fund to each shareholder with respect to such taxable year
which is exempt from California state personal income tax. The total amount of
California exempt-interest dividends paid by the California Tax-Exempt Money
Market Fund with respect to any taxable year cannot exceed the excess of the
amount of interest received by the California Tax-Exempt Money Market Fund for
such year on California Exempt Securities over any amounts that, if the
California Tax-Exempt Money Market Fund were treated as an individual, would be
considered expenses related to tax exempt income or amortizable bond premium and
would thus not be deductible under federal income or California state personal
income tax law. The percentage of total dividends paid for any taxable year
which qualifies as California exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund for such year.
38
<PAGE> 724
In cases where shareholders are "substantial users" or "related persons" with
respect to California Exempt Securities held by the California Tax-Exempt Money
Market Fund, such shareholders should consult their tax advisers to determine
whether California exempt-interest dividends paid by the Fund with respect to
such obligations retain California state personal income tax exclusion. In this
connection rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. See Taxes - Federal - Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund above. Interest on indebtedness
incurred by a shareholder to purchase or carry California Tax-Exempt Money
Market Fund shares is not deductible for California state personal income tax
purposes if the California Tax-Exempt Money Market Fund distributes California
exempt-interest dividends during the shareholder's taxable year.
The foregoing is only a summary of some of the important California state
personal income tax considerations generally affecting the California Tax-Exempt
Money Market Fund and its shareholders. No attempt is made to present a detailed
explanation of the California state personal income tax treatment of the
California Tax-Exempt Money Market Fund or its shareholders, and this discussion
is not intended as a substitute for careful planning. Further, it should be
noted that the portion of any California Tax-Exempt Money Market Fund dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary or capital gains
dividends to such purchasers notwithstanding that all or a portion of such
dividends is exempt from California state personal income tax. Accordingly,
potential investors in the California Tax-Exempt Money Market Fund, including,
in particular, corporate investors which may be subject to either California
franchise tax or California corporate income tax, should consult their tax
advisers with respect to the application of such taxes to the receipt of
California Tax-Exempt Money Market Fund dividends and as to their own California
state tax situation, in general.
ADDITIONAL INFORMATION REGARDING TAXES
Depending upon the extent of activities in states and localities in which its
offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, a Fund may
be subject to the tax laws of such states or localities.
Exempt-interest dividends generally will be exempt from state and local taxes as
well. However, except as noted above with respect to California state personal
income tax, in some situations income distributions may be taxable to
shareholders under state or local law as dividend income even though all or a
portion of such distributions may be derived from interest on tax-exempt
obligations or U.S. Government obligations which, if realized directly, would be
exempt from such income taxes. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations which are in
effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by
39
<PAGE> 725
legislative or administrative action.
YIELD INFORMATION
The "yields" and "effective yields" of each Fund are calculated according to
formulas prescribed by the U.S. Securities and Exchange Commission. The
standardized seven-day yield for each Fund's series of shares is computed
separately for each series by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the particular
Fund involved having a balance of one share at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7). The net change in the value of an account in
a Fund includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares, net of all fees, other than nonrecurring account or sales
charges, that are charged to all shareholder accounts in proportion to the
length of the base period and the Fund's average account size. The capital
changes to be excluded from the calculation of the net change in account value
are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The effective annualized yields for each Fund are
computed by compounding a particular Fund's unannualized base period returns
(calculated as above) by adding 1 to the base period returns, raising the sums
to a power equal to 365 divided by 7, and subtracting 1 from the results. In
addition, the Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
may quote a standardized "tax-equivalent yield" for each of its series of shares
which is computed by: (a) dividing the portion of the Fund's yield (as
calculated above) for such series that is exempt from federal, or in the case of
the California Tax-Exempt Money Market Fund both federal and California state,
income tax by one minus a stated federal, or in the case of the California
Tax-Exempt Money Market Fund a combined federal and California state, income tax
rate; (b) with respect to the California Tax-Exempt Money Market Fund dividing
the portion of that Fund's yield (as calculated above) that is exempt from
federal income tax only by one minus a federal income tax rate, and (c) adding
the figure resulting from (a) above (with respect to the Tax-Exempt Money Fund)
or from (a) and (b) above (with respect to the California Tax-Exempt Money
Market Fund) to that portion, if any, of the Fund's yield for such series of
shares that is not exempt from federal income tax. The fees which may be imposed
by institutional investors directly on their customers for cash management
services are not reflected in the Funds' calculations of yields. The current
yields for the Funds may be obtained by calling (800) 227-1545.
Based on the foregoing calculations, for the seven-day period ended February 28,
1998, the yield (and effective yield) for Horizon Shares, Horizon Service
Shares, Pacific Horizon Shares and X Shares (Prime and Treasury Funds only) S
Shares (Prime, Tax-Exempt Money and California Tax-Exempt Money Market Funds)
and Y Shares (Prime and Treasury Fund only) of the Prime Fund, Treasury Fund,
Government Fund, Treasury Only Fund, and Tax-Exempt Money Fund after fee waivers
and/or expense reimbursements were as follows: Prime Fund - Horizon Shares -
5.51% (5.66%); Prime Fund - Horizon Service Shares - 5.26% (5.40%); Prime Fund -
Pacific Horizon Shares - 5.19% (5.33%); Prime Fund - X Shares 4.96% (5.09%);
Prime Fund - Y Shares - 4.51% (4.61%); Prime Fund - S Shares - 4.96% (5.09%);
Treasury Fund - Horizon Shares - 5.40% (5.55%); Treasury Fund - Horizon Service
Shares - 5.15% (5.28%); Treasury Fund - Pacific Horizon Shares - 5.08% (5.21%);
Treasury Fund - X Shares 4.85%(4.97%); Treasury Fund - Y Shares - 4.40%
40
<PAGE> 726
(4.50%); Government Fund - Horizon Shares - 5.45% (5.59%); Government Fund -
Horizon Service Shares - 5.20% (5.33%); Government Fund - Pacific Horizon Shares
- - 5.13% (5.26%); Treasury Only Fund - Horizon Service Shares - 4.91% (5.03%);
Treasury Only Fund - Pacific Horizon Shares - 4.84% (4.96%); Treasury Only Fund
- - Horizon Shares - 5.16% (5.30%); Tax-Exempt Money Fund - Horizon Shares - 3.25%
(3.30%); Tax-Exempt Money Fund - Horizon Service Shares - 3.00% (3.04%);
Tax-Exempt Money Fund - Pacific Horizon Shares - 2.93% (2.97%); and Tax-Exempt
Money Fund - S Shares - 2.70% (2.73%). For the same period, the tax-equivalent
yield for the Tax-Exempt Money Fund was 5.38%, 4.97%, 4.85% and 4.47% for
Horizon Shares, Horizon Service Shares, Pacific Horizon Shares and S Shares,
respectively. The federal income tax rate used in calculating the tax-equivalent
yield was 39.6%. For the seven-day period ended February 28, 1998, the yield
(and effective yield) for Horizon Service Shares, Pacific Horizon Shares, X
Shares and S Shares of the California Tax-Exempt Money Market Fund were as
follows: Horizon Service Shares -- 2.78% (2.82%); Pacific Horizon Shares - 2.71%
(2.75%); X Shares - 2.48% (2.51%); and S Shares - 2.48% (2.51%). For the same
period, the tax-equivalent yield for the California Tax-Exempt Money Market Fund
was 4.26%, 4.15%, 3.80% and 3.80% for Horizon Service Shares, Pacific Horizon
Shares, X Shares and S Shares, respectively. The combined federal and California
income tax rate used in calculating the foregoing tax-equivalent yields was
34.7%. As of February 28, 1998, Horizon Shares of the California Tax-Exempt
Money Market Fund and S Shares of the Treasury Fund were not offered and
accordingly, no yield information is available.
From time to time, the yields of the Funds may be quoted in and compared to
other mutual Funds with similar investment objectives in advertisements,
shareholder reports or other communi-cations to shareholders. The Funds may also
include calculations in such communications that describe hypothetical
investment results. (Such performance examples will be based on an express set
of assumptions and are not indicative of the performance of any Fund.) Such
calculations may from time to time include discussions or illustrations of the
effects of compounding in advertisements. "Compounding" refers to the fact that,
if dividends or other distributions on a Fund investment are reinvested by being
paid in additional Fund shares, any future income of a Fund would increase the
value of the Fund investment more quickly than if dividends or other
distributions had been paid in cash. The Funds may also include discussions or
illustrations of the potential investment goals of a prospective investor
(including but not limited to tax and/or retirement planning), investment
management techniques, policies or investment suitability of a Fund, economic
conditions, legislative developments (including pending legislation), the
effects of inflation and historical performance of various asset classes. From
time to time advertisements or communications to shareholders may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the investment
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund and
may include testimonials as to the investment adviser's capabilities by clients.
Such advertisements or communications may include symbols, headlines or other
41
<PAGE> 727
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Funds is generally available by
calling (800) 346-2087.
In addition to the publications listed in the Funds' Prospectus, yield data as
reported in the following publications may be used in comparing the yields of
the Funds to those of other mutual Funds with similar investment objectives:
Business Week, Investor's Business Daily, Kiplinger, U.S. News, Financial World,
USA Today, Morningstar, Mutual Fund Monitor, and American Banker.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation and is
registered under the Investment Company Act of 1940 as an open-end management
company. At present the Company offers the following share classes of the Funds:
<TABLE>
<CAPTION>
SHARE CLASSES PURPOSE OF FUNDS OFFERING
OFFERED EACH CLASS EACH CLASS
- ------------- ---------------------- --------------------
<S> <C> <C>
- - S Class - S Shares of the - Prime
Prime, Tax-Exempt - Tax-Exempt Money
Money and - California
California Tax-Exempt Money
Tax-Exempt Money Market
Market Funds are
available to
customers who
purchase such shares
through cash
management services
and are offered to
customers of
selected Service
Organizations and
departments of
Bank of America
and its affiliates
who have executed
the appropriate
account
documentation.
- - X Class - X Shares of the - Prime
Prime, Treasury, - Treasury
and California - California
Tax-Exempt Money Tax-Exempt Money
Market Funds are Market
available to
customers who
purchase such shares
through cash
management services
and are offered to
customers of
selected Service
Organizations and
departments of
Bank of America
and its affiliates
who have executed
the
</TABLE>
42
<PAGE> 728
<TABLE>
<S> <C> <C>
appropriate
account
documentation.
- - Y Class - Y Shares of the - Prime
Prime and Treasury - Treasury
Funds are available
only to customers
who purchase such
shares through cash
management services
and are offered
to customers of
selected Service
Organizations and
departments of
Bank of America
and its affiliates
who have executed
the appropriate
account
documentation.
- - Horizon Service Class - Offered to - Prime
institutional - Government
investors or to - Treasury
customers of - Treasury Only
selected Service - Tax-Exempt Money
Organizations - California
Tax-Exempt Money Market
- - Horizon Class - Offered to - Prime
institutional - Government
investors or to - Treasury
customers of - Treasury Only
selected Service - Tax-Exempt Money
Organizations - California
Tax-Exempt Money Market
- - Pacific Horizon Class - May be purchased - Prime
by customers of - Government
Bank of America - Treasury
through qualified - Treasury Only
trust and agency - Tax-Exempt Money
accounts, by - California
customers of Tax-Exempt Money
Service Market
Organizations and
directly by
individual
investors.
</TABLE>
The Company's charter authorizes the Board of Directors to issue up to four
hundred billion full and fractional shares of capital stock, 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 seventy-one
classes of stock - Classes A through W, Common Stock representing interests in
twenty separate investment portfolios. Each share of capital stock has a par
value of $.001. The Board of Directors may similarly classify or reclassify any
class of shares into one or more
43
<PAGE> 729
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 its Prospectuses, the Company's shares will be fully paid and
non-assessable.
Pursuant to such authority, the Board of Directors has authorized the issuance
of the following series of shares representing interests in the Funds: twenty
billion X Shares, twenty billion S Shares, twenty billion Y Shares, twenty
billion Pacific Horizon Shares, twenty billion Horizon Shares and twenty billion
Horizon Service Shares representing interests in the Prime Fund; ten billion X
Shares, ten billion S Shares, ten billion Y Shares, ten billion Pacific Horizon
Shares, ten billion Horizon Shares and ten billion Horizon Service Shares
representing interests in the Treasury Fund; ten billion Pacific Horizon Shares,
ten billion Horizon Shares and ten billion Horizon Service Shares representing
interests in the Government Fund; ten billion Pacific Horizon Shares, ten
billion Horizon Shares and ten billion Horizon Service Shares representing
interests in the Treasury Only Fund; ten billion Pacific Horizon Shares, ten
billion Horizon Shares, ten billion Horizon Service Shares and ten billion S
Shares representing interests in the Tax-Exempt Money Fund; and ten billion
Pacific Horizon Shares, ten billion Horizon Shares, ten billion Horizon Service
Shares, ten billion S Shares and ten billion X Shares representing interests in
the California Tax-Exempt Money Market Fund. The Board of Directors has also
authorized the issuance of additional classes of shares representing interests
in other investment portfolios of the Company, which are described in separate
prospectuses available from the Distributor.
Each X Share, S Share, Y Share, Pacific Horizon Share, Horizon Share and Horizon
Service Share in a Fund has a par value of $.001, and, except as noted below, is
entitled to participate equally in the dividends and distributions declared by
the Board of Directors with respect to such Fund and in the net distributable
assets of such Fund on liquidation. Holders of X Shares of the Prime, Treasury
and California Tax-Exempt Money Market Funds, Y Shares of the Prime and Treasury
Funds and S Shares of the Prime, Treasury, Tax-Exempt Money and California
Tax-Exempt Money Market Funds bear the fees that are paid to the distributor and
service organizations by such Funds under the Company's Distribution and
Services Plan. The fees paid under the Distribution and Services Plan are for
distribution and shareholder services paid to the Distributor and Service
Organizations in connection with S, Y and X Shares of the Prime, Treasury,
Tax-Exempt Money and California Tax-Exempt Money Market (as applicable) Funds,
and are not paid by such Funds' Horizon, Horizon Service or Pacific Horizon
Shares. Holders of a Fund's Pacific Horizon Shares bear the fees that are paid
to Shareholder Organizations by the Fund under the Company's Special Management
Services Plan for Pacific Horizon Shares. Similarly holders of Horizon Service
Shares bear the fees described in the Prospectus for such shares that are paid
to shareholder organizations by a Fund under the Company's Shareholder Services
Plan. The fees paid under the Special Management Services Plan are for services
provided by Shareholder Organizations to holders of the Funds' Pacific Horizon
Shares and are not borne by the Funds' Horizon Shares or Horizon Service Shares
or by X, S and Y Shares of the Prime, Treasury, Tax-Exempt Money and California
Tax-Exempt Money Market (as applicable) Funds. The fees paid under the
Shareholder Services Plan are for services provided by shareholder organizations
to their customers in connection with Horizon Service Shares, and shareholder
organizations do not receive similar fees with respect to the Funds'
44
<PAGE> 730
Horizon Shares or Pacific Horizon Shares or the X Shares, Y Shares or S Shares
of the Prime, Treasury, Tax-Exempt Money and California Tax-Exempt Money Market
(as applicable) Funds. As a result of the different fees borne by the various
series of shares in a Fund, at any given time, absent waivers of any
class-specific fees or expenses, the net yield will be affected by the expenses
borne by a particular share class. For example, the Prime, Treasury and
California Tax-Exempt Money Market Funds' X Shares generally will be
approximately 0.23% lower than the yield on the same Fund's Pacific Horizon
Shares, (.20% with respect to the California Tax-Exempt Money Market Fund),
0.30% lower than the yield on the same Fund's Horizon Service Shares, 0.55%
lower than the yield on the same Fund's Horizon Shares and 0.45% higher than the
yield on the same Fund's S and Y Shares. Standardized yield quotations will be
computed separately for each series of Shares.
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 law or when class voting is
permitted by the Board of Directors. It is contemplated that all shareholders of
a Fund will vote together as a single class on matters relating to the Fund's
investment advisory agreement and on any change in its Fundamental investment
limitations. Only holders of Pacific Horizon Shares will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Funds' Special
Management Services Plan. Only holders of Horizon Service Shares will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Funds' Shareholder Service Plan. Only holders of particular S, Y and X
Shares, if affected by changes to such plan, will be entitled to vote on matters
submitted to a vote of shareholders pertaining to a Fund's Distribution and
Services Plan relating to the particular series. Further, shareholders of all of
the Funds, as well as those of any other investment portfolio now or hereafter
offered by the Company, will vote together in the aggregate and not separately
on a Fund-by-Fund basis, except as otherwise required by law or when permitted
by the Board of Directors. Rule 18f-2 under the 1940 Act provides that any
matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by a majority of the
outstanding shares of each Fund affected by the matter. A Fund is affected by a
matter unless it is clear that the interests of each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under the Rule, the approval of an investment advisory agreement or any
change in a Fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding shares of
such Fund. However, the Rule also provides that the ratification of independent
public accountants, the approval of principal underwriting contracts and the
election of directors may be effectively acted upon by shareholders of the
Company voting in the aggregate without regard to particular Funds. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant at its discretion. When issued for payment, shares will be fully paid
and non-assessable. Certificates for shares will not be issued. For information
concerning possible restrictions upon the transferability of the Company's
shares and redemption provisions with respect to such shares, see "Shareholder
Information" in the Prospectus and "Supplementary
45
<PAGE> 731
Purchase and Redemption Information" in the SAI.
Notwithstanding any provision of Maryland law requiring a greater vote of the
Company's common stock (or of the shares of a Fund voting separately as a class)
in connection with any corporate action, unless otherwise provided by law or by
the Company's Charter, the Company may take or authorize such action upon the
favorable vote of the holders of more than 30% of the outstanding common stock
of the Company voting without regard to class.
The Company does not presently intend to hold annual meetings of shareholders
for the election of directors and other business unless and until such time as
less than a majority of the directors holding office have been elected by the
shareholders of the Company, at which 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 meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested by the holders of record of 10% or more of the
Company's outstanding shares of common stock. To the extent required by law and
the Company's undertaking with the Securities and Exchange Commission, the
Company will assist in shareholder communications in such matters. Shares have
cumulative voting rights to the extent that may be required by applicable law.
REPORTS
Each Fund will send its shareholders unaudited semi-annual reports including a
description of the Fund's investments, and annual financial statements together
with a report of independent accountants.
MISCELLANEOUS
As used in the Prospectus and this SAI, a "vote of a majority" of the
outstanding shares of a Fund or a particular series means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change in
a Fundamental investment policy, the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares of the Fund or of the series, or (b) 67% of
the shares of the Fund or of the series present at a meeting at which more than
50% of the outstanding shares of the Fund or series are represented in person or
by proxy.
PRINCIPAL HOLDERS OF SECURITIES
As of June 5, 1998, the officers and directors of the Company collectively owned
less than 1% of the outstanding shares of any class of the Funds.
As of June 5, 1998, the following entities were known by the Funds to own 5% or
more of the outstanding shares of any class of the Funds:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF OUTSTANDING
SHARES HELD SHARES OF CLASS
-------------------- ---------------
<S> <C> <C>
PRIME FUND -- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 2,112,267,667.780 80.6%
</TABLE>
46
<PAGE> 732
<TABLE>
<S> <C> <C>
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 259,888,898.200 9.9%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
PRIME FUND -- HORIZON SHARES
Bank of America NT&SA 815,409,324.970 31.3%
Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
William Barron Hilton 311,526,000.000 11.9%
Charitable Remainder Trust
9336 Civic Center Drive
Beverly Hills, CA 90210
PRIME FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 934,160,388.770 25.0%
Financial Management and Trust Services
P.O. Box 513577 -- Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 310,996,075.190 8.3%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
Security Pacific Cash Management 708,728,100.000 19.0%
c/o Bank of America
1850 Gateway Blvd.
Concord, CA 94520
PRIME FUND -- X SHARES
BA Investment Services, Inc. 528,249,277.05 50.9%
FBO Customers
Unit 17852
</TABLE>
47
<PAGE> 733
<TABLE>
<S> <C> <C>
P.O. Box 7042
San Francisco, CA 94120
PRIME FUND -- Y SHARES
BA Arizona 8,049,762.200 5.5%
2044 Franklin Street
Oakland, CA 94612
Bank of America-California 7,500,000.000 5.1%
2044 Franklin Street
Oakland, CA 94612
Karsten Manufacturing Corporation 8,149,580.350 5.6%
2201 West Desert Cove
Phoenix, AZ 85029
PRIME FUND -- S SHARES
BA Investment Services, Inc. 803,285,361.970 99.2%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY FUND -- PACIFIC HORIZON SHARES
HARE & Co., Bank of New York 64,553,129.890 20.9%
and Short Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 192,584,335.900 62.4%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY FUND -- HORIZON SHARES
Bank of America NT&SA 227,462,997.510 32.4%
Private Banking
Attn: Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
HARE & Co 164,326,526.330 23.4%
c/o Bank of New York
</TABLE>
48
<PAGE> 734
<TABLE>
<S> <C> <C>
One Wall Street, 5th Floor
New York, NY 10286
KPMG Peat Marwick LLP 51,000,000.000 7.3%
3 Chestnut Ridge Road
Montvale, NJ 07645
Los Angeles Department of Airports 42,557,369.150 6.1%
515 South Flower Street
Los Angeles, CA 90071
Century Theatres Inc. 47,096,226.750 6.7%
150 Pelican Way
San Rafael, CA 94901
TREASURY FUND -- HORIZON SERVICE SHARES
Security Pacific Cash Management 199,484,100.000 11.3%
c/o Bank of America
1850 Gateway Blvd.
Concord, CA 94520
Bank of America FM&TS 368,064,376.550 20.8%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TREASURY FUND -- X SHARES
BA Investment Services, Inc. 12,694,320.760 5.3%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
Bank of America California 32,000,000.000 13.5%
2044 Franklin Street
Oakland, CA 94612
TREASURY FUND -- Y SHARES
Bank of America California 5,000,000.000 6.6%
2044 Franklin Street
Oakland, CA 94612
BA Arizona 7,700,404.480 10.2%
2044 Franklin Street
</TABLE>
49
<PAGE> 735
<TABLE>
<S> <C> <C>
Oakland, CA 94612
BA Nevada 6,071,336.580 8.0%
2044 Franklin Street
Oakland, CA 94612
CCC TA Welfare Benefit Trust 5,736,144.850 7.6%
2950 E. Rochelle Ave
Las Vegas, NV 89121
Collectron AZ 4,051,866.650 5.4%
P.O. Box 1931
Nogales, AZ 85628
Sunclipse Inc. 4,191,584.710 5.6%
6600 Valley View Street
Buena Park, CA 90620
TREASURY ONLY FUND -- PACIFIC HORIZON SHARES
HARE & Co., Bank of New York and Short 22,854,225.010 12.1%
Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 101,186,129.680 53.4%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 59,850,049.120 31.6%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TREASURY ONLY FUND -- HORIZON SHARES
Bank of America Illinois 4,334,149.550 13.6%
231 S. LaSalle Street
Chicago, IL 60697
Bank of America NT&SA 22,854,051.990 71.5%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
</TABLE>
50
<PAGE> 736
<TABLE>
<S> <C> <C>
Los Angeles, CA 90051
City and County of San Francisco 4,100,243.250 12.8%
Mayors Office of Community
25 Van Ness Avenue, Suite 700
San Francisco, CA 94102
TREASURY ONLY FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 52,896,546.290 24.3%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 17,371,255.110 8.0%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
The Emerson U. and Erika J. Glazer Trust 12,364,024.280 5.7%
3 Del Amo Fashion Center
Torrance, CA 90503
GOVERNMENT -- PACIFIC HORIZON SHARES
Wall Data Inc. 14,657,467.680 9.2%
11332 NE 122nd Way
Kirkland, WA 98034
HARE & Co., Bank of New York and Short 8,707,595.120 5.5%
Term Investment Funds
One Wall Street
New York, NY 10286
BA Investment Services, Inc. 93,865,900.070 59.1%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 24,813,941.710 15.6%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
GOVERNMENT FUND -- HORIZON SHARES
</TABLE>
51
<PAGE> 737
<TABLE>
<S> <C> <C>
Skinner Corporation 11,294,088.600 5.1%
1326 Fifth Avenue, Suite 711
Seattle, WA 98101
New York New York Hotel LLC 12,847,712.880 5.8%
3790 Las Vegas Boulevard South
Las Vegas, NV 89109
Sletton Construction of Nevada Inc. 12,607,585.140 5.7%
P.O. Box 93776
Las Vegas, NV 89193
GOVERNMENT FUND -- HORIZON SERVICE SHARES
Bank of America NT&SA 35,965,540.250 80.6%
Trust, Financial Management & Trust Services
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
Security Pacific Cash Management 6,619,300.000 14.8%
c/o Bank of America
1850 Gateway Blvd
Concord, CA 94520
TAX EXEMPT MONEY FUND -- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 124,277,308.400 94.6%
FBO Customers Unit 17852
P.O. Box 7042
San Francisco, CA 94120
TAX EXEMPT MONEY FUND -- HORIZON SHARES
Bank of America NT&SA 308,877,964.040 94.5%
The Private Bank
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TAX EXEMPT MONEY FUND -- HORIZON SERVICE SHARES
BA Investment Services, Inc. 29,904,479.330 11.5%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
</TABLE>
52
<PAGE> 738
<TABLE>
<S> <C> <C>
Bank of America 117,932,621.380 65.1%
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
TAX EXEMPT MONEY FUND -- S SHARES
BA Investment Services, Inc. 35,815,756.430 100.0%
FBO Customers
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- PACIFIC HORIZON SHARES
BA Investment Services, Inc. 300,327,896.900 54.2%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
BancAmerica Robertson Stephens 232,178,555.240 41.9%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- HORIZON SERVICE SHARES
Bank of America NT&SA 326,393,595.930 55.0%
Attn: Common Trust Funds Unit
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BA Investment Services, Inc. 175,398,911.420 29.6%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
-- X SHARES
BA Investment Services, Inc. 25,836,568.320 100.0%
FBO Customers
Unit 17852
P.O. Box 7042
</TABLE>
53
<PAGE> 739
<TABLE>
<S> <C> <C>
San Francisco, CA 94120
CALIFORNIA TAX EXEMPT MONEY MARKET FUND
-- S SHARES
BA Investment Services, Inc. 227,376,082.980 100.0%
FBO Customers
Unit 17852
P.O. Box 7042
San Francisco, CA 94120
INTERMEDIATE BOND FUND -- A SHARES
PACO -- Attn: Mutual Funds 544,191.036 12.1%
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 2,347,781.402 52.2%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
PACO 475,408.464 10.6%
P.O. Box 513577
Los Angeles, CA 90051
INTERMEDIATE BOND FUND -- K SHARES
Corelink Financial, Inc. 46,135.414 100.0%
P.O. Box 4054
Concord, CA 94524
INTERMEDIATE BOND FUND -- SRF SHARES
Seafirst Bank 3,080,718.572 100.0%
FBO Retirement Services
P.O. Box 84248
Seattle, WA 98124
CORPORATE BOND FUND -- A SHARES
PACO 206,707.063 8.1%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 477,339.651 18.8%
The Private Bank
Attn: Common Trust Funds Unit 38329
</TABLE>
54
<PAGE> 740
<TABLE>
<S> <C> <C>
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
FLEXIBLE INCOME (FORMERLY CORPORATE BOND) FUND -- K SHARES
Corelink Financial, Inc. 23,543.085 100.0%
P.O. Box 4054
Concord, CA 94524
U.S. GOVERNMENT SECURITIES FUND -- K SHARES
Corelink Financial, Inc. 116,153.211 100.0%
P.O. Box 4054
Concord, CA 94524
SHORT-TERM GOVERNMENT FUND -- A SHARES
Bank of America NT&SA 3,156,142.163 83.8%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
CALIFORNIA MUNICIPAL (FORMERLY, CALIFORNIA
TAX-EXEMPT) BOND FUND -- A SHARES
Bank of America NT&SA 3,044,994.685 9.6%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
CAPITAL INCOME FUND -- K SHARES
Corelink Financial, Inc. 150,245.252 88.5%
P.O. Box 4054
Concord, CA 94524
ASSET ALLOCATION FUND -- A SHARES
Corelink Financial, Inc. 260,091.341 8.1%
P.O. Box 4054
Concord, CA 94524
Bank of America NT&SA 272,916.571 8.5%
FBO PACO
Attn: Mutual Funds Unit
P.O. Box 3577
Terminal Annex
</TABLE>
55
<PAGE> 741
<TABLE>
<S> <C> <C>
Los Angeles, CA 90051
Vanguard Fiduciary Trust Company 184,535.325 5.8%
Kirkland and Ellis Defined
Contribution Retirement Plan
P.O. Box 2600
Valley Forge, PA 19482
ASSET ALLOCATION FUND -- K SHARES
Corelink Financial, Inc. 63,480.863 100.0%
P.O. Box 4054
Concord, CA 94524
ASSET ALLOCATION -- SRF SHARES
Seafirst Bank 11,668,940.795 100.0%
FBO Retirement Services
P.O. Box 84248
Seattle, WA 98124
AGGRESSIVE GROWTH FUND - A SHARES
PACO - Attn: Mutual Funds 491,251.531 5.3%
P.O. Box 513577
Los Angeles, CA 90051
AGGRESSIVE GROWTH FUND -- K SHARES
Corelink Financial Inc. 161,757.766 100.0%
P.O. Box 4054
Concord, CA 94524
BLUE CHIP FUND -- A SHARES
Bank of America NT&SA 901,809.695 7.6%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 513577
Terminal Annex
Los Angeles, CA 90051
BLUE CHIP FUND -- K SHARES
Corelink Financial Inc. 250,051.579 99.5%
P.O. Box 4054
Concord, CA 94524
BLUE CHIP FUND -- SRF SHARES
Seafirst Bank 13,956,166.970 100.0%
FBO Retirement Services
P.O. Box 84248
</TABLE>
56
<PAGE> 742
<TABLE>
<S> <C> <C>
Seattle, WA 98124
INTERNATIONAL EQUITY FUND -- A SHARES
PACO 789,867.260 18.9%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
Bank of America NT&SA 893,038.660 21.3%
The Private Bank
Attn: Common Trust Funds Unit 38329
P.O. Box 3577
Terminal Annex
Los Angeles, CA 90051
PACO 1,500,976.246 35.9%
Attn: Mutual Funds
P.O. Box 513577
Los Angeles, CA 90051
INTERNATIONAL EQUITY FUND -- K SHARES
Corelink Financial, Inc. 62,528.613 100.0%
P.O. Box 4054
Concord, CA 94524
</TABLE>
At June 5, 1998, no other person was known by the Company to hold of record or
beneficially more than 5% of the outstanding shares of any investment portfolio
of the Company.
The Prospectuses and this SAI omit certain information contained in the
Company's registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the SEC by
paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended February 28, 1998
accompany this SAI. The financial statements and notes thereto in each Annual
Report are incorporated into this
57
<PAGE> 743
SAI. The financial statements and notes in each Annual Report have been audited
by Price Waterhouse LLP, whose report thereon also appears in each Annual Report
and is also incorporated herein by reference. No other parts of the Annual
Reports are incorporated by reference herein. Such financial statements have
been incorporated herein in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
58
<PAGE> 744
APPENDIX A
COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The following summarizes the rating categories used by S&P for
commercial paper:
"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment is strong. Within
this category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established
A-1
<PAGE> 745
industries; high rates of return on Funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of D&P for investment grade commercial
paper and short-term debt are "D-1," "D-2" and "D-3." D&P employs three
designations, "D-1+," "D-1" and "D-1-," within the highest rating category. The
following summarizes the rating categories used by D&P for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of Funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good Fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good Fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company Fundamentals are sound. Although ongoing Funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may
A-2
<PAGE> 746
be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects
A-3
<PAGE> 747
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other
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obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
Fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes
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possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by D&P for
corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
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"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the
highest potential for recovery on these securities, and "D" represents the
lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
MUNICIPAL NOTE RATINGS
A S&P rating reflects the liquidity concerns and market access risks
unique to notes due in three years or less. The following summarizes the ratings
used by Standard & Poor's Ratings Group for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over
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the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and D&P use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, COMMERCIAL PAPER AND SHORT-TERM
NOTES. Certificates of deposit are negotiable certificates issued against Funds
deposited in a commercial bank for a definite period of time and earning a
specific return. Bankers' acceptances are negotiable deposits or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank (meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument at maturity).
Certificates of deposit and bankers' acceptances acquired by a Fund will be
dollar-denominated obligations of domestic or foreign banks having total assets
at the time of purchase (including assets of both domestic and foreign branches)
in excess of $2.5 billion. Commercial paper consists of unsecured promissory
notes issued by corporations. Short-term notes acquired by a Fund may be issued
by commercial or investment banking firms, financing companies or industrial or
manufacturing concerns. Commercial paper and short-term notes, except for
variable and floating rate instruments, will normally have maturities of nine
months or less and fixed rates of return, although such instruments may have
maturities of up to thirteen months. Commercial paper and short-term notes will
consist of issues which, with respect to the Prime, Treasury and Tax-Exempt
Money Funds are "First Tier Securities" as defined by the SEC and, with respect
to the California Tax-Exempt Money Market Fund are "Eligible Securities" as
defined by the SEC. During temporary defensive periods or if in the investment
adviser's opinion suitable First Tier Securities are not available for
investment, the Tax-Exempt Money Fund may also acquire "Eligible Securities" as
defined by the SEC. First Tier Securities consist of instruments that are either
rated at the time of purchase in the top rating category by one or more
unaffiliated nationally recognized statistical rating organizations ("NRSROs")
or issued by issuers with such ratings. Eligible Securities consist of
instruments that are either rated at the time of purchase in the top two rating
categories by one or more unaffiliated NRSROs or issued by issuers with such
ratings. See the Appendix to this statement of additional information for a
description of the applicable NRSRO ratings. Unrated instruments (including
instruments with long-term but no short-term ratings) purchased by a Fund will
be of comparable quality as determined by Bank of America pursuant to guidelines
approved by the Board of Directors and Bank of America.
The Prime Fund may also invest in commercial paper issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the Federal securities laws and generally is
sold to institutional investors such as the Prime Fund that agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Prime Fund through
or with the assistance of the issuer or investment dealers that make a market in
Section 4(2) paper. Section 4(2) paper will not be subject to the Fund's 10%
limitation on illiquid securities set forth below where the Board of Directors
or Bank of America (pursuant to guidelines adopted by the Board) determines that
a liquid trading market exists.
The Prime Fund may purchase bank obligations such as certificates of deposit and
bankers' acceptances issued or supported by the credit of domestic banks,
foreign branches of domestic
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banks ("Euro CDs") or domestic branches of foreign banks ("Yankee CDs" and
"Yankee BAs") or foreign branches of foreign banks ("Yankee Euros"). Holding
Euro CDs, Yankee CDs, Yankee BAs, Yankee Euros, commercial paper or other
obligations of foreign issuers may subject a Fund to investment risks that are
different in some respects from those incurred by a Fund which invests only in
obligations of domestic issuers. Such risks include future political and
economic developments, the possible imposition of withholding taxes by the
particular country in which the issuer is located on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on these securities. In addition, foreign branches of domestic
banks, domestic branches of foreign banks and foreign branches of foreign banks
are not necessarily subject to the same regulatory requirements that apply to
domestic branches of domestic banks (such as reserve requirements, loan
limitations, examinations, accounting, auditing and recordkeeping requirements,
and public availability of information) and the Fund may experience difficulties
in obtaining or enforcing a judgment against the issuing bank.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry is dependent largely upon the availability and cost of Funds
for the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are, among
other things, required to maintain specified levels of reserves, limited in the
amount which they can loan to a single borrower, and subject to other
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to the Euro CDs, Yankee CDs, Yankee BAs,
Yankee Euros and other foreign bank obligations that a Fund may acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S. Government and its agencies
and instrumentalities include Treasury bills, certificates of indebtedness,
notes and bonds, Treasury strips, and issues of such entities as the Federal
Home Loan Banks, Federal Land Banks, Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, Resolution Funding Corporation, Tennessee
Valley Authority and Federal National Mortgage Association. The Prime, Treasury,
Tax-Exempt Money and California Tax-Exempt Money Market Funds will not acquire
obligations issued by the International Bank for Reconstruction and Development,
the Asian Development Bank or the Inter-American Development Bank; however, the
Government and Treasury Only Funds may acquire such obligations in accordance
with their investment policies.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Small
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<PAGE> 754
Business Administration, are backed by the full faith and credit of the United
States. Others are backed by the right of the issuer to borrow from the U.S.
Treasury (such as obligations of the Federal Home Loan Bank), by the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as obligations of the Federal National Mortgage Association),
or only by the credit of the agency or instrumentality issuing the obligation
(such as the Student Loan Marketing Association). Securities instrumentalities
have historically involved little risk of loss of principal if held to maturity.
However, no assurance can be given that the U.S. Government would provide
financial support to any agency or instrumentality if it is not obligated to do
so by law.
Certain securities issued or guaranteed by all governmental agencies may be
prepaid by the issuer without penalty. Thus, when prevailing interest rates
decline, the value of these securities is not likely to rise on a comparable
basis with other debt securities that are not so prepayable. The proceeds of
prepayments and scheduled payments of principal of these securities will be
reinvested by a Fund at then-prevailing interest rates, which may be lower than
the rate of interest on the securities on which these payments were received.
The Government Fund may purchase certain agency securities (such as guaranteed
notes of the Federal Aviation Administrations, Department of Defense, Bureau of
Indian Affairs and Private Export Funding Corporation) which often provide
higher yields than are available from the more common types of government-backed
investments. However, such specialized investments may only be available from a
few sources, in limited amounts, or only in very large denominations; they may
also require specialized capability in portfolio servicing and in legal matters
related to government guarantees. While frequently offering attractive yields,
the limited-activity markets of many of these securities means that if the
Government Fund were required to liquidate any of them it might not be able to
do so advantageously; accordingly, the Government Fund intends normally to hold
such securities to maturity or pursuant to repurchase agreements, and would
limit its investment in such securities (as well as repurchase agreements
maturing in more than seven days) to not more than 10% of the Fund's net assets.
Government National Mortgage Association ("GNMA") certificates are U.S.
Government agency mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. GNMA
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. GNMA certificates are called "pass-through" securities because both
interest and principal payments (including prepayments) are passed through to
the holder of the certificate. In addition to GNMA certificates, mortgage-backed
securities issued by the Federal National Mortgage Association ("FNMA") and by
the Federal Home Loan Mortgage Corporation ("FHLMC") may also be acquired.
Securities issued and guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the United States. If either fixed or
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\
variable rate pass-through securities issued by the U.S. Government or its
agencies or instrumentalities are developed in the future, the Prime,
Government, Tax-Exempt Money and California Tax-Exempt Money Market Funds
reserve the right to invest in them, after making appropriate disclosure to
investors. Certain securities issued by all governmental agencies may be
prepaid. Prepayment of mortgages underlying most mortgage-backed securities may
reduce their current yield and total return. During periods of declining
interest rates, such prepayments can be expected to accelerate and the Funds
would be required to reinvest the proceeds at the lower interest rates then
available.
"STRIPPED" SECURITIES. Each Fund may invest in "stripped" securities, which are
U.S. Treasury bonds and notes the unmatured interest coupons of which have been
separated from the underlying principal obligation. Stripped securities are zero
coupon obligations that are normally issued at a discount to their "face value",
and may exhibit greater price volatility than ordinary debt securities because
of the manner in which their principal and interest are returned to investors.
The Treasury and Treasury Only Funds may only invest in stripped securities
issued by the U.S. Treasury and recorded in the Federal Reserve book-entry
record-keeping system. The Government Fund may invest no more than 35% of its
assets in stripped securities that have been stripped by their holder, typically
ac custodian bank or investment brokerage firm. A number of securities firms and
banks have stripped the interest coupons and resold them in custodian receipt
programs with different names such as Treasury Income Growth Receipts ("TIGRs")
and Certificates of Accrual on Treasuries ("CATS"). The Government Fund intends
to rely on the opinions of counsel to the sellers of these certificates or other
evidences of ownership of U.S. Treasury obligations that, for Federal tax and
securities purposes, purchasers of such certificates most likely will be deemed
the beneficial holders of the underlying U.S. Government obligations.
Privately-issued stripped securities such as TIGRs and CATS are not themselves
guaranteed by the U.S. Government, but the future payment of principal or
interest on U.S. Treasury obligations which they represent is to guaranteed.
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by a Fund may
include variable and floating rate instruments, which may have a stated maturity
in excess of a Fund's maturity limitations but which will, except for certain
U.S. Government obligations, permit a Fund to demand payment of the principal of
the instrument at least once every thirteen months upon not more than thirty
days' notice. Variable and floating rate instruments purchased by the Government
Fund will be U.S. Government agency securities with stated maturities of
typically up to 10 years, although stated maturities of up to 30 years are
possible. Variable and floating rate instruments may include variable amount
master demand notes that permit the indebtedness thereunder to vary in addition
to providing for periodic adjustments in the interest rate. There may be no
active secondary market with respect to a particular variable or floating rate
instrument. Nevertheless, the periodic readjustments of their interest rates
tend to assure that their value to a Fund will approximate their par value.
Illiquid variable and floating rate instruments (instruments which are not
payable upon seven days notice and do not have an active trading market) that
are acquired by the Funds are subject to a Fund's percentage limitations
regarding securities that are illiquid or not readily marketable. The Fund's
investment adviser will continuously monitor the creditworthiness of issuers of
variable and floating rate instruments in which the Funds invest, and their
ability to repay principal and interest.
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Variable and floating rate instruments purchased by the Prime, Treasury,
Government and Treasury Only Funds may include participation certificates issued
by trusts or financial institutions in variable and floating rate obligations
owned by such issuers or affiliated organizations. A participation certificate
gives a Fund a specified undivided interest (up to 100%) in the underlying
obligations and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice. If the credit of the obligor is of minimal
credit risk, no credit support from a bank or other financial institution will
be necessary. In other circumstances, the participation certificate will be
backed by an irrevocable letter of credit or guarantee of a bank,, or will be
insured by an insurer, that the Funds' investment adviser has determined meets
the quality standards for the Fund involved. If an interest is backed by an
irrevocable letter of credit or guarantee of a bank or is insured as described
above, a Fund will usually have the right to sell the interest back to the
institution or draw on the letter of credit or insurance policy on demand after
a specified notice period, for all or any part of the principal amount of the
interest plus accrued interest. Although a participation interest may be sold by
a Fund, under normal circumstances they will be held until maturity.
The Prime, Treasury, Government and Treasury Only Funds may also invest in
obligations which provide for a variable or floating interest rate which is
determined through a periodic "auction process." From time to time, holders of
the obligations have the right to tender any such obligations to a remarketing
agent which then remarkets the obligations which have been tendered and thereby
determines a new interest rate for the following periods.
Variable and floating rate instruments are frequently not rated by credit rating
agencies; however, unrated variable and floating rate instruments purchased by a
Fund will be determined by the investment adviser under guidelines established
by the Company's Board of Directors to be of comparable quality at the time of
purchase to rated instruments eligible for purchase by such Fund. In making such
determinations, the investment adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. There may not be an active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund. The absence of such an active secondary market
could make it difficult for a Fund to dispose of the variable or floating rate
instrument involved. In the event the issuer of the instrument defaulted on its
payment obligations, the Fund involved could, for this or other reasons, suffer
a loss to the extent of the default. Variable and floating rate instruments may
be secured by bank letters of credit and may have maturities of more than
thirteen months. In determining a Fund's average weighted maturity and whether a
variable or floating rate instrument has a remaining maturity of thirteen months
or less, each variable rate instrument having a demand feature that entitles the
Fund to receive the principal amount thereof at any time, or at specified
intervals not exceeding thirteen months, in each case on not more than thirty
days' notice, shall be deemed by the Company to have a maturity equal to the
longer of the period remaining until its next interest rate adjustment or the
period remaining until the principal amount can be recovered through demand;
each variable rate instrument not having such a demand feature but having a
stated maturity of thirteen
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months or less or issued or guaranteed by the U.S. Government or its agencies
will be deemed to have a maturity equal to the period remaining until the next
interest rate adjustment; each floating rate instrument having a demand feature
that entitles the Fund to receive the principal amount thereof at any time, or
at specified intervals not exceeding thirteen months, in each case on not more
than thirty days' notice, shall be deemed to have a maturity equal to the period
of time remaining until the principal amount owed can be recovered through
demand. Variable and floating rate instruments which are not payable upon seven
days' notice and which do not have an active trading market are considered
illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Credit Rating Co. ("D&P"), Fitch IBCA ("Fitch IBCA") and Thomson
Bankwatch, Inc. ("Thomson") represent their opinions as to the quality of debt
securities. However, ratings are general and are not absolute standards of
quality, and debt securities with the same maturity, interest rate and rating
may have different yields while debt securities of the same maturity and
interest rate with different ratings may have the same yield.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code and laws which may be enacted by
federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or, in the case of governmental entities, upon the ability of such
entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its debt
securities may be materially adversely affected by litigation or other
conditions.
MUNICIPAL SECURITIES. Substantially all of the assets of the Tax-Exempt Money
Fund and primarily all of the assets of the California Tax-Exempt Money Market
Fund are invested in "Municipal Securities" (securities issued by or on behalf
of states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, authorities, agencies and
instrumentalities, the interest on which is exempt from regular Federal income
tax in the opinion of bond counselor to the issuer). The Tax-Exempt Money Fund
may concentrate more than 25% of its assets in California Municipal Securities
and the California Tax-Exempt Money Market Fund intends that under normal market
conditions at least 80% of its net assets will be invested in California
Municipal Securities. Although the Prime Fund is also authorized to invest in
Municipal Securities under certain circumstances, no more than 5% of the value
of such Fund's net assets will be so invested at any one time. (The purchase of
Municipal Securities by the Prime Fund may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield on such
securities, on a pre-tax basis, is comparable to that of other short-term money
market instruments that the Fund may purchase. Dividends paid by the Prime Fund
that are derived from interest on Municipal Securities would be taxable to the
Fund's shareholders for federal income tax purposes.)
The two principal classifications of Municipal Securities which may be held by
the Tax-Exempt Money and the California Tax-Exempt Money Market Funds (the
"Tax-Exempt Funds") are
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"general obligation" securities and "revenue securities". General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility being
financed. Private activity bonds held by the Tax-Exempt Funds are in most cases
revenue securities, which are not payable from the unrestricted revenues of the
issuers. Consequently, the credit quality of such private activity bonds is
usually directly related to the credit ratings of the users of the facility
involved. The Tax-Exempt Funds may also acquire "moral obligation" securities,
which are normally issued by special purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve Fund, the restoration of which
is a moral commitment but not a legal obligation of the state or municipality
which created the issuer.
Municipal Securities include debt obligations issued by governmental entities to
obtain Funds for various public purposes, including the construction of a wide
range of public facilities, the reFunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition certain types of private activity bonds
are issued by or on behalf of public authorities to finance various
privately-operated facilities. Municipal Securities also include short-term tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
other forms of short-term loan obligations. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax Funds, the proceeds of
bond placements or other revenues. The Tax-Exempt Funds may also purchase
tax-exempt commercial paper.
Securities acquired by the Tax-Exempt Funds may be in the form of custodial
receipts evidencing rights to receive a specific future interest payment,
principal payment or both on certain Municipal Securities. Such obligations are
held in custody by a bank on behalf of holders of the receipts. These custodial
receipts are known by various names, including "Municipal Receipts," "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS") and "Municipal
Zero-Coupon Receipts." A Tax-Exempt Fund may also purchase from time to time
participation interests in debt securities held by trusts or financial
institutions. A participation interest gives a Fund involved an undivided
interest (up to 100%) in the underlying obligation. Participation interests
purchased by a Fund may have fixed, floating or variable rates of interest, and
will have remaining maturities of thirteen months or less as determined in
accordance with the regulations of the Securities and Exchange Commission
(although the securities held by the issuer may have longer maturities). If a
participation interest is unrated, the investment adviser will have determined
that the interest is of comparable quality to those instruments in which the
Tax-Exempt Fund involved will have the right to demand payment, on not more than
30 days' notice for all or any part of such participation interest, plus accrued
interest. As to these instruments, the Tax-Exempt Funds intend to exercise their
right to demand payment as needed to provide liquidity, to maintain or improve
the quality of their respective investment portfolios or upon a default (if
permitted under the terms of the instrument). Although a participation interest
may be sold by a Fund under normal circumstances they will be held until
maturity.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon
B-7
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from regular federal income tax (and, with respect to California Municipal
Securities, California state personal income tax) are rendered by bond counsel
to the respective issuers at the time of issuance. Neither the Tax-Exempt Funds
nor their investment adviser will review the proceedings relating to the
issuance of Municipal Securities or the basis for such opinions.
There are variations in the quality of Municipal Securities between
classifications (such as general obligation, revenue and moral obligation
issues) and within a particular classification, and the yields on Municipal
Securities depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. It should also be noted, with respect to
all Municipal Securities issued after August 15, 1986 (August 31, 1986 in the
case of certain bonds), that the issuer must comply with certain rules formerly
applicable only to "industrial development bonds" which, if the issuer fails to
observe them, could cause interest on the Municipal Securities to become taxable
retroactive to the date of issue.
The payment of principal and interest on most Municipal Securities purchased by
the Funds will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities and authorities and each multi-state agency of which
a state is a member is a separate "issuer" as that term is used in this
Statement of Additional Information and the Prospectuses. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
From time to time proposals have been introduced before Congress for the purpose
of restricting or eliminating the federal income tax exemption for interest on
Municipal Securities. For example, pursuant to federal tax legislation passed in
1986, interest on certain private activity bonds must be included in an
investor's federal alternative minimum taxable income, and corporate investors
must include all tax-exempt interest in their federal alternative minimum
taxable income. (See the relevant Funds' Prospectuses under "Dividends,
Distributions and Taxes.") The Funds cannot predict what legislation, if any,
may be proposed in Congress or in the California legislature in the future as
regards the federal and California state personal income tax status of interest
on Municipal Securities in general, or California Municipal Securities in
particular, or which proposals, if any, might be enacted. Such proposals, if
enacted, might materially adversely affect the availability of Municipal
Securities (and California Municipal Securities) for investment by the
Tax-Exempt Money Fund and the California Tax-Exempt Money Market Fund and the
liquidity and value of such Funds' portfolios. In such an event the Board of
Directors would reevaluate the Funds' investment objectives and policies and
consider changes in their structure or possible dissolution.
REPURCHASE AGREEMENTS. Each Fund, except the Treasury Only Fund, may enter into
repurchase agreements with respect to their portfolio securities as indicated in
their Prospectuses. Pursuant to such agreements, a Fund purchases securities
from financial institutions such as banks and broker-dealers which are deemed to
be creditworthy by the investment adviser under guidelines approved by the Board
of Directors, subject to the seller's agreement to repurchase and the Fund's
agreement to resell such securities at a specified date and price. No Fund will
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<PAGE> 760
enter into repurchase agreements with Bank of America or Bank of America's
affiliates, nor will any Fund give preference to repurchase agreements with
distribution organizations, shareholder organizations or service organizations.
The repurchase price generally equals the price paid by the Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the underlying portfolio security). Securities subject to
repurchase agreements will be held by the Funds' custodian or a sub-custodian or
in the Federal Reserve/Treasury book-entry system, and a Fund will make payment
for such securities only upon receipt of evidence of physical delivery of the
securities or of such book entry. The seller under a repurchase agreement will
be required to deliver instruments the value of which is 102% of the repurchase
price (excluding accrued interest), provided that notwithstanding such
requirement, the adviser shall require that the value of the collateral, after
transaction costs (including loss of interest reasonably expected to be incurred
on a default), shall be equal to or greater than the resale price (including
accrued resale premium) provided in the agreement. The accrued resale premium
shall be the amount specified in the repurchase agreement or the daily
amortization of the difference between the purchase price and the resale price
specified in the repurchase agreement. If the seller defaulted on its repurchase
obligation, the Fund holding the repurchase agreement would suffer a loss to the
extent that the proceeds from a sale of the underlying securities were less than
the repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the particular Fund's rights with respect to such
securities to be delayed or limited. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to banks, and with respect to the Prime and
Treasury Funds, other financial institutions, and agree to repurchase them at an
agreed upon date and price. Whenever a Fund enters into a reverse repurchase
agreement, it will place in a segregated account maintained with its custodian
cash, U.S. Government securities and other liquid high-grade debt securities
having a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account for maintenance of such equivalent value.
A Fund would only enter into reverse repurchase agreements to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions.
Reverse repurchase agreements involve the risk that the market value of the
portfolio securities sold by a Fund may decline below the price of the
securities such Fund is obligated to repurchase. Interest paid by a Fund in
connection with a reverse repurchase agreement will reduce the net investment
income of such Fund. Neither the Tax-Exempt Money Fund nor the California
Tax-Exempt Money Market Fund will purchase securities while it has borrowings
(including reverse repurchase agreements) outstanding. Reverse repurchase
agreements are considered to be borrowings by a Fund under the 1940 Act.
INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued," basis and may purchase or sell
securities on a "forward commitment" or "delayed settlement" basis. When-issued
and forward commitment transactions,
B-9
<PAGE> 761
which involve a commitment by a Fund to purchase or sell particular securities
with payment and delivery taking place at a future date (perhaps one or two
months later), permit a Fund to lock in a price or yield on a security it owns
or intends to purchase or sell, regardless of future changes in interest rates.
Delayed settlement describes a securities transaction in a secondary market for
which settlement will occur sometime in the future. When-issued, forward
commitment and delayed settlement transactions involve the risk, however, that
the yield or price obtained in a transaction may be less favorable than the
yield or price available in the market when the securities delivery takes place.
The Funds' forward commitments, when-issued purchases and delayed settlements
are not expected to exceed 25% of the value of the total assets of a particular
Fund absent unusual market conditions. The Funds do not intend to engage in
these transactions for speculative purposes but only in furtherance of their
investment objective. When a Fund agrees to purchase securities on a
when-issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets (cash or liquid
securities) in the separate account so that the value of the account remains
equal to the amount of such Fund's commitment. The Funds do not intend to engage
in these transactions for speculative purposes but only in furtherance of their
investment objectives. Because a Fund will set aside cash or liquid investments
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and the ability of the investment adviser to manage it may be affected
in the event the Fund's forward commitments, commitments to purchase when-issued
securities and delayed settlements ever exceeded 25% of the value of its assets.
A Fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases the Fund may realize a taxable capital
gain or loss.
When a Fund engages in when-issued, forward commitment and delayed settlement
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase, a forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.
STAND-BY COMMITMENTS. The Tax-Exempt Money Fund and California Tax-Exempt Money
Market Fund may acquire "stand-by commitments" with respect to Municipal
Securities held in their respective portfolios. Under a "stand-by commitment," a
dealer agrees to purchase from a Fund, at the Fund's option, specified Municipal
Securities at a specified price.
B-10
<PAGE> 762
The amount payable to the Tax-Exempt Money Fund or the California Tax-Exempt
Money Market Fund upon its exercise of a "stand-by commitment" is normally the
amortized cost of the underlying instruments plus accrued interest, if any.
"Stand-by commitments" can be acquired when the remaining maturity of the
underlying Municipal Securities is not greater than thirteen months, and are
exercisable by a Fund at any time before the maturity of such obligations. In
determining net asset value, a Fund values Municipal Securities on the basis of
amortized cost without reference to the presence of the "stand-by commitment,"
as described below. A "stand-by commitment" may be sold, transferred or assigned
by a Fund only with the instrument involved.
The Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund expect
that "stand-by commitments" will generally be available without the payment of
any direct or indirect consideration. However, if necessary or advisable, a Fund
may pay for a "stand-by commitment" either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). The total amount paid in either manner for outstanding "stand-by
commitments" held by a Fund will not exceed 1/2 of 1% of the value of its total
assets calculated immediately after each "stand-by commitment" is acquired.
The Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund intend to
enter into "stand-by commitments" only with dealers, banks and broker-dealers
which, in the investment adviser's opinion, present minimal credit risks. A
Fund's reliance upon the credit of these dealers, banks and broker-dealers is
secured by the value of the underlying Municipal Securities that are subject to
a commitment.
The Tax-Exempt Money Fund or California Tax-Exempt Money Market Fund would
acquire "stand-by commitments" solely to facilitate portfolio liquidity and do
not intend to exercise their rights thereunder for trading purposes. The
acquisition of a "stand-by commitment" would not affect the valuation or assumed
maturity of the underlying Municipal Securities, which would continue to be
valued at amortized cost in accordance with the ordinary method of valuation
employed by a Fund. "Stand-by commitments" which would be acquired by a Fund
would be valued at zero in determining net asset value. Where a Fund paid any
consideration directly or indirectly for a "stand-by commitment," its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund. "Stand-by commitments" would not affect a
Fund's average weighted maturity.
LOANS OF SECURITIES. The Prime Fund, Government Fund and Treasury Only Fund may
lend their securities to brokers, dealers and financial institutions, provided
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities (U.S. Treasury securities with respect to the Treasury Only Fund) or
cash or letters of credit which is marked to the market daily to ensure that
each loan is fully collateralized at all times; (2) the Fund involved may at any
time call the loan and obtain the return of the securities loaned within five
business days; (3) the Fund will receive any interest or dividends paid on the
securities loaned; and (4) the aggregate market value of securities loaned will
not at any time exceed 30% of the total assets of the Fund
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<PAGE> 763
(33 1/3% with respect to the Treasury Only Fund).
A Fund will earn income for lending its securities because cash collateral
pursuant to these loans will be invested in short term money market instruments.
In connection with lending securities, a Fund may pay reasonable finders,
administrative and custodial fees. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to provide additional
collateral.
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include bank certificates
of deposit, bankers' acceptances, corporate debt obligations, equity securities
and other investments any of which may also be purchased by a Fund of the
Company. The Fund may also invest in securities, interests or obligations of
companies or entities which have a deposit, loan, commercial banking or other
business relationship with Bank of America or any of its affiliates (including
outstanding loans to such issuers which may be repaid in whole or in part with
the proceeds of securities purchased by a Fund of the Company).
The California Tax-Exempt Money Market Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940. Investment return
on a non-diversified portfolio typically is dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio, and thereby subject the market-based net asset value per share of the
non-diversified portfolio to greater fluctuations. In addition, a
non-diversified portfolio may be more susceptible to economic, political and
regulatory developments than a diversified investment portfolio with similar
objectives may be.
The California Tax-Exempt Money Market Fund is, and the Tax-Exempt Money Fund
may be, concentrated in securities issued by the State of California or entities
within the State of California, and the California Tax-Exempt Money Market Fund
may invest a significant percentage of its assets in a single issuer. Therefore,
investment in the Funds may be riskier than an investment in other types of
money market funds.
The concentration in California Municipal Securities by the California
Tax-Exempt Money Market Fund and the Tax-Exempt Money Fund raises additional
considerations. Payment of the interest on and the principal of these
obligations is dependent upon the continuing ability of California issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk
inherent in a Fund's concentration in such obligations versus the safety that
comes with a less geographically concentrated investment portfolio and should
compare the yield available on a portfolio of California issues with the yield
of a more diversified portfolio including non-California issues before making an
investment decision.
Many of the Tax-Exempt Funds' Municipal Securities are likely to be obligations
of California governmental issuers which rely in whole or in part, directly or
indirectly, on real property taxes
B-12
<PAGE> 764
as a source of revenue. "Proposition Thirteen" and similar California
constitutional and statutory amendments and initiatives in recent years have
restricted the ability of California taxing entities to increase real property
tax revenues. Other initiative measures approved by California voters in recent
years, through limiting various other taxes, have resulted in a substantial
reduction in state revenues. Decreased state revenues may result in reductions
in allocations of state revenues to local governments.
Because of the complex nature of the various initiatives mentioned above and
certain possible ambiguities and inconsistencies in their terms and the scope of
various exemptions and exceptions, as well as the impossibility of predicting
the level of future appropriations for state and local California governmental
entities, it is not presently possible to determine the impact of these
initiatives and related measures on the ability of California governmental
issuers to pay interest or repay principal on their obligations. There have,
however, been certain adverse developments with respect to Municipal Securities
of California governmental issuers over the past several years.
In addition to the various initiatives discussed above, although economic
factors such as the reduction in defense spending and a decline in tourism had
an adverse impact on the economy in California in the early 1990's, California's
economy has recently out performed that of the nation, with employment growth,
unemployment decline and increases in personal income as well as an anticipated
budget surplus for the State in Fiscal Year 1997-98. With approximately half of
California's exports being sold in Asia, financial problems in the region have
had a slight dampening effect on the California economy. However, strong export
growth to Mexico has offset some of the weakness in Asia.
In addition to the risk of nonpayment of state and local California governmental
debt, if such debt declines in quality and is downgraded by the NRSROs, it may
become ineligible for purchase by the Funds pursuant to current Securities and
Exchange Commission regulations. Since there are large numbers of buyers of such
debt that are similarly restricted, the supply of Eligible Securities (as
defined above) could become inadequate at certain times. A more detailed
description of special factors affecting investments in California Municipal
Securities, of which investors should be aware, is set forth below.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive description of all relevant
facts. Although the Company has no reason to believe that the information
summarized herein is not correct in all material respects, this information has
not been independently verified for accuracy or thoroughness by the Company.
Rather, the information presented herein has been culled from official
statements and prospectuses issued in connection with various securities
offerings of the State of California and local agencies in California, available
as of the date of this Statement of Additional Information. Further, the
estimates and projections presented herein should not be construed as statements
of fact. They are based upon assumptions which may be affected by numerous
factors and there can be no assurance that target levels will be achieved. While
the Company has not independently verified such information, it has no reason to
believe that such information is not correct in all material respects.
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ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1995-96. Pressures on the State's budget in the late
1980's and early 1990's were caused by a combination of external economic
conditions and growth of the largest General Fund Program - K-14 education,
health, welfare and corrections -- at rates faster than the revenue base. These
pressures could continue as the State's overall population and school age
population continue to grow, and as the State's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders. In addition, the State's health
and welfare programs are in a transition period as result of recent federal and
State welfare reform initiatives.
As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, from the late 1980's until 1992-93, the State had period of
significant budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments;
transfers of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding for
schools under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year budget), most of which were for a short duration.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the SFEU, as compared to projected positive
balances. By the 1993-94 Fiscal Year, the accumulated deficit was so large that
it was impractical to budget to retire such deficits in one year, so a two-year
program was implemented, using the issuance of revenue anticipation warrants to
carry a portion of the deficit over to the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year Plan was
implemented in 1994-95, again using cross-fiscal year revenue anticipation
warrants to partly finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
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For several fiscal years during the recession, the State was forced to rely on
external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
1995-96 AND 1996-97 FISCAL YEARS
With the end of the recession, and a growing economy beginning in 1994, the
State's financial condition improved markedly in the last two fiscal years, with
a combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions taken in
earlier years. The last of the recession-induced budget deficits was repaid,
allowing the SFEU to post a positive cash balance for only the second time in
the 1990's, totaling $281 million as of June 30, 1997. The State's cash position
also returned to health, as cash flow borrowing was limited to $3 billion in
1996-97, and no deficit borrowing has occurred over the end of these last two
fiscal years.
In each of these two fiscal years, the State budget contained the following
major features:
1. Expenditures for K-14 schools grew significantly, as new revenues were
directed to school spending under Proposition 98. This new money allowed several
new education initiatives to be funded, and raised K-12 per-pupil spending to
around $4,900 by Fiscal Year 1996-97. See "STATE FINANCES" Proposition 98".
2. The Budgets restrained health and welfare spending levels, holding to reduced
benefit levels enacted in earlier years, and attempted to reduce General Fund
spending by calling for greater support from the federal government. The State
also attempted to shift to the federal government a larger share of the cost of
incarceration and social services for illegal aliens. Some of these efforts were
successful, and federal welfare reform also helped, but as a whole the federal
support never reached the levels anticipated when the budgets were enacted.
These funding shortfalls were, however, filled by the strong revenue
collections, which exceeded expectations.
3. General Fund support for the University of California and the California
State University system grew by an average of 5.2 percent and 3.3 percent per
year, respectively, and there were no increases in student fees.
4. General Fund support for the Department of Corrections grew as needed to meet
increased prison population. No new prisons were approved for construction,
however.
5. There were no tax increases, and starting January 1, 1997, there was a 5
percent cut in corporate taxes. The suspension of the Renter's Tax Credit, first
taken as a cost-saving measure during the recession, was continued.
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As noted, the economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (about $2.2 billion
in 1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. As a result, there was no dramatic increase in
budget reserves, although the accumulated budget deficit from the recession
years was finally eliminated in the past fiscal year.
1997-98 FISCAL YEAR
Background
On January 9, 1997, the Governor released his proposed budget for the 1997-98
Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated General Fund
revenues and transfers of about $50.7 billion, and proposed expenditures of
$50.3 billion, resulting in an anticipated budget reserve in the SFEU of about
$550 million. The Proposed Budget included provisions for a further 10% cut in
Bank and Corporation Taxes, which ultimately was not enacted by the Legislature.
At the time of the Department of Finance May Revision, released on May 14, 1997,
the Department of Finance increased it revenue estimate for the upcoming fiscal
year by $1.3 billion, in response to the continued strong growth in the State's
economy. Budget negotiations continued into the summer, with major issues to be
resolved including final agreement on State welfare reform, an increase in State
employee salaries and consideration of the tax cut proposed by the Governor.
In May, 1997, action was taken by the California Supreme Court in an ongoing
lawsuit, PERS v. Wilson, below, which made final a judgment against the State
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.235 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
In late 1997, the plaintiffs filed a claim with the State Board of Control for
payment of interest under the Court rulings in an amount of $308 million. The
Department of Finance has recommended approval of this claim. If approved by the
Board of Control, the claim would become part of an annual claims bill in the
1998-99 Budget.
FISCAL YEAR 1997-98 BUDGET ACT
Following the transfer of funds to the PERF, final agreement was reached within
a few weeks on the welfare package and remainder of the budget. The Legislature
passed the Budget Bill on August 11, 1997, along with numerous related bills to
implement its provisions. Agreement was not finally reached at that time on one
aspect of the budget plan, concerning the Governor's proposal for a
comprehensive educational testing program.
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On August 18, 1997, the Governor signed the Budget Act, but vetoed about $314
million of specific spending items, primarily in health and welfare and
education areas from both the General Fund and Special Funds. Approximately $200
million of this amount was restored in subsequent legislation passed before the
end of the Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of $52.5 billion
(a 6.8 percent increase over the final 1996-97 amount), and expenditures of
$52.8 billion (an 8.0 percent increase from the 1996-97 levels). The Budget Act
also included Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14 billion), and $2.1 billion of expenditures from
various Bond Funds. Subsequent to the Budget Act enactment, the State undertook
its normal cash flow borrowing program by issuing $3 billion of Notes which
mature June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which have exceeded initial budgeted amounts. Part of the nearly $1.75 billion
in increased spending was allocated to prior fiscal years. Funds were provided
to fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives. See "STATE FINANCES -
Proposition 98.
2. The Budget Act reflected the $1.228 billion pension case judgment payment,
and brings funding of the State's pension contribution back to the quarterly
basis which existed prior to the deferral actions which were invalidated by the
courts.
3. Continuing the third year of a four-year "compact" which the Administration
had made with higher education units, funding from the General Fund for the
University of California and the California State University system was
increased by approximately 6 percent ($121 million and $107 million,
respectively). There was no increase in student fees.
4. Because of the effect of the pension payment, most other State programs were
continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain federal
budget actions. About $300 million in general funds, already included in the
federal FY 1997 and 1998 budgets, were included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions. The Renters
Tax Credit was suspended for another year, saving approximately $500 million.
The Legislature has not made any decision on conformity of State tax laws to the
recent federal tax reduction bill; a comprehensive review of this subject is
expected to take place next year.
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At the end of the Legislative Session on September 13, 1997, the Legislature
passed and the Governor later signed several bills encompassing a coordinated
package of fiscal reforms, mostly to take effect after the 1997-98 Fiscal Year.
Included in the package are a variety of phased-in tax cuts, conformity with
certain provisions of the federal tax reform law passed earlier in the year, and
reform of funding for county trial courts, with the State to assume greater
financial responsibility. The Department of Finance estimates that the major
impact of these fiscal reforms will occur in Fiscal Year 1998-99 and subsequent
years.
The Department of Finance released updated estimates for the 1997-98 Fiscal Year
on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year Budget
Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
PROPOSED 1998-99 FISCAL YEAR BUDGET
On January 9, 1998, the Governor released his Budget Proposal for the 1998-99
Fiscal Year (the "Governor's Budget"). The Governor's Budget projects total
General Fund revenues and transfers of $55.4 billion, a $2.5 billion increase
(4.7 percent) over revised 1997-98 revenues. This revenue increase takes into
account reduced revenues of approximately $600 million from the 1997 tax cut
package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital gains activity and the resultant revenues derived
from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4 billion,
an increase of $2.4 billion (4.5 percent) above the revised 1997-98 level. The
Governor's Budget includes funds to pay the interest claim relating to the court
decision on pension fund payments PERS v. Wilson (See "1997-98 Fiscal Year"
above). The Governor's Budget projects that the State will carry out its normal
intra-year cash flow external borrowing in 1998-99, in an estimated amount of $3
billion. The Governor's Budget projects that the budget reserve, the SFEU, will
be $296 million at June 30, 1999, slightly lower than the projected level at
June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion, and
Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A total
of $3.2 billion of bond fund expenditures are also proposed.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County, California and
its Investment Pool (the "Pool") filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code. The subsequent restructuring led to the sale of
substantially all of the Pool's portfolio and resulted in losses estimated to be
approximately $1.7 billion (or approximately 22% of amounts deposited by the
Pool investors). Approximately 187 California public entities -- substantially
all of which are public agencies within the county -- had various bonds, notes
or other forms of indebtedness outstanding. In some instances the proceeds of
such indebtedness were invested in the Pool.
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In April, 1996, the County emerged from bankruptcy after closing on a $900
million recovery bond transaction. At that time, the County and its financial
advisors stated that the County had emerged from the bankruptcy without any
structural fiscal problems and assured that the County would not slip back into
bankruptcy. However, for many of the cities, schools and special districts that
lost money in the County portfolio, repayment remains contingent on the outcome
of litigation which is pending against investment firms and other finance
professionals. Thus, it is impossible to determine the ultimate impact of the
bankruptcy and its aftermath on these various agencies and their claims.
In May 1996, a taxpayer action was filed against the City of San Diego ("San
Diego") and the San Diego Convention Center Expansion Authority (the
"Authority") challenging the validity of a lease revenue financing involving a
lease (the "San Diego Lease") having features similar to the leases commonly
used in California lease-based financings such as certificates of participation
(the "Rider Case"). The Rider Case plaintiffs alleged that voter approval is
required for the San Diego Lease (a) since the lease constituted indebtedness
prohibited by Article XVI, Section 18 of the California Constitution without a
two-thirds vote of the electorate, and (b) since San Diego was prohibited under
its charter from issuing bonds without a two-thirds vote of the electorate, and
the power of the Authority, a joint powers' authority, one of the members of
which is San Diego, to issue bonds is no greater than the power of San Diego. In
response to San Diego's motion for summary judgment, the trial court rejected
the plaintiffs' arguments and ruled that the San Diego Lease was
constitutionally valid and that the Authority's related lease revenue bonds did
not require voter approval. The plaintiffs appealed the matter to the Court of
Appeals for the Fourth District, which affirmed the validity of the San Diego
Lease and of the lease revenue bond financing arrangements. The plaintiffs then
filed a petition for review with the California State Supreme Court, and, on
April 2, 1997, the Court granted the plaintiff's petition for review. A decision
from the Supreme Court is expected to be decided within the 1998 calendar term.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could produce the
adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain Debt Obligations in the California Tax-Exempt
Money Market Fund may be obligations of issuers which rely in whole or in part
on California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's general fund will be distributed in the future to
counties, cities and their various entities is unclear.
HEALTH CARE LEGISLATION. Certain Debt Obligations in the California Tax-Exempt
Money Market Fund may be obligations which are payable solely from the revenues
of health care institutions. Certain provisions under California law may
adversely affect these revenues and, consequently, payment on those Debt
Obligations.
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The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of
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the study and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
MORTGAGES AND DEEDS. Certain Debt Obligations in the California Tax-Exempt Money
Market Fund may be obligations which are secured in whole or in part by a
mortgage or deed of trust on real property. California has five principal
statutory provisions which limit the remedies of a creditor secured by a
mortgage or deed of trust. Two statutes limit the creditor's right to obtain a
deficiency judgment, one limitation being based on the method of foreclosure and
the other on the type of debt secured. Under the former, a deficiency judgment
is barred when the foreclosure is accomplished by means of a nonjudicial
trustee's sale. Under the latter, a deficiency judgment is barred when the
foreclosed mortgage or deed of trust secures certain purchase money obligations.
Another California statute, commonly known as the "one form of action" rule,
requires creditors secured by real property to exhaust their real property
security by foreclosure before bringing a personal action against the debtor.
The fourth statutory provision limits any deficiency judgment obtained by a
creditor secured by real property following a judicial sale of such property to
the excess of the outstanding debt over the fair value of the property at the
time of the sale, thus preventing the creditor from obtaining a large deficiency
judgment against the debtor as the result of low bids at a judicial sale. The
fifth statutory provision gives the debtor the right to redeem the real property
from any judicial foreclosure sale as to which a deficiency judgment may be
ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain Debt Obligations in the California Tax-Exempt Money Market Fund may be
obligations which finance the acquisition of single family home mortgages for
low and moderate income
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mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original principal amount of the
mortgage loan in a 12-month period; a prepayment charge cannot in any event
exceed six months' advance interest on the amount prepaid during the 12-month
period in excess of 20% of the original principal amount of the loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
PROPOSITION 13. Certain of the Debt Obligations may be obligations of issuers
who rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem tax on
real property to 1% of full cash value to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under 'full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article XIIIA
provides that notwithstanding any other law, local agencies may not levy any ad
valorem property tax except to pay debt service on indebtedness approved by the
voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as "Proposition 9" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual
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"appropriations limit" and are not allowed to spend certain moneys called
"appropriations subject to limitation" in an amount higher than the
"appropriations limit." Article XIIIB does not affect the appropriation of
moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population, and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising tax
rates or fee schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (modified
by Proposition 111 as discussed below), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both houses,
with the Governor's concurrence -- to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. During the
course of this litigation, a trial court determined that almost $2 billion in
"loans" which had been provided to school districts during the recession
violated the constitutional protection of support for public education. A
settlement was reached on April 12,
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1996 which ensures that future school funding will not be in jeopardy over
repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July 1,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative provided the following:
1. Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA;
5. Prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governments;
6. Requires that any tax imposed by a local government on or after August 1,
1985 be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
7. Requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government
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occurs in an amount equal to the revenues received by such entity attributable
to the tax levied in violation of the initiative; and
8. Permits these provisions to be amended exclusively by the voters of the State
of California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511 (Cal.Ct.App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d 1058, subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review both the City of Westminster and the City of Woodlake
decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28, 1995) 11
Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make the
Guardino decision inapplicable to any tax first imposed or increased by an
ordinance or resolution adopted before December 14, 1995. The California State
Senate passed the Bill on May 16, 1996 and it is currently pending in the
California State Assembly. It is not clear whether the Bill, if enacted, would
be constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
PROPOSITION 218. On November 5, 1996,the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what extent
Proposition 218 may be held to be constitutional or how its terms will be
interpreted and applied by the courts. However, if upheld, Proposition 218 could
substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate
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fees and assessments, notify the public and defend local government fees and
assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for the
imposition, extension or increase of general taxes and two-thirds voter approval
for the imposition, extension or increase of special taxes, including special
taxes deposited into a local government's general fund. Proposition 218 also
provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the initiative power to
give voters the power to reduce or repeal local taxes, assessments, fees and
charges, regardless of the date such taxes, assessments, fees or charges were
imposed. This extension of the initiative power to some extent
constitutionalizes the March 6, 1995 State Supreme Court decision in Rossi v.
Brown, which upheld an initiative that repealed a local tax and held that the
State constitution does not preclude the repeal, including the prospective
repeal, of a tax ordinance by an initiative, as contrasted with the State
constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition 218, by its
terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.
Article XIII D of Proposition 218 adds several new requirements making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge upon real property for a special benefit conferred upon the real
property.
Article XIII D of Proposition 218 also adds several provisions affecting "fees"
and "charges" which are defined as "any levy other than an ad valorem tax, a
special tax, or an assessment, imposed by a local government upon a parcel or
upon a person as an incident of property ownership, including a user fee or
charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record
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owner of each parcel of land affected by such fee or charges. The local
government must then hold a hearing upon the proposed imposition or increase of
such property based fee, and if written protests against the proposal are
presented by a majority of the owners of the identified parcels, the local
government may not impose or increase the fee or charge. Moreover, except for
fees or charges for sewer, water and refuse collection services, no property
related fee or charge may be imposed or increased without majority approval by
the property owners subject to the fee or charge or, at the option of the local
agency, two-thirds voter approval by the electorate residing in the affected
area.
PROPOSITION 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989.
Other Investment Information. The investment adviser believes that it is likely
that sufficient California Municipal Securities will be available to satisfy the
investment objective, policies and limitations of the California Tax-Exempt
Money Market Fund, and to enable the Fund to invest at least 50% of its total
assets in California Municipal Securities at the close of each of its fiscal
quarters. In meeting this investment policy the Fund may invest in Municipal
Securities which are private activity bonds (including industrial development
bonds under prior law) the interest on which is subject to the 26% to 28%
federal alternative minimum tax applicable to individuals and the 20% federal
alternative minimum tax and the environmental tax applicable to corporations.
The environmental tax applicable to corporations is imposed at the rate of .12%
on the excess of the corporations modified federal alternative minimum taxable
income over $2,000,000. Investments in such securities, however, will not exceed
under normal market conditions 20% of the Fund's total assets when added
together with any taxable investments held by the Fund. Moreover, although the
Fund does not presently intend to do so on a regular basis, it may invest more
than 25% of its assets in Municipal Securities the interest on which is paid
solely from revenues of similar projects if such investment is deemed necessary
or appropriate by the Fund's investment adviser in light of the Fund's
investment objective and policies. To the extent that the Fund's assets are
concentrated in Municipal Securities payable from revenues on similar projects,
the Fund will be subject to the peculiar risks presented by such projects to a
greater extent than it would be if the Fund's assets were not so concentrated.
If Pacific Horizon's Board of Directors, after consultation with the investment
adviser, should for any reason determine that it is impracticable to invest at
least 50% of the Fund's total assets in California Tax-Exempt Money Market Fund
at the close of each quarter of the Fund's taxable year, the Board would
re-evaluate the Fund's investment objective and policies and consider changes in
its structure and name or possible dissolution.
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FORM N-1A
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a) (1) Restated Articles of Incorporation filed
November 22, 1983 are incorporated by reference
to Exhibit 1(a) to Post- Effective Amendment
No. 45 to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-81110/811-4293)
filed February 23, 1996 ("Post-Effective
Amendment No. 45").
(2) Articles Supplementary filed January 9, 1986
are incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 45.
(3) Articles Supplementary to increase authorized
capital stock filed August 31, 1989 are
incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 45.
(4) Articles Supplementary classifying shares filed
August 31, 1989 are incorporated by reference
to Exhibit 1(d) to Post- Effective Amendment
No. 45.
(5) Articles Supplementary classifying shares filed
June 3, 1991 are incorporated by reference to
Exhibit 1(e) to Post- Effective Amendment No.
45.
(6) Articles Supplementary classifying and
reclassifying shares filed August 1, 1991 are
incorporated by reference to Exhibit 1(f) to
Post-Effective Amendment No. 45.
(7) Articles Supplementary to increase authorized
capital stock filed August 16, 1991 are
incorporated by reference to Exhibit 1(g) to
Post-Effective Amendment No. 45.
(8) Articles Supplementary classifying shares filed
August 16, 1991 are incorporated by reference
to Exhibit 1(h) to Post- Effective Amendment
No. 45.
C - 1
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(9) Articles Supplementary classifying shares filed
November 25, 1991 are incorporated by reference
to Exhibit 1(i) to Post-Effective Amendment No.
45.
(10) Articles Supplementary classifying shares filed
May 11, 1992 are incorporated by reference to
Exhibit 1(j) to Post- Effective Amendment No.
45.
(11) Articles Supplementary reclassifying shares
filed May 15, 1992 are incorporated by
reference to Exhibit 1(k) to Post- Effective
Amendment No. 45.
(12) Articles Supplementary classifying shares filed
July 20, 1992 are incorporated by reference to
Exhibit 1(l) to Post- Effective Amendment No.
45.
(13) Articles Supplementary to increase authorized
capital stock filed August 6, 1992 are
incorporated by reference to Exhibit 1(m) to
Post-Effective Amendment No. 45.
(14) Articles Supplementary classifying shares filed
August 6, 1992 are incorporated by reference to
Exhibit 1(n) to Post- Effective Amendment No.
45.
(15) Articles Supplementary classifying shares filed
March 3, 1993 are incorporated by reference to
Exhibit 1(o) to Post- Effective Amendment No.
45.
(16) Articles Supplementary reclassifying shares
filed May 12, 1993 are incorporated by
reference to Exhibit 1(p) to Post- Effective
Amendment No. 45.
(17) Articles of Amendment eliminating restriction
on number of classes of shares filed May 8,
1990 are incorporated by reference to Exhibit
1(q) to Post-Effective Amendment No. 45.
(18) Articles of Amendment reclassifying shares
filed on July 9, 1993 are incorporated by
reference to Exhibit 1(r) to Post- Effective
Amendment No. 45.
(19) Articles Supplementary classifying shares filed
November 18, 1993 are incorporated by reference
to Exhibit 1(s) to Post-Effective Amendment No.
45.
C - 2
<PAGE> 781
(20) Articles Supplementary reclassifying shares
filed November 18, 1993 are incorporated by
reference to Exhibit 1(t) to Post-Effective
Amendment No. 45.
(21) Articles Supplementary reclassifying shares
filed January 21, 1994 are incorporated by
reference to Exhibit 1(u) to Post-Effective
Amendment No. 45.
(22) Articles Supplementary classifying shares filed
October 30, 1995 are incorporated by reference
to Exhibit 1(v) to Post-Effective Amendment
No. 47 to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-81110/811-4293)
filed April 30, 1996 ("Post-Effective Amendment
No. 47").
(23) Articles of Amendment canceling shares filed on
January 26, 1996 are incorporated by reference
to Exhibit 1(v) to Post-Effective Amendment No.
45.
(24) Articles Supplementary classifying shares filed
on January 26, 1996 are incorporated by
reference to Exhibit 1(w) to Post-Effective
Amendment No. 45.
(25) Articles Supplementary reclassifying shares
filed on January 26, 1996 are incorporated by
reference to Exhibit 1(x) to Post-Effective
Amendment No. 45.
(26) Articles Supplementary reclassifying shares
filed on April 12, 1996 are incorporated by
reference to Exhibit 1(z) to Post-Effective
Amendment No. 51 to the Registration Statement
of the Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed November 13, 1996
("Post-Effective Amendment No. 51").
(27) Articles Supplementary reclassifying shares
filed on June 25, 1996 are incorporated by
reference to Exhibit 1(z) to Post-Effective
Amendment No. 50 to the Registration Statement
of the Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed July 29, 1996
("Post-Effective Amendment No. 50.").
(28) Articles Supplementary reclassifying shares
filed on June 25, 1996 are incorporated by
reference to Exhibit 1(aa) to Post-Effective
Amendment No. 50.
C - 3
<PAGE> 782
(29) Articles Supplementary reclassifying shares
filed on June 25, 1996 are incorporated by
reference to Exhibit 1(bb) to Post-Effective
Amendment No. 50.
(30) Articles Supplementary reclassifying shares
filed on March 5, 1997 are incorporated by
reference to Exhibit 1(dd) to Post-Effective
Amendment No. 54 to the Registration Statement
of the Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed April 16, 1997
("Post-Effective Amendment No. 54.").
(31) Articles Supplementary reclassifying shares
filed on April 11, 1997 are incorporated by
reference to Exhibit 1(ee) to Post-Effective
Amendment No. 54.
(32) Articles Supplementary to increase authorized
capital stock filed on June 11, 1997 are
incorporated by reference to Exhibit 1(ff) to
Post-Effective Amendment No. 56 to the
Registration Statement of the Registrant on
Form N-1A (Nos. 2-81110/811-4293) filed June
16, 1997 ("Post-Effective Amendment No. 56.")
(33) Articles Supplementary reclassifying shares
filed on June 11, 1997 are incorporated by
reference to Exhibit 1(gg) to Post-Effective
Amendment No. 56.
(b) Amended and Restated By-Laws as approved by
Registrant's Board of Directors on July 23,
1996 are incorporated by reference to Exhibit
2(f) to Post-Effective Amendment No. 50.
(c) See Article VI, Section (2) of Article VII,
Article VIII and Section (2) and (4) of Article
X of the Restated Articles of Incorporation
incorporated by reference to Exhibit 1(a) of
Post-Effective Amendment No. 45 and Article I,
Section 1 and 10 of Article II, Article IV and
Section 1 of Article VI of the Amended and
Restated By-laws incorporated by reference to
Exhibit 2(f) of Post-Effective Amendment No.
50.
(d) (1) Investment Advisory Agreement dated as of April
22, 1992 between Registrant and Bank of America
National Trust and Savings Association (Money
Market Funds) is
C - 4
<PAGE> 783
incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 45.
(2) Investment Advisory Agreement dated as of April
22, 1992 between Registrant and Bank of America
National Trust and Savings Association
(Non-Money Market Funds) is incorporated by
reference to Exhibit 5(b) to Post-Effective
Amendment No. 45.
(3) Addendum to Investment Advisory Agreement dated
as of March 1, 1993 between Registrant and Bank
of America National Trust and Savings
Association (Money Market Funds - Prime Value
Fund) is incorporated by reference to Exhibit
5(c) to Post-Effective Amendment No. 45.
(4) Addendum to Investment Advisory Agreement dated
as of March 1, 1993 between Registrant and Bank
of America National Trust and Savings
Association (Money Market Funds - Government
and Treasury Only Funds) is incorporated by
reference to Exhibit 5(d) to Post-Effective
Amendment No. 45.
(5) Investment Advisory Agreement dated November 1,
1994 between Registrant and Bank of America
National Trust & Savings Association with
respect to the Capital Income Fund is
incorporated by reference to Exhibit 5(e) to
Post-Effective Amendment No. 45.
(6) Investment Advisory Agreement dated as of July
1, 1996 between Registrant and Bank of America
National Trust & Savings Association with
respect to the National Municipal Bond Fund is
incorporated by reference to Exhibit 5(f) to
Post-Effective Amendment No. 51.
(7) Investment Advisory Agreement dated as of July
30, 1996 between Registration and Bank of
America National Trust and Savings Association
with respect to the International Equity and
Short-Term Government Funds is incorporated by
reference to Exhibit 5(g) to Post-Effective
Amendment No. 51.
(8) Investment Advisory Agreement dated as of
September 1, 1996 between Registrant and Bank
of America National Trust & Savings Association
with respect to the Corporate
C - 5
<PAGE> 784
Bond Fund is incorporated by reference to
Exhibit 5(h) to Post-Effective Amendment No. 52
to the Registration Statement of the Registrant
on Form N-1A (Nos. 2-81110/ 811-4293) filed
January 31, 1997 ("Post-Effective Amendment No.
52").
(9) Amended and Restated Investment Advisory
Agreement dated as of January 1, 1997 between
Registrant and Bank of America National Trust &
Savings Association with respect to the
International Equity Fund is incorporated by
reference to Exhibit 5(i) to Post-Effective
Amendment No. 52.
(10) Sub-Investment Advisory Agreement dated as of
January 1, 1997 between Bank of America
National Trust & Savings Association and
Wellington Management Company, LLP with respect
to the International Equity Fund is
incorporated by reference to Exhibit 5(j) to
Post-Effective Amendment No. 52.
(11) Investment Advisory Agreement dated as of June
23, 1997 between Registrant and Bank of America
National Trust & Savings Association with
respect to the Asset Allocation Fund is
incorporated by reference to Exhibit 5(k) to
Post-Effective Amendment No. 59 to the
Registration Statement on Form N-1A (Nos.
2-81110/811-4293) filed May 1, 1998
("Post-Effective Amendment No. 59").
(12) Assumption Agreement dated March 1, 1998 among
Registrant, Bank of America NT&SA and
Robertson, Stephens & Company Investment
Management, L.P.
(13) Assumption Agreement dated April 28, 1998 among
Registrant, Bank of America NT&SA and
Robertson, Stephens & Company Investment
Management, L.P.
(14) Assumption Agreement dated March 1, 1998 among
Registrant, Bank of America NT&SA, Robertson,
Stephens & Company Investment Management, LP
and Wellington Management Company.
(15) Form of Assumption Agreement dated April 28,
1998 among Registrant, Bank of America NT&SA,
Robertson, Stephens & Company Investment
Management, LP and Wellington Management
Company.
(16) Form of Investment Advisory Agreement dated
____________, 1998 between Registrant and Bank
of America NT&SA.
(17) Form of Investment Sub-Advisory Agreement
dated ____________, 1998 among Registrant,
Bank of America NT&SA and Wellington
Management Company.
(e) (1) Amended and Restated Distribution Agreement
between the Registrant and Concord Financial
Group, Inc. is incorporated by reference to
Exhibit 6(a) to Post-Effective Amendment No.
51.
(2) Form of Broker/Dealer Agreement is incorporated
by reference to Exhibit 6(c) to Post-Effective
Amendment No. 45.
(3) Form of Bank Agreement is incorporated by
reference to Exhibit 6(d) to Post-Effective
Amendment No. 45.
(4) Distribution Agreement dated September 15,
1997 between Registrant and Provident
Distributors, Inc.
C - 6
<PAGE> 785
(f) Board Guidelines on Significant Governance
Issues (which includes a description of the
Board of Director's retirement policy and
benefit).
(g) (1) Custody Agreement between Registrant and The
Bank of New York dated as of April 3, 1989 is
incorporated by reference to Exhibit 8(a) to
Post-Effective Amendment No. 45.
(2) Amendment No. 1 to Custody Agreement between
Registrant and The Bank of New York dated as of
March 30, 1990 is incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No.
45.
(3) Amendment No. 2 to Custody Agreement between
Registrant and The Bank of New York dated as of
February 26, 1993 is incorporated by reference
to Exhibit 8(c) to Post-Effective Amendment No.
49 to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-81110/811-4293)
filed June 28, 1996 ("Post-Effective Amendment
No. 49").
(4) Amendment No. 3 to Custody Agreement between
Registrant and The Bank of New York dated as of
April 24, 1996 is incorporated by reference to
Exhibit 8(d) to Post-Effective Amendment No.
49.
(5) Amendment No. 4 to Custody Agreement between
Registrant and The Bank of New York dated as of
July 1, 1996 is incorporated by reference to
Exhibit 8(e) to Post-Effective Amendment No.
51.
(6) Custodian Services Agreement between Registrant
and PNC Bank, N.A is incorporated by reference
to Exhibit 8(c) to Post-Effective Amendment No.
45.
(7) Transfer Agency Agreement between Registrant
and BISYS Fund Services, Inc. is incorporated
by reference to Exhibit 8(d) to Post-Effective
Amendment No. 47.
(8) Amendment No. 1 to Transfer Agency Agreement
between Registrant and BISYS Fund Services,
Inc. is incorporated
C - 7
<PAGE> 786
by reference to Exhibit 8(h) to Post-Effective
Amendment No. 52.
(9) Sub-Custodian Agreement between Registrant, The
Bank of New York, and Security Pacific National
Bank is incorporated by reference to Exhibit
8(e) to Post-Effective Amendment No. 45.
(10) Sub-Custodian Agreement between The Bank of New
York and Citibank, N.A. dated May 18, 1988 is
incorporated by reference to Exhibit 8(f) to
Post-Effective Amendment No. 45.
(11) Form of Sub-Custody Agreement between The Bank
of New York and Bank of America National Trust
and Savings Association is incorporated by
reference to Exhibit (8)(i) to Post-Effective
Amendment No. 37.
(12) Transfer Agency Agreement dated October 25,
1997 between Registrant and PFPC Inc.
(h) (1) Basic Administrative Services Agreement between
Registrant and The BISYS Group, Inc. (Money
Market Funds) dated as of November 1, 1996 is
incorporated by reference to Exhibit 9(a) to
Post-Effective Amendment No. 52.
(2) Administration Agreement between Registrant and
The BISYS Group, Inc. (Non-Money Market Funds)
dated as of November 1, 1996 is incorporated by
reference to Exhibit 9(b) to Post-Effective
Amendment No. 52.
(3) Amendment No. 1 to the Administration Agreement
between Registrant and The BISYS Group, Inc.
(Asset Allocation Fund) dated as of November 1,
1996 is incorporated by reference to Exhibit
9(c) to Post-Effective Amendment No. 54.
(4) Cash Management and Related Services Agreement
between Registrant and The Bank of New York
(Horizon Shares and Horizon Service Shares)
dated as of May 1, 1990 is incorporated by
reference to Exhibit 9(s) to Post-Effective
Amendment No. 45.
(5) Amendment to Cash Management and Related
Services Agreement between Registrant and The
Bank of New York
C - 8
<PAGE> 787
dated as of June 21, 1993 is incorporated by
reference to Exhibit 9(t) to Post-Effective
Amendment No. 45.
(6) Accounting Services Agreement between the
Registrant and Provident Financial Processing
Corp is incorporated by reference to Exhibit
9(u) to Post-Effective Amendment No. 45.
(7) Fund Accounting Agreement dated September 15,
1997 between Registrant and The Bank of New
York
(8) Administration Agreement dated September 15,
1997 between Registrant and Bank of America
NT&SA
(9) Sub-Administration Agreement dated September
15,1997 between Bank of America NT&SA and PFPC
Inc.
(10) Accounting Services Agreement dated September
15, 1997 among Registrant, Bank of America
NT&SA and PFPC Inc.
(11) Administration & Sub-Administration Assumption
Agreement dated March 1, 1998 among Bank of
America NT&SA, Robertson, Stephens & Company
Investment Management L.P. and PFPC Inc.
(12) Administration & Sub-Administration
Reassumption Agreement dated April 28, 1998
among Bank of America NT&SA, Robertson,
Stephens & Company Investment Management L.P.
and PFPC Inc.
(i) Opinion of Drinker Biddle & Reath LLP
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of O'Melveny & Myers LLP
(3) Consent of Price Waterhouse LLP
(k) None
(l) (1) Purchase Agreement between Registrant and The
Dreyfus Corporation is incorporated by
reference to Exhibit 13(a) to Post-Effective
Amendment No. 45.
(2) Purchase Agreement between Registrant and
Hambrecht & Quist Group, Inc. dated March 31,
1988 is incorporated by reference to Exhibit
13(b) to Post-Effective Amendment No. 45.
(3) Investment Letter of Concord Financial Group,
Inc. to The Horizon Funds is incorporated by
reference to Exhibit 13(c) to Post-Effective
Amendment No. 45.
(4) Purchase Agreement between Pacific Horizon
Tax-Exempt Money Market Portfolio, Inc. and
Hambrecht & Quist Group, Inc. is incorporated
by reference to Exhibit 13(d) to Post-Effective
Amendment No. 45.
(5) Purchase Agreement between Pacific Horizon
Tax-Exempt Money Market Portfolio, Inc. and
Pacific Horizon Tax- Exempt Funds, Inc. is
incorporated by reference to Exhibit 13(e) to
Post-Effective Amendment No. 45.
(6) Purchase Agreement between Pacific Horizon
Tax-Exempt Money Market Portfolio, Inc. and The
Dreyfus Corporation is incorporated by
reference to Exhibit 13(f) to Post-Effective
Amendment No. 45.
C - 9
<PAGE> 788
(7) Purchase Agreement between Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. and
Hambrecht & Quist Group, Inc. is incorporated
by reference to Exhibit 13(g) to Post-Effective
Amendment No. 45.
(8) Purchase Agreement between Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. and
The Dreyfus Corporation is incorporated by
reference to Exhibit 13(h) to Post-Effective
Amendment No. 45.
(9) Purchase Agreement between Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. and
Pacific Horizon Tax- Exempt Funds, Inc. is
incorporated by reference to Exhibit 13(i) to
Post-Effective Amendment No. 45.
(10) Investment Letter of Concord Financial Group,
Inc. to The Horizon Capital Funds is
incorporated by reference to Exhibit 13(j) to
Post-Effective Amendment No. 45.
(m) (1) Shareholder Services Plan for Non-Money Market
Funds is incorporated by reference to Exhibit
15(a) to Post-Effective Amendment No. 45.
(2) Shareholder Services Plan for Horizon Service
Shares as modified by Registrant's Board of
Directors on January 29, 1993 is incorporated
by reference to Exhibit 15(b) to Post-
Effective Amendment No. 45.
(3) Revised Shareholder Servicing Agreement is
incorporated by reference to Exhibit 15(c) to
Post-Effective Amendment No. 45.
C - 10
<PAGE> 789
(4) Revised Shareholder Service Agreement as
modified by Registrant's Board of Directors on
January 29, 1993 is incorporated by reference
to Exhibit 15(d) to Post-Effective Amendment
No. 45.
(5) Revised Shareholder Servicing Agreement for
Non-Money Market Funds is incorporated by
reference to Exhibit 15(e) to Post-Effective
Amendment No. 45.
(6) Special Management Services Plan and related
Special Management Services Agreement for
Pacific Horizon Shares of Registrant's Money
Market Funds is incorporated by reference to
Exhibit 15(f) to Post-Effective Amendment No.
51.
(7) Distribution and Services Plan and related
Administrative Servicing Agreement and
Distribution Agreement with respect to
Registrant's "B" Shares.
(8) Distribution and Services Plan and related
Distribution and Administrative Servicing
Agreement with respect to Registrant's "S"
Shares, "X" Shares and "Y" Shares is
incorporated by reference to Exhibit 15(h) to
Post-Effective Amendment No. 56.
(9) Distribution Plan and related Distribution
Agreement with respect to Registrant's "K"
Shares is incorporated by reference to Exhibit
15(i) to Post-Effective Amendment No. 51.
(10) Administrative and Shareholder Services Plan
and related Administrative and Shareholder
Services Agreement with respect to Registrant's
"K" Shares is incorporated by reference to
Exhibit 15(j) to Post-Effective Amendment No.
51.
(11) Shareholder Service Plan and related
Shareholder Servicing Agreement for SRF Shares
is incorporated by reference to Exhibit 15(k)
to Post-Effective Amendment No. 53.
C - 11
<PAGE> 790
(n) Financial Data Schedules
(o) Amended and Restated Plan Pursuant to Rule 18f-3 for
Operation of a Multi-Class System.
ITEM 24. PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Directors.
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<PAGE> 791
ITEM 25. INDEMNIFICATION
Article VII, Section 3, of Registrant's Restated Articles of
Incorporation, incorporated herein by reference as Exhibit (a) hereto, and
Article VI, Section 2, of Registrant's Amended and Restated By-Laws,
incorporated herein by reference as Exhibit (b) hereto, provide for the
indemnification of Registrant's directors and officers. Indemnification of the
Fund's principal underwriter, custodians, sub-custodians, transfer agent and
sub-transfer agent is provided for, respectively, Section 4 of the Distribution
Agreement included herewith as Exhibit (e)(4), Article XV, Section 15 of the
Custody Agreement incorporated herein by reference as Exhibit (g)(1) hereto,
Section 12 of the Custodian Services Agreement incorporated herein by reference
as Exhibit (g)(6), Article XII, Section 5 of the Sub-Custodian Agreement
incorporated herein by reference as Exhibit (g)(9) hereto, Article III, Section
4 of the Sub-Custodian Agreement incorporated herein by
C - 13
<PAGE> 792
reference as Exhibit (g)(10) hereto, Section 8 of the form of Sub-Custody
Agreement incorporated herein by reference as Exhibit (8)(k), Article VII,
Section 7, of the Transfer Agency Agreement included herein as Exhibit (g)(12),
and Article VI, Section 3, of the Cash Management and Related Services Agreement
incorporated herein by reference as Exhibit (9)(d) hereto. Registrant has
obtained from a major insurance carrier a directors and officers' liability
policy covering certain types of errors and omissions. In no event will
Registrant indemnify any of its directors, officers, employees or agents against
any liability to which such person would otherwise be subject by reason of his
willful misfeasance, bad faith or gross negligence in the performance of his
duties or by reason of his reckless disregard of the duties involved in the
conduct of his office or under his agreement with Registrant. Registrant will
comply with Rule 484 under the Securities Act of 1933 and Release 11330 under
the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. (a) BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Bank of America National Trust and Savings Association performs investment
advisory services for Registrant.
Bank of America and its predecessors have been in the business of managing the
investments of fiduciary and other accounts since 1904. In addition to its trust
business, Bank of America provides commercial and consumer banking services.
To the knowledge of Registrant, none of the directors or officers
of Bank of America, except those set forth below, is or has been, at any time
during the past two calendar years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and officers of Bank of America also hold various positions with, and engage in
business for, BankAmerica Corporation, which owns all the outstanding stock of
Bank of America, or other subsidiaries of BankAmerica Corporation. Set forth
below are the names and principal businesses of the directors of Bank of America
and the directors and certain of the senior executive officers of Bank of
America who are engaged in any other business, profession, vocation or
employment of a substantial nature, other than with BankAmerica Corporation.
C - 14
<PAGE> 793
<TABLE>
<CAPTION>
POSITION WITH
BANK OF AMERICA
NATIONAL TRUST
AND SAVINGS PRINCIPAL TYPE OF
ASSOCIATION NAME OCCUPATION BUSINESS
- ----------- ---- ---------- --------
<S> <C> <C> <C>
Director ...... Joseph F. Alibrandi Chairman of the Manufacturer of
Board and CEO, Aerospace and
Whittaker Communication
Corporation Products
Director ...... Peter B. Bedford Chairman and CEO, California based
Bedford Property Real Estate
Investors, Inc. Investment Trust
Director ...... Richard A. Retired Chairman of Utility Company
Clarke the Board, Pacific
Gas and Electric
Company
Chairman ...... David A. Coulter Chairman of the National Bank
Board, Chief
Executive Officer
and President, Bank
America Corporation
and Bank of America
National Trust &
Savings Association
Director ...... Timm F. Crull Retired Chairman of Food
the Board, Nestle
USA, Inc.
Director ...... Kathleen Feldstein President, Economic
Economics Consulting
Studies, Inc.
Director ...... Donald E. Guinn Chairman Emeritus, Telecommuni-
Pacific Telesis cations and
Group Diversified
Holding Com-
pany
Director ...... Frank L. Hope, Jr. Consulting Architectural
Architect and Engineering
Consulting
Director ...... Walter E. Massey, President, Higher
Ph.D. Morehouse Education
College
Director ...... John M. Richman Of Counsel, Law firm
Wachtell, Lipton,
Rosen & Katz
</TABLE>
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<PAGE> 794
<TABLE>
<CAPTION>
Position with
Bank of America
National Trust
and Savings Principal Type of
Association Name Occupation Business
- ----------- ---- ---------- --------
<S> <C> <C> <C>
Director ...... Richard M. Retired; Chairman National Bank
Rosenberg of the Board and
CEO, Bank America
Corporation and
Bank of America
NT & SA
Director ...... A. Michael Spence Dean of the Higher
Graduate School of Education
Business, Stanford
University
Director ...... Solomon D. President and CEO, Telecommunica-
Trujillo U.S. West tions
Communications
Group
</TABLE>
(b) BUSINESS AND OTHER CONNECTIONS OF SUB-ADVISER
Wellington Management Company, LLP, ("Wellington") is an
investment adviser registered under the Investment Advisers Act of 1940 (the
"Advisers Act").
The list required by this Item 28 of the partners of Wellington,
together with information as to any business profession, vocation or employment
of substantial nature engaged in by such partners during the past two years, is
incorporated herein by references to Schedules A and D of Form ADV filed by
Wellington pursuant to the Advisers Act (SEC File No. 801-15908).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Provident Distributors, Inc. (the "Distributor") acts as
principal underwriter for the Company. The Distributor also acts as principal
underwriter or exclusive distributor for the following registered investment
companies: Temporary Investment Fund, Inc., Trust for Federal Securities,
Municipal Fund for Temporary Investment, Municipal Fund for California
Investors, Municipal Fund for New York Investors and Time Horizon Funds.
(b) For information as to the business, profession, vocation or
employment of a substantial nature of the Distributor, its officers and
partners, reference is made to the Form BD filed by the Distributor (file no.
8-46564), which is incorporated by reference herein.
(c) Not Applicable.
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<PAGE> 795
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(1) Bank of America NT&SA, 555 California Street, San Francisco,
California 94104 (records relating to the investment adviser,
administrator and subcustodian for the Funds it services).
(2) Provident Distributors, Inc., Four Falls Corporate Center,
6th Floor, West Conshohocken, Pennsylvania 19428-2961
(records relating to the distributor).
(3) PFPC International Ltd., 80 Harcourt Street, Dublin 2,
Ireland (records relating to the administrator for the Funds
it services).
(4) Wellington Management Company, LLP, 75 State Street, Boston,
Massachusetts 02109 (records relating to the investment
sub-adviser for the International Equity Fund)
(5) The Bank of New York, 90 Washington Street, New York, New
York 10286 (records relating to the custodian for the Funds
it services).
(6) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to the transfer agent for the Funds it
services and records relating to the sub-administrator for
the Funds it services).
(7) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496 (Registrant's Charter, By-Laws and Minute Books).
(8) PNC Bank, National Association, 200 Stevens Drive, Lester,
Pennsylvania 19113 (records relating to the custodian for the
Funds it services).
ITEM 29. MANAGEMENT SERVICES
Inapplicable.
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<PAGE> 796
ITEM 30. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940, as amended, as though such
provisions were applicable to it.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom a prospectus
is delivered.
C - 18
<PAGE> 797
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certified that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Philadelphia, and the Commonwealth of
Pennsylvania, on this 1st day of July, 1998.
PACIFIC HORIZON FUNDS, INC.
Registrant
*/Cornelius John Pings
---------------------------
Cornelius John Pings
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
*/Cornelius John Pings Chairman of the July 1, 1998
- ---------------------------- Board and President
Cornelius John Pings
/s/ Jay F. Nusblatt Treasurer (Chief July 1, 1998
- ---------------------------- Accounting and
Jay F. Nusblatt Financial Officer)
*/ Thomas M. Collins Director July 1, 1998
- ----------------------------
Thomas M. Collins
*/ Douglas B. Fletcher Director July 1, 1998
- ----------------------------
Douglas B. Fletcher
*/ Robert E. Greeley Director July 1, 1998
- ----------------------------
Robert E. Greeley
</TABLE>
*By: /S/W. Bruce McConnel, III
----------------------------
W. Bruce McConnel, III
Attorney-in-fact
C - 19
<PAGE> 798
SIGNATURES
Master Investment Trust, Series I has duly caused this Amendment to the
Registration Statement of the Pacific Horizon Funds, Inc. as it relates to the
Intermediate Bond (formerly, Flexible Bond) and Blue Chip Funds only, to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Philadelphia, and the Commonwealth of Pennsylvania on this 1st day of July,
1998.
MASTER INVESTMENT TRUST, SERIES I.
/s/ Monroe S. Haegele
--------------------------
Monroe S. Haegele
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement of Pacific Horizon Fund, Inc. has been signed below
by the Trustees and Principal Officers of Master Investment Trust, Series I.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Monroe S. Haegele President July 1, 1998
- ----------------------------
Monroe S. Haegele
*/ Robert E. Greeley Trustee July 1, 1998
- ----------------------------
Robert E. Greeley
*/ Thomas M. Collins Chairman of the Board July 1, 1998
- ----------------------------
Thomas M. Collins
/s/ Jay F. Nusblatt Assistant Treasurer July 1, 1998
- ---------------------------- (Chief Accounting
Jay F. Nusblatt and Financial Officer)
*/ Michael Austin Trustee July 1, 1998
- ----------------------------
Michael Austin
*/ Robert A. Nathane Trustee July 1, 1998
- ----------------------------
Robert A. Nathane
*/ Cornelius John Pings Trustee July 1, 1998
- ----------------------------
Cornelius John Pings
*By: /S/ W. Bruce McConnel, III
----------------------------
W. Bruce McConnel, III
Attorney-in-fact
</TABLE>
C - 20
<PAGE> 799
PACIFIC HORIZON FUNDS, INC.
Certificate of Secretary
The following resolution was duly adopted by the Board of Directors of
Pacific Horizon Funds, Inc. on February 3, 1998 and remains in effect on the
date hereof:
FURTHER RESOLVED, that the directors and officers of Pacific
Horizon who may be required to execute any amendments to Pacific
Horizon's Registration Statement be, and each hereby is, authorized to
execute a power of attorney appointing W. Bruce McConnel, III and
Cornelius J. Pings their true and lawful attorney or attorneys, to
execute in their name, place and stead, in their capacity as director
or officer, or both, of Pacific Horizon any and all amendments to the
Registration Statement, and all instruments necessary or incidental in
connection therewith, and to file the same with the SEC; and either of
said attorneys shall have the power to act thereunder with or without
the other said attorney and shall have full power of substitution and
resubstitution; and to do in the name and on behalf of said directors
and officers, or any or all of them, in any and all capacities, every
act whatsoever requisite or necessary to be done in the premises, as
fully and to all intents and purposes as each of said directors or
officers, or any or all of them, might or could do in person, said
acts of said attorneys, being hereby ratified and approved.
In WITNESS WHEREOF, I have hereunto set my hand this 1st day of July,
1998.
PACIFIC HORIZON FUNDS, INC.
/s/ W. Bruce McConnel, III
------------------------------------
W. Bruce McConnel, III
Secretary
<PAGE> 800
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
Cornelius John Pings, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable Pacific Horizon
Funds, Inc. (the "Fund"), to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended ("Acts"), and any rules,
regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Fund's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a director and/or officer of the Fund any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/ Cornelius John Pings
------------------------------
Cornelius John Pings
Date: December 6, 1995
<PAGE> 801
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
Thomas M. Collins, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Thomas M. Collins
------------------------------
Thomas M. Collins
Date: December 7, 1995
<PAGE> 802
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
Douglas B. Fletcher, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Douglas B. Fletcher
------------------------------
Douglas B. Fletcher
Date: December 7, 1995
<PAGE> 803
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
Robert E. Greeley, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended ("Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Robert E. Greeley
------------------------------
Robert E. Greeley
Date: December 7, 1995
<PAGE> 804
PACIFIC HORIZON FUNDS, INC.
POWER OF ATTORNEY
Kermit O. Hanson, whose signature appears below, does hereby
constitute and appoint Cornelius John Pings and W. Bruce McConnel, III, and
either of them his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable
Pacific Horizon Funds, Inc. (the "Fund"), to comply with the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended (Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Fund's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Fund any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
/s/ Kermit O. Hanson
------------------------------
Kermit O. Hanson
Date: December 6, 1995
<PAGE> 805
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
Thomas M. Collins, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable Master
Investment Trust, Series I (the "Trust") to comply with the Investment Company
Act of 1940, as amended and/or the Securities Act of 1933, as amended (the
"Acts") and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of (i) the Trust's Registration Statement and (ii) the
Registration Statement of any management investment company which invests or
intends to invest substantially all of its assets in the Trust (collectively,
the "Registration Statements") and any and all amendments to the Registration
Statements (including post-effective amendments) pursuant to said Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Trust the Registration Statements and any and
all amendments thereto filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/ Thomas M. Collins
-------------------------
Thomas M. Collins
Date: October 6, 1993
<PAGE> 806
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
Michael Austin, whose signature appears below, does hereby constitute
and appoint Thomas M. Collins and W. Bruce McConnel, III, and either of them,
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Michael Austin
-------------------------
Michael Austin
Date: October 6, 1993
<PAGE> 807
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
Robert A. Nathane, whose signature appears below, does hereby
constitute and appoint Thomas M. Collins and W. Bruce McConnel, III, and
either of them, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable Master
Investment Trust, Series I (the "Trust") to comply with the Investment Company
Act of 1940, as amended and/or the Securities Act of 1933, as amended (the
"Acts") and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of (i) the Trust's Registration Statement and (ii) the
Registration Statement of any management investment company which invests or
intends to invest substantially all of its assets in the Trust (collectively,
the "Registration Statements") and any and all amendments to the Registration
Statements (including post-effective amendments) pursuant to said Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Trust the Registration Statements and any and
all amendments thereto filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Robert A. Nathane
-------------------------
Robert A. Nathane
Date: October 6, 1993
<PAGE> 808
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
Robert E. Greeley, whose signature appears below, does hereby
constitute and appoint Thomas M. Collins and W. Bruce McConnel, III, and
either of them, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable Master
Investment Trust, Series I (the "Trust") to comply with the Investment Company
Act of 1940, as amended and/or the Securities Act of 1933, as amended (the
"Acts") and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of (i) the Trust's Registration Statement and (ii) the
Registration Statement of any management investment company which invests or
intends to invest substantially all of its assets in the Trust (collectively,
the "Registration Statements") and any and all amendments to the Registration
Statements (including post-effective amendments) pursuant to said Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Trust the Registration Statements and any and
all amendments thereto filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Robert E. Greeley
-------------------------
Robert E. Greeley
Date: October 6, 1993
<PAGE> 809
MASTER INVESTMENT TRUST, SERIES I
POWER OF ATTORNEY
Cornelius John Pings, whose signature appears below, does hereby
constitute and appoint Thomas M. Collins and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with power of substitution
or resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable Master Investment
Trust, Series I (the "Trust") to comply with the Investment Company Act of
1940, as amended and/or the Securities Act of 1933, as amended (the "Acts") and
any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of (i) the Trust's Registration Statement and (ii) the Registration Statement
of any management investment company which invests or intends to invest
substantially all of its assets in the Trust (collectively, the "Registration
Statements") and any and all amendments to the Registration Statements
(including post-effective amendments) pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a trustee
and/or officer of the Trust the Registration Statements and any and all
amendments thereto filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Cornelius John Pings
-------------------------
Cornelius John Pings
Date: December 6, 1995
<PAGE> 810
EXHIBIT INDEX
Exhibits
(d)(12) Assumption Agreement dated March 1, 1998 among Registrant, Bank of
America NT&SA and Robertson, Stephens & Company Investment
Management, L.P.
(d)(13) Assumption Agreement dated April 28, 1998 among Registrant, Bank of
America NT&SA and Robertson, Stephens & Company Investment
Management, L.P.
(d)(14) Assumption Agreement dated March 1, 1998 among Registrant, Bank of
America NT&SA, Robertson, Stephens & Company Investment Management,
L.P. and Wellington Management Company.
(d)(15) Form of Assumption Agreement dated April 28, 1998 among Registrant,
Bank of America NT&SA, Robertson, Stephens & Company Investment
Management, L.P. and Wellington Management Company.
(d)(16) Form of Investment Advisory Agreement dated , 1998 between
Bank of America NT&SA and Registrant.
(d)(17) Form of Investment Sub-Advisory Agreement dated , 1998 among
Registrant, Bank of America NT&SA and Wellington Management
Company.
(e)(4) Distribution Agreement dated September 15, 1997 between Registrant
and Provident Distributors, Inc.
(f) Board Guidelines on Significant Governance Issues.
(g)(12) Transfer Agency Agreement dated October 25, 1997 between
Registrant and PFPC Inc.
(h)(7) Fund Accounting Agreement dated September 15, 1997 between
Registrant and The Bank of New York
(h)(8) Administration Agreement dated September 15, 1997 between
Registrant and Bank of America NT&SA
(h)(9) Sub-Administration Agreement dated September 15,1997 between
Bank of America NT&SA and PFPC Inc.
(h)(10) Accounting Services Agreement dated September 15, 1997 among
Registrant, Bank of America NT&SA and PFPC Inc.
(h)(11) Administration & Sub-Administration Assumption Agreement dated
March 1, 1998 among Bank of America NT&SA, Robertson, Stephens &
Company Investment Management L.P. and PFPC Inc.
(h)(12) Administration & Sub-Administration Reassumption Agreement dated
April 28, 1998 among Bank of America NT&SA, Robertson, Stephens
& Company Investment Management L.P. and PFPC Inc.
(i) Opinion of Drinker Biddle & Reath LLP
(j)(1) Consent of Drinker Biddle & Reath LLP.
(j)(2) Consent of O'Melveny & Myers LLP
(j)(3) Consent of Price Waterhouse LLP
(m)(7) Distribution and Services Plan and related Administrative Servicing
and Distribution Agreements with respect to Registrant's "B"
Shares.
(n) Financial Data Schedules
(o) Amended and Restated Plan pursuant to Rule 18f-3 for Operation of a
Multi-Class System.
<PAGE> 1
Exhibit (d)(12)
ASSUMPTION
AGREEMENT made as of March 1, 1998 among PACIFIC HORIZON
FUNDS, INC., a Maryland corporation (the "Company"), BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under the laws of
the United States ("Bank of America"), and ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P., a California limited partnership registered as an
investment adviser pursuant to the Investment Advisers Act of 1940 ("Robertson
Stephens"). Bank of America and Robertson Stephens are each indirect,
wholly-owned subsidiaries of BankAmerica Corporation, a registered bank holding
company.
WHEREAS, the Company is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed as
investment adviser to the Company's (1) Prime, Treasury, Government, Treasury
Only, Tax-Exempt Money and California Tax-Exempt Money Market Funds pursuant to
an Investment Advisory Agreement dated April 22, 1992 as amended March 1, 1993;
(2) Aggressive Growth, U.S. Government Securities, and California Tax-Exempt
Bond Fund pursuant to an Investment Advisory Agreement dated April 22, 1992; (3)
Capital Income Fund pursuant to an Investment Advisory Agreement dated November
1, 1994; (4) National Municipal Bond Fund pursuant to an Investment Advisory
Agreement dated July 1, 1996; (4) Short-Term Government Fund pursuant to an
Investment Advisory Agreement dated July 30, 1996; (5) Corporate Bond Fund
pursuant to an Investment Advisory Agreement dated September 1, 1996; (6)
International Equity Fund pursuant to an Investment Advisory Agreement dated
January 1, 1997; and (7) Asset Allocation Fund (collectively, with the other
Funds named in this paragraph and the Blue Chip and Intermediate Bond Funds, the
"Funds") pursuant to an Investment Advisory Agreement dated June 23, 1997
(collectively, the "Investment Advisory Agreements");
WHEREAS, Bank of America has been previously appointed as the
Company's administrator pursuant to an Administration Agreement dated September
15, 1997 (the "Administration Agreement");
WHEREAS, Bank of America and Robertson Stephens desire to have
Robertson Stephens assume the rights, responsibilities, liabilities and
obligations of Bank of America under the Investment Advisory Agreements and
Administration Agreement;
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Robertson Stephens hereby assumes all rights,
responsibilities, liabilities and obligations of Bank of America under the
Investment Advisory Agreements and Administration Agreement.
<PAGE> 2
2. Bank of America and Robertson Stephens hereby represent to
the Company that (i) the management personnel of Bank of America responsible for
providing investment advisory and administrative services to the Funds under the
Investment Advisory Agreements and Administration Agreement, including the
portfolio managers and the supervisory personnel, are employees of Robertson
Stephens where they continue to provide such services for the Funds, (ii) Bank
of America and Robertson Stephens are indirect, wholly owned subsidiaries of
BankAmerica Corporation, and (iii) the proposed assumption does not involve a
change in actual control or actual management with respect to the investment
adviser, administrator or the Funds and does not result in an "assignment"
pursuant to Rule 2a-6 under the 1940 Act.
3. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory Agreements and
Administration Agreement.
-2-
<PAGE> 3
IN WITNESS WHEREOF, intending to be legally bound hereby, the
parties hereto have caused this instrument to be executed by their officers
designated below as of the day and year first above written.
PACIFIC HORIZON FUNDS, INC.
By:/s/Cornelius J. Pings
---------------------------------
(Authorized Officer)
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/Signature Illegible
---------------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By:/s/Dana Welch
---------------------------------
(Authorized Officer)
-3-
<PAGE> 1
Exhibit (d)(13)
ASSUMPTION
AGREEMENT made as of April 28, 1998 among PACIFIC HORIZON
FUNDS, INC., a Maryland corporation (the "Company"), BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under the laws of
the United States ("Bank of America"), and ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P., a California limited partnership registered as an
investment adviser pursuant to the Investment Advisers Act of 1940 ("Robertson
Stephens"). Bank of America and Robertson Stephens are each indirect,
wholly-owned subsidiaries of BankAmerica Corporation, a registered bank holding
company.
WHEREAS, the Company is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed as
investment adviser to the Company's (1) Prime, Treasury, Government, Treasury
Only, Tax-Exempt Money and California Tax-Exempt Money Market Funds pursuant to
an Investment Advisory Agreement dated April 22, 1992 as amended March 1, 1993;
(2) Aggressive Growth, U.S. Government Securities, and California Tax-Exempt
Bond Fund pursuant to an Investment Advisory Agreement dated April 22, 1992; (3)
Capital Income Fund pursuant to an Investment Advisory Agreement dated November
1, 1994; (4) National Municipal Bond Fund pursuant to an Investment Advisory
Agreement dated July 1, 1996; (4) Short-Term Government Fund pursuant to an
Investment Advisory Agreement dated July 30, 1996; (5) Corporate Bond Fund
pursuant to an Investment Advisory Agreement dated September 1, 1996; (6)
International Equity Fund pursuant to an Investment Advisory Agreement dated
January 1, 1997; and (7) Asset Allocation Fund (collectively, with the other
Funds named in this paragraph and the Blue Chip and Intermediate Bond Funds, the
"Funds") pursuant to an Investment Advisory Agreement dated June 23, 1997
(collectively, the "Investment Advisory Agreements");
WHEREAS, Bank of America has been previously appointed as the
Company's administrator pursuant to an Administration Agreement dated September
15, 1997 (the "Administration Agreement");
WHEREAS, Robertson Stephens pursuant to as Assumption
Agreement dated March 1, 1998 assumed the rights, responsibilities, liabilities
and obligations of Bank of America under the Investment Advisory Agreements and
Administration Agreement;
WHEREAS, Bank of America and Robertson Stephens desire to have
Bank of America assume the rights, responsibilities, liabilities and obligations
of Robertson Stephens under the Investment Advisory Agreements and
Administration Agreement; and
<PAGE> 2
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Bank of America hereby assumes all rights,
responsibilities, liabilities and obligations of Robertson Stephens under the
Investment Advisory Agreements and Administration Agreement.
2. Bank of America and Robertson Stephens hereby represent to
the Company that (i) the management personnel of Robertson Stephens responsible
for providing investment advisory and administrative services to the Funds under
the Investment Advisory Agreements and Administration Agreement, including the
portfolio managers and the supervisory personnel, are employees of Bank of
America where they continue to provide such services for the Funds, (ii) Bank of
America and Robertson Stephens are indirect, wholly owned subsidiaries of
BankAmerica Corporation, and (iii) the proposed assumption does not involve a
change in actual control or actual management with respect to the investment
adviser, administrator or the Funds and does not result in an "assignment"
pursuant to Rule 2a-6 under the 1940 Act.
3. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory Agreements and
Administration Agreement.
-2-
<PAGE> 3
IN WITNESS WHEREOF, intending to be legally bound hereby, the
parties hereto have caused this instrument to be executed by their officers
designated below as of the day and year first above written.
PACIFIC HORIZON FUNDS, INC.
By:/s/Jay F. Nusblatt
-------------------------------
(Authorized Officer)
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/Signature Illegible
-------------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By:/s/Dana Welch
-------------------------------
(Authorized Officer)
-3-
<PAGE> 1
Exhibit (d)(14)
ASSUMPTION
AGREEMENT made as of March 1, 1998 among BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under
the laws of the United States ("Bank of America"), ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P., a California limited partnership registered as an
investment adviser pursuant to the Investment Advisers Act of 1940 ("Robertson
Stephens"); and WELLINGTON MANAGEMENT COMPANY, LLP, a Massachusetts limited
liability partnership ("Wellington"). Bank of America and Robertson Stephens are
each indirect, wholly-owned subsidiaries of BankAmerica Corporation, a
registered bank holding company.
WHEREAS, Pacific Horizon Funds, Inc. (the "Company") is
registered as an open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed as
investment adviser to the Company's International Equity Fund (the "Fund")
pursuant to an Investment Advisory Agreement dated January 1, 1997 and
Wellington has been previously appointed as sub-investment adviser to the Fund
pursuant to a Sub-Advisory Agreement dated January 1, 1997;
WHEREAS, Bank of America and Robertson Stephens desire to have
Robertson Stephens assume the rights, responsibilities, liabilities and
obligations of Bank of America under the Investment Advisory and Sub-Advisory
Agreements;
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Robertson Stephens hereby assumes all rights,
responsibilities, liabilities and obligations of Bank of America under the
Investment Advisory and Sub-Advisory Agreements.
2. Bank of America and Robertson Stephens hereby represent to
Wellington that (i) the management personnel of Bank of America responsible for
providing investment advisory services to the Fund under the Investment Advisory
and Sub-advisory Agreements, including the portfolio managers and the
supervisory personnel, are employees of Robertson Stephens where they continue
to provide such services for the Fund, (ii) Bank of America and Robertson
Stephens are indirect, wholly owned subsidiaries of BankAmerica Corporation, and
(iii) the proposed assumption does not involve a change in actual control or
actual management with respect to the investment adviser, sub-investment adviser
or the Funds and does not result in an "assignment" pursuant to Rule 2a-6 under
the 1940 Act.
3. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory Agreement.
<PAGE> 2
IN WITNESS WHEREOF, intending to be legally bound hereby, the
parties hereto have caused this instrument to be executed by their officers
designated below as of the day and year first above written.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/Signature Illegible
-------------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By:/s/Dana Welch
-------------------------------
(Authorized Officer)
WELLINGTON MANAGEMENT COMPANY, LLP
By:/s/Signature Illegible
-------------------------------
(Authorized Officer)
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<PAGE> 1
Exhibit (d)(15)
ASSUMPTION
AGREEMENT made as of April 28, 1998 among BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under
the laws of the United States ("Bank of America"), ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P., a California limited partnership registered as an
investment adviser pursuant to the Investment Advisers Act of 1940 ("Robertson
Stephens"); and WELLINGTON MANAGEMENT COMPANY, LLP, a Massachusetts limited
liability partnership ("Wellington"). Bank of America and Robertson Stephens are
each indirect, wholly-owned subsidiaries of BankAmerica Corporation, a
registered bank holding company.
WHEREAS, Pacific Horizon Funds, Inc. (the "Company") is
registered as an open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed as
investment adviser to the Company's International Equity Fund (the "Fund")
pursuant to an Investment Advisory Agreement dated January 1, 1997 and
Wellington has been previously appointed as sub-investment adviser to the Fund
pursuant to a Sub-Advisory Agreement dated January 1, 1997;
WHEREAS, Robertson Stephens pursuant to as Assumption
Agreement dated March 1, 1998 assumed the rights, responsibilities, liabilities
and obligations of Bank of America under the Investment Advisory and
Sub-Advisory Agreements;
WHEREAS, Bank of America and Robertson Stephens desire to have
Bank of America assume the rights, responsibilities, liabilities and obligations
of Robertson Stephens under the Investment Advisory and Sub-Advisory Agreements;
and
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Bank of America hereby assumes all rights,
responsibilities, liabilities and obligations of Robertson Stephens under the
Investment Advisory and Sub-Advisory Agreements.
2. Bank of America and Robertson Stephens hereby represent to
Wellington that (i) the management personnel of Robertson Stephens responsible
for providing investment advisory services to the Fund under the Investment
Advisory and Sub-advisory Agreements, including the portfolio managers and the
supervisory personnel, are employees of Bank of America where they continue to
provide such services for the Fund, (ii) Bank of America and Robertson Stephens
are indirect, wholly owned subsidiaries of BankAmerica Corporation, and (iii)
the proposed assumption does not involve a change in actual control or actual
<PAGE> 2
management with respect to the investment adviser, sub-investment adviser or the
Funds and does not result in an "assignment" pursuant to Rule 2a-6 under the
1940 Act.
3. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory and Sub-Advisory
Agreements.
IN WITNESS WHEREOF, intending to be legally bound hereby, the
parties hereto have caused this instrument to be executed by their officers
designated below as of the day and year first above written.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
----------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By:
----------------------------
(Authorized Officer)
WELLINGTON MANAGEMENT COMPANY, LLP
By:
----------------------------
(Authorized Officer)
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<PAGE> 1
Exhibit (d)(16)
PACIFIC HORIZON FUNDS, INC.
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of __________________, 1998 between PACIFIC
HORIZON FUNDS, INC., a Maryland corporation (herein called the "Company"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Adviser").
WHEREAS, the Company is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Company desires to retain the Adviser to furnish
investment advisory services to the investment portfolios of the Company listed
on Schedule A and any other investment portfolios which may be organized in the
future and listed on Schedule A (the "Funds") ;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) The Company hereby appoints the Adviser to act as
investment adviser to each Fund for the period and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided. The Adviser may,
in its discretion, provide such services through its own employees or the
employees of one or more affiliated companies that are qualified to act as
investment adviser to the Company under applicable law and are under the common
control of BankAmerica Corporation provided (i) that all persons, when providing
services hereunder, are functioning as part of an organized group of persons,
and (ii) that such organized group of persons is managed at all times by
authorized officers of the Adviser.
(b) In the event that the Company establishes one or more
investment portfolios other than the Funds with respect to which it desires to
retain the Adviser to act as investment adviser hereunder, it shall notify the
Adviser in writing. If the Adviser is willing to render such services under this
Agreement it shall so notify the Company in writing whereupon such investment
portfolio shall become a "Fund" hereunder and shall be subject to the provisions
of this Agreement to the same extent as the Funds except to the extent that said
provisions (including those relating to the compensation payable by the Funds to
the Adviser) are modified with respect to such Fund in writing by the Company
and the Adviser at the time. The Funds and any additional
<PAGE> 2
investment portfolios established hereunder in accordance with this paragraph
are sometimes collectively referred to herein as the "Funds" and individually as
a "Fund."
2. SERVICES. Subject to the supervision of the Company's Board of
Directors (the "Board"), the Adviser, in consultation with any Sub-Adviser
appointed pursuant to Section 3 hereof with respect to a particular Fund, will
provide a continuous investment program for each of the Funds, including
investment research and management with respect to all securities and
investments and cash equivalents in the Funds. The Adviser will determine from
time to time what securities and other investments will be purchased, retained
or sold by the Company with respect to each Fund. The Adviser will provide the
services under this Agreement in accordance with each Fund's investment
objective, policies and restrictions as stated in the Company's registration
statement, as from time to time amended, and resolutions of the Board. The
Adviser further agrees that it:
(a) Will conform with all applicable rules and regulations of
the Securities and Exchange Commission and will in addition conduct its
activities under this Agreement in accordance with other applicable law,
including but not limited to banking law.
(b) Will review, monitor and report to the Board of Directors
regarding the performance and investment procedures of any Sub-Adviser (as
defined in Section 3 of this Agreement).
(c) Will assist and consult with any Sub-Adviser appointed
with respect to a particular Fund in connection with that Fund's continuous
investment program (as defined in Section 3 of this Agreement).
(d) Will place all orders for the purchase and sale of
portfolio securities for the account of each Fund with brokers or dealers
selected by the Adviser. In executing portfolio transactions and selecting
brokers or dealers, the Adviser will use its best efforts to seek on behalf of
the Company and each Fund the best overall terms available. In assessing the
best overall terms available for any transaction the Adviser shall consider all
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis. In evaluating the best
overall terms available, and in selecting the broker or dealer to execute a
particular transaction, the Adviser may also consider the brokerage and research
services (as those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934, as amended) provided to any Fund and/or other accounts over which
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<PAGE> 3
the Adviser or any affiliate of the Adviser exercises investment discretion. The
Adviser is authorized, subject to the prior approval of the Board, to negotiate
and pay to a broker or dealer who provides such brokerage and research services
a commission for executing a portfolio transaction for any Fund which is in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction if, but only if, the Adviser determines in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer viewed in
terms of that particular transaction or in terms of the overall responsibilities
of the Adviser to the particular Fund and to the Company. No prior approval by
the Board, however, shall be required so long as the broker or dealer selected
by the Adviser obtains best price and execution on a particular transaction. In
no instance will portfolio securities be purchased from or sold to the Adviser,
any Sub-Adviser, any administrator, sub-administrator or distributor of the
Company, or an affiliated person of any of them acting as principal or as
broker, except as permitted by law. In executing portfolio transactions for any
Fund, the Adviser may, but shall not be obligated to, to the extent permitted by
applicable laws and regulations, aggregate the securities to be sold or
purchased with those of other Funds and its other clients where such aggregation
is not inconsistent with the policies set forth in the Company's registration
statement. In such event, the Adviser will allocate the securities so purchased
or sold, and the expenses incurred in the transaction, pursuant to any
applicable law or regulation and in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Funds and such
other clients.
In performing the investment advisory services hereunder, the Adviser
is authorized to purchase, sell or otherwise deal with securities or other
instruments for which (a) the Adviser, (b) any affiliate of the Adviser, (c) an
entity in which the Adviser or an affiliate of the Adviser has a direct or
indirect interest, or (d) another member of a syndicate or other intermediary
(where an entity referred to in (a), (b) or (c) above was a member of the
syndicate), has acted, now acts or in the future will act as an underwriter,
syndicate member, market-maker, dealer, broker or in any other similar capacity,
whether the purchase, sale or other dealing occurs during the life of the
syndicate or after the close of the syndicate, provided such purchase, sale or
dealing is permitted under the 1940 Act and the rules thereunder. Insofar as
permitted by law any rules of or under applicable law prohibiting or restricting
in any way an agent or fiduciary from dealing with itself or from dealing with
respect to any matter in which it may or does have a personal interest shall not
apply to the Adviser, to the extent its actions are authorized under this
paragraph.
(e) Will maintain all books and records with respect to the
securities transactions for the Funds, keep books of account
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<PAGE> 4
with respect to such Funds and furnish the Board such periodic special reports
as the Board may request.
(f) Will maintain a policy and practice of conducting its
investment advisory operations independently of its commercial banking
operations. When the Adviser makes investment recommendations for a Fund, its
investment advisory personnel will not inquire or take into consideration
whether the issuer of securities proposed for purchase or sale for the Fund's
account are customers of its commercial department. In dealing with commercial
customers, the Adviser's commercial department will not inquire or take into
consideration whether securities of those customers are held by the Funds.
(g) Will treat confidentially and as proprietary information
of the Company all records and other information relative to the Company and
prior or present Company shareholders or those persons or entities who respond
to inquiries concerning investment in the Company, and will not use such records
and information for any purpose other than performance of its responsibilities
and duties hereunder or under any other agreement with the Company except after
prior notification to and approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be withheld where the Adviser may
be exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Company. Nothing contained herein, however, shall prohibit
the Adviser from advertising to or soliciting the public generally with respect
to other products or services, including, but not limited to, any advertising or
marketing via radio, television, newspapers, magazines or direct mail
solicitation, regardless of whether such advertisement or solicitation may
coincidentally include prior or present Company shareholders or those persons or
entities who have responded to inquiries regarding the Company.
3. SUB-ADVISER. It is understood that the Adviser may from time to time
employ or associate with itself such person or persons as the Adviser believes
to be fitted to assist it in the performance of this Agreement (each a
"Sub-Adviser"); provided, however, that the compensation of such person or
persons shall be paid by the Adviser and that the Adviser shall be as fully
responsible to the Company for the acts and omissions of any such person as it
is for its own acts and omissions; and provided further, that the retention of
any Sub-Adviser shall be approved as may be required by the 1940 Act.
Notwithstanding any such employment or association with respect to the
International Equity Fund, the Adviser shall itself (a) establish and monitor
general investment criteria and policies for the Fund involved, (b) review and
analyze on a periodic basis such Fund's portfolio holdings and transactions in
order to determine their appropriateness in light
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<PAGE> 5
of the Fund's shareholder base, and (c) review and analyze on a periodic basis
the policies established by any Sub-Adviser for such Fund with respect to the
placement of orders for the purchase and sale of portfolio securities. In the
event that any Sub-Adviser appointed hereunder is terminated, the Adviser may
provide investment advisory services pursuant to this Agreement to the Funds
without further shareholder approval.
4. SERVICES NOT EXCLUSIVE. The Adviser will for all purposes herein be
deemed to be an independent contractor and will, unless otherwise expressly
provided herein or authorized by the Board from time to time, have no authority
to act for or represent the Company in any way or otherwise be deemed its agent.
The investment management services furnished by the Adviser hereunder are not
deemed exclusive, and the Adviser will be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all records which it
maintains for the Company are the property of the Company and further agrees to
surrender promptly to the Company any such records upon the Company's request.
The Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31-1 under the
1940 Act.
6. EXPENSES. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its activities under the
Agreement other than the cost of securities (including brokerage commissions, if
any) purchased for the Company.
7. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Company will pay the Adviser and the Adviser
will accept as full compensation therefor a fee, computed daily and paid monthly
(in arrears) for the Funds and at the annual rates set forth on Schedule B. Such
fee as is attributable to a Fund will be a separate charge to each such Fund and
will be the several (and not joint or joint and several) obligation of each such
Fund.
8. LIMITATION OF LIABILITY. Subject to the provisions of Section 3
hereof concerning the Adviser's responsibility for the acts and omissions of
persons employed by or associated with the Adviser, the Adviser will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Company in connection with the performance of this 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 on the part of the
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<PAGE> 6
Adviser in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
9. DURATION AND TERMINATION. This Agreement will become effective with
respect to each Fund as of the date first above written, provided that the
shareholders of each such Fund have previously approved the Agreement in
accordance with the requirements of the 1940 Act. This Agreement will become
effective with respect to any additional Fund on the date of receipt by the
Company of notice from the Adviser in accordance with Section 1(b) hereof that
the Adviser is willing to serve as investment adviser with respect to such Fund,
provided that this Agreement (as supplemented by the terms specified in any
notice and agreement pursuant to Section 1(b) hereof) shall have been approved
by the shareholders of such Fund in accordance with the requirements of the 1940
Act.
Unless sooner terminated as provided herein, this Agreement will
continue in effect until October 31, 1999. Thereafter, if not terminated, this
Agreement shall continue in effect as to a particular Fund for successive annual
periods, provided such continuance is specifically approved at least annually
(a) by the vote of a majority of those members of the Board who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Board or by
vote of a majority of the outstanding voting securities of such Fund.
Notwithstanding the foregoing, this Agreement may be terminated as to any Fund
at any time, without the payment of any penalty, by the Company (by vote of the
Board or by vote of a majority of the outstanding voting securities of such
Fund), or by the Adviser, on sixty days' written notice. This Agreement will
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meaning as the meaning
of such terms in the 1940 Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement will be
effective as to a particular Fund until approved by vote of a majority of the
outstanding voting securities of such Fund.
11. NOTICES. Notices of any kind to be given to the Adviser hereunder
by the Company will be in writing and will be duly given if mailed or delivered
to the Adviser at ______________________, or at such other address or to such
individuals as will be so specified by the Adviser to the Company. Notices of
any kind to be
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<PAGE> 7
given to the Company hereunder by the Adviser will be in writing and will be
duly given if mailed or delivered to the Company at 400 Bellevue Parkway, Suite
108, Wilmington, Delaware 19809 (with a copy to Association of American
Universities, 1200 New York Avenue, N.W., Suite 550, Washington, D.C. 20005,
Attention: Dr. Cornelius J. Pings), or at such other address or to such
individual as will be so specified by the Company to the Adviser.
12. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and will inure to the benefit of
the parties hereto and their respective successors and will be governed by the
internal laws, and not the law of conflicts, of the State of Maryland; provided
that nothing herein will be construed in a manner inconsistent with the 1940
Act, the Investment Advisers Act of 1940, as amended, or any rule or regulation
of the Securities and Exchange Commission thereunder. This Agreement may be
executed in two or more parts which together shall constitute a single
Agreement.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PACIFIC HORIZON FUNDS, INC.
By:
--------------------------
Name:
Title:
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By:
--------------------------
Name:
Title:
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<PAGE> 9
Schedule A
FUNDS
Prime
Treasury
Treasury Only
Government
Tax-Exempt Money
California Tax-Exempt Money Market
Aggressive Growth
U.S. Government Securities
Capital Income
California Tax-Exempt Bond
Asset Allocation
National Municipal Bond
International Equity
Short-Term Government
Corporate Bond Funds
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<PAGE> 10
Schedule B
FUND FEE AS A PERCENTAGE
OF EACH FUND'S NET ASSETS
Prime, Treasury, Treasury Only, .10% of the first $3 billion;
Government, Tax-Exempt Money .09% of the next $2 billion;
and California Tax-Exempt plus .08% of the amount over $5
Money Market Funds billion
Short-Term Government .25%
California Tax-Exempt Bond .30%
U.S. Government Securities Fund .35%
National Municipal Bond .35%
Asset Allocation .40%
Capital Income Fund .45%
Corporate Bond Fund .45%
Aggressive Growth .60%
International Equity Fund .75%
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<PAGE> 1
Exhibit (d)(17)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of __________, 1998 between Bank of America National
Trust and Savings Association, a national banking association (herein called the
"Adviser"), and Wellington Management Company, LLP, a Massachusetts limited
liability partnership (herein called the "Sub-Adviser").
WHEREAS, Pacific Horizon Funds, Inc., a Maryland corporation
(hereinafter called the "Company"), is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, pursuant to an Investment Advisory Agreement dated __________,
1998 (hereinafter called the "Investment Advisory Agreement"), by and between
the Company and the Adviser, the Adviser has agreed to furnish investment
advisory services to the Company with respect to its International Equity Fund
(the "Fund"); and
WHEREAS, the Investment Advisory Agreement specifically authorizes the
Adviser to sub-contract investment advisory services on behalf of the Fund to a
sub-adviser pursuant to a sub-advisory agreement agreeable to the Company and
approved in accordance with the provisions of the 1940 Act; and
WHEREAS, the Board of Directors of the Company and the shareholders of
the Fund approved this Agreement, and the Sub-Adviser is willing to furnish such
services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. APPOINTMENT.
The Adviser hereby appoints the Sub-Adviser to act as sub-investment
adviser with respect to the Fund, for the period and on the terms set forth in
this Agreement. The Sub-Adviser accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
<PAGE> 2
2. SERVICES OF SUB-ADVISER.
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 and investments and cash equivalents in the Fund.
The Sub-Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by the Fund. The Sub-Adviser
will provide the services rendered by it under this Agreement in accordance with
the investment criteria and policies established from time to time for the Fund
by the Adviser, the investment objective, policies and restrictions as stated in
the Company's currently effective Registration Statement with respect to the
Fund, and resolutions of the Company's Board of Directors. Without limiting the
generality of the foregoing, the Sub-Adviser further agrees that it will
maintain such books and records regarding the securities transactions with
respect to the Fund as may be required or otherwise requested by the Company and
its Board of Directors and the Sub-Adviser will also supply the Company and its
Board of Directors with reports, statistical data and economic information as
requested.
3. OTHER COVENANTS.
The Sub-Adviser agrees that it:
(a) will conform with all applicable Rules and Regulations of
the Securities and Exchange Commission and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will use the same skill and care in providing services
under this Agreement as it uses in providing services to fiduciary accounts for
which it has investment responsibilities;
(c) will place orders pursuant to its investment
determinations with respect to the Fund with brokers or dealers in accordance
with the policy set forth in the Fund's Registration Statement or as the Adviser
or Board of Directors may direct from time to time. In executing portfolio
transactions and selecting brokers or dealers, the Sub-Adviser will use its best
efforts to seek on behalf of the Fund the best overall terms available. In
assessing the best overall terms available for any transaction, the Sub-Adviser
shall consider all factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for specific transactions and on a continuing basis. In
evaluating the best overall terms available, and in selecting the broker-dealer
to
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<PAGE> 3
execute a particular transaction, the Sub-Adviser may also consider the
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934, as amended) provided with respect to the
Fund, other investment portfolios or other accounts over which the Sub-Adviser
or an affiliate of the Sub-Adviser exercises investment discretion. The
Sub-Adviser is authorized, subject to the prior approval of the Adviser and the
Company's Board of Directors, to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction with respect to the Fund that is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if, but only if, the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer -- viewed in terms of that particular
transaction or in terms of the overall responsibilities of the Sub-Adviser to
the Fund and to the Company. No prior approval by the Adviser or the Company's
Board of Directors, however, shall be required so long as the broker or dealer
selected by the Sub-Adviser obtains best price and execution on a particular
transaction. In no instance will portfolio securities be purchased from or sold
to the Adviser, the Sub-Adviser, or Concord Holding Corporation, or any
affiliated person of the Adviser, the Sub-Adviser, or Concord Holding
Corporation acting as principal or broker, except as permitted by law. In
executing portfolio transactions with respect to the Fund, the Sub-Adviser may,
but is not obligated to, to the extent permitted by applicable laws and
regulations, aggregate the securities to be sold or purchased with those of its
other clients where such aggregation is not inconsistent with the policies set
forth in the Company's currently effective Registration Statement. In such event
the Sub-Adviser will allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Fund, such other
portfolios and such other clients.
(d) will treat confidentially and as proprietary information
of the Company all records and other information relative to the Company and
prior or present Company shareholders ("Investors") or those persons or entities
who respond to inquiries concerning investment in the Company, and will not use
such records and information for any purpose other than performance of its
responsibilities and duties hereunder or under any other agreement with the
Company except after prior notification to and approval in writing by the
Company, which approval shall not be unreasonably withheld and may not be
withheld where the Sub-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Company. Nothing
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<PAGE> 4
contained herein, however, shall prohibit the Sub-Adviser from advertising to or
soliciting the public generally with respect to other procedures or services,
including but not limited to, any advertising or marketing via radio,
television, newspapers, magazines or direct mail solicitation, regardless of
whether such advertisement or solicitation may coincidentally include prior or
present Investors or those persons or entities who have responded to inquiries
regarding the Company.
(e) will not purchase any securities from or sell any
securities to the Adviser, the Company's administrator or either of their
affiliates on behalf of the Fund except as permitted by law. Nothing in this
subsection shall in any way prohibit the Sub-Adviser or any of its affiliates
from purchasing securities from, selling securities to or engaging in any other
financial transactions with the Adviser or any of its affiliates on behalf of
any other accounts managed by the Sub-Adviser.
(f) will provide the Fund's Custodian on each business day
with information relating to all transactions concerning the Fund's assets and
shall provide the Adviser with such information upon request.
(g) on a monthly basis, will provide information regarding
investment strategy to be employed by the Sub-Adviser on behalf of the Fund and
information regarding the Fund's performance against its benchmark and will
provide such other information as the Adviser may reasonably request from time
to time.
4. SERVICES NOT EXCLUSIVE.
The services furnished by the Sub-Adviser hereunder are deemed not to
be exclusive, and the Sub-Adviser shall be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby.
The Sub-Adviser will for all purposes herein be deemed to be an independent
contractor and will, unless otherwise expressly authorized by the Board from
time to time, have no authority to act for or represent the Company or the
Adviser in any way or otherwise be deemed their agent.
-4-
<PAGE> 5
5. BOOKS AND RECORDS.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Sub-Adviser hereby agrees that all records that it maintains with respect to
the Fund are the property of the Company and further agrees to surrender
promptly to the Company any of such records upon the Company's request; provided
however that the Sub-Adviser may retain a copy of such records. The Sub-Adviser
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act.
6. EXPENSES.
During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions and other
transaction costs, if any) purchased or sold with respect to the Fund.
7. COMPENSATION.
For the services provided and the expenses assumed pursuant to this
Agreement, the Adviser will pay the Sub-Adviser, and the Sub-Adviser will accept
as full compensation therefor, a fee, payable quarterly (in arrears), at the
following annual rates based on the average month-end net assets of the Fund as
follows:
<TABLE>
<CAPTION>
FUND ASSETS RATE OF SUB-ADVISORY FEE
----------- ------------------------
<S> <C>
First $50 million 0.40%
Next $100 million 0.30%
Next $350 million 0.25%
Over $500 million 0.20%
</TABLE>
The Sub-Adviser acknowledges that it shall not be entitled to any further
compensation from the Adviser in respect of the services provided and expenses
assumed by it under this Agreement. The Sub-Adviser understands and agrees that
the Company and the Fund shall have no liability for payment of the
Sub-Adviser's fees hereunder, and that the Sub-Adviser's sole recourse for
payment of such fees shall be to the Adviser.
-5-
<PAGE> 6
8. LIMITATION OF LIABILITY.
The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company in connection with the
performance of this Agreement, except that the Sub-Adviser shall be 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 this Agreement. The Sub-Adviser acknowledges
and agrees that the performance of this Agreement is for the benefit of the
Company, that the Sub-Adviser is therefore directly liable and responsible to
the Company for the performance of its obligations hereunder, and that the
Company may enforce in its own name and for itself such liability and
responsibility.
9. DURATION AND TERMINATION.
This Agreement will become effective as of the date hereof and, unless
sooner terminated as provided herein, shall continue in effect until October 31,
1999. Thereafter, if not terminated, this Agreement shall 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 this 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.
Notwithstanding the foregoing, this 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 shall be given
simultaneously to the Adviser. In addition, notwithstanding anything herein to
the contrary, 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) this Agreement shall terminate upon the
effective date of such termination of the Investment Advisory Agreement. This
Agreement will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meanings as such terms
have in the 1940 Act.)
-6-
<PAGE> 7
10. AMENDMENT OF THIS AGREEMENT.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought. No amendment of this Agreement shall be effective until approved by vote
of a majority of the outstanding voting securities of the Fund.
11. MISCELLANEOUS.
The captions in the Agreement are included for convenience of reference
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and shall be governed by the internal laws, and not the
law of conflicts, of the State of Maryland; provided that nothing herein will be
construed in a manner inconsistent with the 1940 Act, the Investment Advisers
Act of 1940, as amended, or any rule or regulation of the Securities and
Exchange Commission thereunder.
This Agreement may be executed in two or more parts which together
shall constitute a single Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
--------------------------------
Name:
Title:
WELLINGTON MANAGEMENT COMPANY, LLP
By:
--------------------------------
Name:
Title:
-7-
<PAGE> 1
Exhibit(e)(4)
DISTRIBUTION AGREEMENT
This Distribution Agreement is made as of September 15, 1997 between
PACIFIC HORIZON FUNDS, INC., a Maryland Corporation (herein called the
"Company"), and PROVIDENT DISTRIBUTORS, INC., (herein called "Distributor").
WHEREAS, the Company is an open-end, management investment company and is
so registered under the Investment Company Act of 1940; and
WHEREAS, the Company will offer and maintain multiple investment
portfolios as specified in its Registration Statement on Form N-1A (each
individually a "Fund" and collectively the "Funds"); and
WHEREAS, the Company desires to retain Distributor as distributor for the
Funds to provide for the sale, distribution and redemption of shares of common
stock of the Funds (herein collectively called "Shares"), and Distributor is
willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Company has delivered to Distributor copies of each of the following
documents and shall deliver to it all future amendments and supplements
thereto, if any:
(a) The Company's Charter and all amendments thereto (such Charter, as
presently in effect and as it shall from time to time be amended,
herein called the "Company Charter");
(b) Bylaws of the Company (such Bylaws, as presently in effect and as they
shall from time to time be amended, herein called the "Bylaws");
(c) Resolutions of the Board of Directors of the Company authorizing the
execution and delivery of this Agreement;
1
<PAGE> 2
(d) The Company's registration statement under the Securities Act of 1933,
as amended (the "1933 Act"), and the Investment Company Act of 1940,
as amended (the "1940 Act"), on Form N-1A as filed with the Securities
and Exchange Commission (the "Commission") relating to the Shares, and
all subsequent amendments thereto (said registration statement, as
presently in effect and as amended or supplemented from time to time,
is herein called the "Registration Statement");
(e) Notification of Registration of the Company under the 1940 Act on Form
N-8A as filed with the Commission; and
(f) Prospectuses and statements of additional information of the Company
and of the Funds (such prospectuses and statements of additional
information, as presently in effect and as they shall from time to
time be amended and supplemented, herein called individually the
"Prospectus" and collectively the "Prospectuses").
II. DISTRIBUTION
1. APPOINTMENT OF DISTRIBUTOR.
The Company hereby appoints Distributor as Distributor of the Funds' Shares
and Distributor hereby accepts such appointment and agrees to render the
services and duties set forth in this Section II. The Distributor shall for
all purposes herein be deemed to be an independent contractor and shall,
unless otherwise expressly provided herein or authorized by the Board of
Directors of the Company from time to time, have no authority to act for or
represent the Company in any way or otherwise be deemed its agent. The
services furnished by the Distributor hereunder are not deemed exclusive,
and the Distributor shall be free to furnish similar services to others so
long as its services under this Agreement are not impaired thereby.
2. SERVICES AND DUTIES.
(a) The Company agrees to sell through Distributor, as agent, from time to
time during the term of this Agreement, Shares of the Funds upon the
terms and at the current offering price as described in the applicable
Prospectus. Distributor shall act only on its own behalf as principal
in making agreements for the sale and redemption of Shares, and shall
sell Shares only at the offering price thereof as set forth in the
applicable Prospectus. Distributor shall devote its best efforts to
effect sales of Shares of each of the Funds, but shall not be
obligated to sell any certain number of Shares.
2
<PAGE> 3
(b) In all matters relating to the sale and redemption of Shares, Distributor
shall act in conformity with the Company's Charter, Bylaws and Prospectuses
and with the instructions and directions of the Board of Directors of the
Company, and shall conform to and comply with the requirements of the 1933
Act, the 1940 Act, the regulations of the NASD Regulations, Inc. and all
other applicable federal or state laws and regulations. In connection with
such sales, Distributor acknowledges and agrees that it is not authorized
to provide any information or make any representations other than as
contained in the Company's Registration Statement and Prospectuses and any
sales literature specifically approved by the Company. The Company shall
furnish from time to time, for use in connection with the sale of the
Shares, such information with respect to the Funds and the Shares as
Distributor may reasonably request.
(c) Except to the extent permitted by a plan adopted by the Company under Rule
12b-1 of the 1940 Act, Distributor shall bear the cost of (i) printing and
distributing any Prospectus (including any supplement thereto), and (ii)
preparing, printing and distributing any literature, advertisement or
material which is primarily intended to result in the sale of the Shares;
provided, however, that Distributor shall not be obligated to bear the
expenses incurred by the Company in connection with (1) the preparation and
printing of any supplement or amendment to any Registration Statement or
Prospectus necessary for the continued effective registration of the Shares
under the 1933 Act or any state securities laws; and (2) the printing and
distribution of any Prospectus, supplement or amendment thereto for
existing shareholders of the Fund described therein.
(d) The Company, or any agent of the Company designated in writing by the
Company, shall be promptly advised of all purchase orders for Shares
received by the Distributor.
(e) The Distributor shall provide the services of certain persons who may be
appointed as officers of the Company by the Company's Board of Directors.
(f) It is understood that certain expenses to be incurred in connection with
the shares may be paid as provided in a shareholder service plan or similar
plan adopted by the Company. The Distributor agrees to be responsible for
the operation of such plan in accordance with the terms thereof.
(g) The Company shall have the right at any time to inspect the records of the
Company (including work papers and the other related documents) in the
possession of the Distributor.
3
<PAGE> 4
3. SALES AND REDEMPTIONS.
(a) Shares of the Company are to be sold by the Distributor to shareholders at
the offering price as set forth in the Prospectuses then in effect.
(b) The Company shall pay all costs and expenses in connection with the
registration of the Shares under the 1933 Act, and all expenses in
connection with maintaining facilities for the issue and transfer of the
Shares and for supplying information, prices and other data to be furnished
by the Company hereunder, and all expenses in connection with preparing,
printing and distributing the Prospectuses except as set forth in
subsection 2(c) of Section II hereof or in any other agreement entered into
by the Company.
(c) The Company shall execute all documents, furnish all information and
otherwise take all actions which may be reasonably necessary in the
discretion of the Company's officers in connection with the qualification
of the Shares for sale in such states as Distributor may designate to the
Company and the Company may approve, and the Company shall pay all filing
fees which may be incurred in connection with such qualification.
Distributor shall pay all expenses connected with its qualification as a
dealer under state or federal laws and, except as otherwise specifically
provided in this Agreement, all other expenses incurred by Distributor in
connection with the sale of the Shares as contemplated in this Agreement.
(d) Any of the outstanding Shares of the Company may be tendered for redemption
at any time, and the Company agrees to repurchase or redeem the Shares so
tendered in accordance with the Company's Charter, Bylaws and Prospectuses.
The price to be paid to redeem or repurchase the Shares shall be equal to
the net asset value per Share determined as set forth in the applicable
Prospectus (the "redemption price"). All payments by the Company hereunder
shall be made in the manner set forth in Section 3(e) below.
(e) The proceeds of any redemption of shares shall be paid by the Company (or
its agent) in accordance with the applicable provisions of the applicable
Prospectus.
(f) The Company shall have the right to suspend the sale of Shares of any Fund
at any time in response to conditions in the securities markets or
otherwise, and to suspend the redemption of Shares of any Fund at any time
as permitted by the 1940 Act or the rules of the Commission ("Rules").
(g) The Company reserves the right to reject in its discretion any order for
Shares.
4
<PAGE> 5
III. LIMITATIONS OF LIABILITY
Distributor shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Company or any Fund in connection with the
matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and
duties under this Agreement.
IV. CONFIDENTIALITY
Distributor shall treat confidentially and as proprietary information of
the Company all records and other information relative to the Company and
the Funds and prior or present shareholders or those persons or entities
who respond to Distributor's inquiries concerning investment in the
Company, and shall not use such records and information for any purpose
other than the performance of its responsibilities and duties hereunder or
under any other agreement with the Company, except after prior notification
to and approval in writing by the Company, which approval shall not be
unreasonably withheld and may not be withheld where Distributor may be
exposed to civil or criminal contempt proceedings for failure to comply,
when Distributor is requested to divulge such information by duly
constituted authorities, or when Distributor is so requested by the
Company.
V. INDEMNIFICATION
1. COMPANY REPRESENTATIONS
The Company represents and warrants to Distributor that (a) it is duly
organized as a Maryland Corporation and is and at all times will remain
duly authorized to enter into and perform this Agreement, and (b) at all
times the Registration Statement and Prospectuses will in all material
respects conform to the applicable requirements of the 1933 Act and the
Rules and will not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, except that no representation or warranty in
this subsection shall apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Company by
or on behalf of and with respect to Distributor expressly for use in the
Registration Statement or Prospectuses.
5
<PAGE> 6
2. DISTRIBUTOR REPRESENTATIONS.
Distributor represents and warrants to the Company that (a) it is duly organized
as a Delaware corporation and is and at all times will remain duly authorized
and licensed to carry out its services as contemplated herein (b) at all times
any written information furnished to the Company by or on behalf of Distributor
expressly for use in the Registration Statement or Prospectuses will not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading and (d)
Distributor is at all times during the term of this Agreement a registered
broker-dealer under the Securities Exchange Act of 1934.
3. COMPANY INDEMNIFICATION.
The Company shall indemnify, defend and hold harmless Distributor, its several
officers and directors, and any person who controls Distributor within the
meaning of Section 15 of the 1933 Act, from and against any losses, claims,
damages or liabilities, joint or several, to which any of them may become
subject under the 1933 Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon, any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, the Prospectuses or any
application or other document executed by or on behalf of the Company, or arise
out of, or are based upon, information furnished by or on behalf of the Company
filed in any state in order to qualify the Shares under the securities or blue
sky laws thereof ("Blue Sky Application"), or arise out of, or are based upon,
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
shall reimburse Distributor, its several officers and partners, and any person
who controls Distributor within the meaning of Section 15 of the 1933 Act, for
any legal or other expenses reasonably incurred by any of them in investigating,
defending or preparing to defend any such action, proceeding or claim; provided,
however, that the Company shall not be liable in any case to the extent that
such loss, claim, damage or liability arises out of, or is based upon, any
untrue statement, alleged untrue statement, or omission or alleged omission made
or information in the Registration Statement, the Prospectuses, any Blue Sky
Application or any application or other document executed by or on behalf of the
Company in reliance upon and in conformity with written information furnished to
the Company by or on behalf of and with respect to Distributor specifically for
inclusion therein.
The Company shall not indemnify any person pursuant to this subsection 3 of
Section VI hereof unless the court or other body before which the proceeding
was brought has rendered a final decision on the merits that such person was
not liable
6
<PAGE> 7
by reason of his willful misfeasance, bad faith or negligence in the performance
of his duties, or his reckless disregard of obligations and duties, under this
Agreement ("disabling conduct") or, in the absence of such a decision, a
reasonable determination (based upon a review of the facts) that such person was
not liable by reason of disabling conduct has been made by the vote of a
majority of a quorum of directors of the Company who are neither "interested
persons" of the Company (as defined in the 1940 Act) nor parties to the
proceeding, or by an independent legal counsel in a written opinion.
Each Fund shall advance attorneys' fees and other expenses incurred by any
person in defending any claim, demand, action or suit which is the subject of a
claim for indemnification pursuant to this subsection 3 of Section VI hereof, so
long as:
(a) such person shall undertake to repay all such advances unless it is
ultimately determined that he is entitled to indemnification hereunder; and
(b) such person shall provide security for such undertaking, or the Fund shall
be insured against losses arising by reason of any lawful advances, or a
majority of a quorum of the disinterested, non-party directors of the
Company (or an independent legal counsel in a written opinion) shall
determine based on a review of readily available facts (as opposed to a
full trial-type inquiry) that there is reason to believe that such person
ultimately will be found entitled to indemnification hereunder.
4. DISTRIBUTOR INDEMNIFICATION.
Distributor shall indemnify, defend and hold harmless the Company, each Fund,
the Company's several officers and directors and any person who controls the
Company or any Fund within the meaning of Section 15 of the 1933 Act, from and
against any losses, claims, damages or liabilities, joint or several, to which
any of them may become subject under the 1933 Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of, or are based upon, any breach of its representations and
warranties in subsection 2 of Section VI or its agreements in subsection 2 of
Section II hereof, or which arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectuses, or any application or other document
executed by or on behalf of the Company, or arise out of, or are based upon
information furnished by the Distributor filed in any Blue Sky Application, or
arise out of, or are based upon, the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, which statement or omission was made in
reliance upon and in conformity with information furnished to the Company or any
of its several officers and trustees by or on behalf of and
7
<PAGE> 8
with respect to Distributor specifically for inclusion therein, and shall
reimburse the Company, each Fund, the Company's several officers and
directors, and any person who controls the Company or any Fund within the
meaning of Section 15 of the 1933 Act, for any legal or other expenses
reasonably incurred by any of them in investigating, defending or preparing
to defend any such action, proceeding or claim.
5. GENERAL INDEMNITY PROVISIONS.
No indemnifying party shall be liable under its indemnity agreement
contained in subsection 3 or 4 of Section VI hereof with respect to any
claim made against such indemnifying party unless the indemnified party
shall have notified the indemnifying party in writing within a reasonable
time after the summons or other first legal process giving information of
the nature of the claim shall have been served upon the indemnified party
(or after the indemnified party shall have received notice of such service
on any designated agent), but failure to notify the indemnifying party of
any such claim shall not relieve it from any liability which it may
otherwise have to the indemnified party. The indemnifying party shall be
entitled to participate at its own expense in the defense or, if it so
elects, to assume the defense of any suit brought to enforce any such
liability, and if the indemnifying party elects to assume the defense, such
defense shall be conducted by counsel chosen by it and reasonably
satisfactory to the indemnified party. In the event the indemnifying party
elects to assume the defense of any such suit and retain such counsel, the
indemnified party shall bear the fees and expenses of any additional
counsel retained by the indemnified party.
VI. DURATION AND TERMINATION
This Agreement shall become effective as of the date hereof and, unless
sooner terminated as provided herein, shall continue in effect with respect
to each Fund until October 31, 1998. Thereafter, if not terminated, this
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 this Agreement or "interested persons"
of any such party, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the Board of Directors of the Company
or by vote of a "majority of the outstanding voting securities" of the
Funds as to which the Agreement is effective; provided, however, that this
Agreement may be terminated by the Company at any time, without the payment
of any penalty, by vote of a majority of the entire Board of Directors of
the Company or by a vote of a "majority of the outstanding voting
securities" of such Funds on sixty (60) days' prior written notice to
Distributor or by Distributor at any time, without the payment of any
penalty, on ninety (90) days' prior written notice to the Company. This
Agreement
8
<PAGE> 9
shall automatically and immediately terminate in the event of its
"assignment." As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall
have the same meanings as such terms have in the 1940 Act. Any documents,
records or work papers prepared by the Distributor on behalf of the
Company in order to maintain the regulatory records of the Funds shall
become the property of the Company. In the event of termination, the
Distributor shall promptly, upon written request, turn over such
documents, records or work papers to the Company.
VII. AMENDMENT OF THIS AGREEMENT
No provision of the Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party against
whom an enforcement of the change, waiver, discharge or termination is
sought.
VIII. NOTICES
Notices of any kind to be given to the Company hereunder by Distributor
shall be in writing and shall be duly given if mailed or delivered to the
Company at:
Dr. Cornelius Pings
c/o Association of American Universities
1200 New York Avenue, NW, Suite 550
Washington, DC 20005
or such other address or to such individual as shall be so specified by
the one party to the other party.
With a copy to:
W. Bruce McConnel, III
Philadelphia National Bank Building
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107
9
<PAGE> 10
Notices of any kind to be given to Distributor hereunder by the Company
shall be in writing and shall be duly given if mailed or delivered to
Distributor at:
Monroe Haegele
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, PA 19428-2961
or such other address or to such individual as shall be so specified by the
one party to the other party.
IX. MISCELLANEOUS
The obligations of each Fund under this Agreement shall be the several (and
not joint or joint and several) obligations of each Fund. The captions in
this Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby. Subject to the provisions
of Section VI hereof, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
shall be governed by Delaware law (without regard to principles of
conflicts of law); provided, however, that nothing herein shall be
construed in a manner inconsistent with the 1940 Act or any rule or
regulation of the Commission thereunder. This Agreement may be executed in
two or more parts which together shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PACIFIC HORIZON FUNDS, INC.
A MARYLAND CORPORATION
By: /s/ Cornelius Pings
-------------------------
President
PROVIDENT DISTRIBUTORS, INC.
By: /s/ Monroe Haegele
-------------------------
Chief Executive Officer
10
<PAGE> 1
Exhibit (f)
PACIFIC HORIZON FUNDS, INC.
Amended and Restated Board Guidelines on Significant Governance Issues
Approved March 9, 1995
Amended and Restated October 28, 1997
Amended and Restated March 18, 1998
1. Selection of New Director Candidates
The Board believes that it should be responsible, in fact as well as
procedure, for selecting its own members. The Board delegates the screening
process involved to its Nominating Committee consisting of those directors who
are not "interested persons" of the Pacific Horizon Funds, Inc. (the "Company").
2. Board Membership Criteria
The Nominating Committee is responsible for reviewing with the Board on
a periodic basis the appropriate skills and characteristics desired of Board
members in the context of the current make-up of the Board. This assessment
should include issues of diversity, age and skills (e.g., an understanding of
the investment management or securities industries, etc.) -- all in the context
of an assessment of the needs of the Board at the time.
3. Extending an Invitation to a Potential Director
An invitation to join the Board should be extended by the Board itself,
through a joint communication by the Chairman of the Nominating Committee and
the Chairman of the Board.
-1-
<PAGE> 2
4. Size of the Board; Composition
The Board presently has six members. It is the sense of the Board that
a size of six is about right. However, the Board recognizes a somewhat larger
size might be desirable in order to accommodate the availability of an
outstanding candidate(s). The Board believes that as a matter of policy, a
majority of its members should be persons who are not "interested persons" of
the Company or of a service provider ("outside" directors).
5. Term Limits; Retirement Age
The Board does not believe it should establish term limits or a
mandatory retirement age. While such limitations could help ensure that there
are fresh ideas and viewpoints available to the Board, they hold the
disadvantage of losing the contribution of directors who have been able to
develop, over a period of time, increasing insight into the Company and its
operations and who therefore provide an increasing contribution to the Board as
a whole.
In lieu of establishing term limits or a mandatory retirement age, a
director's continued service on the Board will be reviewed at three-year
intervals by those "outside" directors not subject to review at the time and
following consultation with all Board members and representatives of other
constituencies, as appropriate. This will allow for a regular assessment of each
member's contribution as well as an opportunity for a member to conveniently
confirm his/her desire to continue as a director.
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<PAGE> 3
6. Director Review Procedure
Those "outside" directors whose continued service on the Board is not
subject to review during a given year shall select one of their members to meet
confidentially with each director being reviewed, other Board members, and
appropriate representatives of the Company's investment adviser and distributor.
The purpose of these meetings is to assess the individual's desire to continue
as a Board member for a subsequent three-year period and his/her contribution to
the Board, not to target individual Board members.
The "outside" director asked to review the continued service of another
Board member is responsible to report to the "outside" directors of the Board in
executive session at the Board's October meeting concerning the sense of these
discussions and any recommendations as to areas in which a director's
contribution might be strengthened. It is anticipated that a director's decision
to continue in principle as a Board member for a subsequent three-year period
(or to resign) will be better informed as a result of this process.
The policy of reviewing a director's continued Board membership at
three-year intervals will apply to those present Board members who elect to be
subject to this policy and others who may be invited to join the Board in
future.
To allow the policy to be administered on a rotating basis, those
present members of the Board who elect to be subject to the policy will be
divided into three classes as equal in size as feasible and in order of
seniority of service on the Board. Directors in Classes 1, 2 and 3 will be first
reviewed during the Company's fiscal years ending February 28, 1996, 1997 and
1998, respectively (and thereafter upon subsequent three-year intervals).
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<PAGE> 4
7. Vested Benefits for Service after February 28, 1994
No individual elected to the Board after March 18, 1998 shall be
eligible for any benefits under this Section or under Section 8. However, each
director in office on March 18, 1998 who elects to be subject to the foregoing
policy concerning review of continued service, shall be entitled to the
following benefits following his/her death or resignation as a director:
(a) Shares of any Fund of the Company may be purchased by a retired
director without any sales load;
(b) A retired director shall be designated "Director Emeritus" and be
welcome to attend social occasions arranged by the Board from time to time; and
(c) A director who dies or resigns after at least five years of service
as a director shall be entitled to receive 10 annual payments, each equal to the
greater of: (i) the "Applicable Percentage" set forth below of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) the Applicable Percentage of the annual director's
retainer in effect for directors of the Company during the year of such payment:
<TABLE>
<CAPTION>
Years of Service * Applicable Percentage *
------------------ -----------------------
<S> <C>
Fewer than 5 0
5 but fewer than 6 50
6 but fewer than 7 60
7 but fewer than 8 70
8 but fewer than 9 80
9 but fewer than 10 90
10 or more 100
</TABLE>
-4-
<PAGE> 5
* For service that includes a fractional year, a director's
Years of Service shall be rounded to the nearest quarter of a
Year of Service, and the director's Applicable Percentage
shall be rounded to the nearest 0.25 percent. For example, if
a director has seven years and 10 months of service his/her
service shall be rounded to 7 3/4 Years of Service and his/her
Applicable Percentage shall be rounded to 70.75 percent.
Notwithstanding the foregoing general rule, a director in office on March 18,
1998 who either resigns in good standing or dies before completing five years of
service as a director shall be entitled to the payments described above and
shall be assigned an Applicable Percentage of 50 percent.
A director's years of service for the purpose of calculating the
Applicable Percentage shall be based upon service as a director or Chairman
after February 28, 1994. The retirement benefit in which a director has become
vested may not be reduced by later Board action.
The payments described in this paragraph (c) shall begin on the first
anniversary of the director's date of death or resignation and shall continue on
each anniversary date thereafter up to and including the 10th anniversary date.
Further, the amount payable each year to a director who dies or resigns shall be
increased by $1,000 for each year of service that the director provided as
Chairman of the Board.
In lieu of receiving 10 annual payments and in full satisfaction of
such obligation, a director may elect to receive substantially equivalent
benefits through a single-sum cash payment of the present value of such
benefits, to be paid by the Company within 45 days of the death or resignation
of the director. The present value of such benefits shall 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
-5-
<PAGE> 6
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.
8. Additional Benefit for Directors in Office on March 18, 1998
A director in office on March 18, 1998 shall be entitled to an
additional retirement benefit following the director's death or resignation
equal to an "Additional Percentage" of the annual director's retainer described
in Section 7(c). The Additional Percentage shall equal one half of the
difference between 100 percent and the director's Applicable Percentage
calculated under Section 7(c). Thus, if the director's Applicable Percentage
calculated under Section 7(c) is 80.25 percent, the director's Additional
Percentage shall be 9.88 percent (1/2 x [100% - 80.25%]). The director's
additional retirement benefit shall be paid at the same time and in the same
manner as his regular retirement benefit is paid under Section 7(c).
-6-
<PAGE> 7
9. Benefits Not Secured; No Priority
The obligation of the Company to pay benefits to a former director
shall be unsecured but shall be binding upon all successors in interest to the
Company. The payment of such benefits shall not have any priority or preference
over the lawful claims of the Company's creditors or shareholders. The right to
receive such payments shall not be assignable or transferable, in whole or in
part, 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.
Approved: March 9, 1995
Amended and Restated: October 28, 1997
Amended and Restated: March 18, 1998
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<PAGE> 1
Exhibit (g)(12)
TRANSFER AGENCY AGREEMENT
This Transfer Agency Agreement is made as of the 25th of October, 1997
between Pacific Horizon Funds, Inc., a Maryland corporation (herein called the
"Company"), having its principal office and place of business at 400 Bellevue
Parkway, Wilmington, Delaware 19809 and PFPC Inc., a Delaware corporation having
its principal office and place of business at 400 Bellevue Parkway, Wilmington,
Delaware 19809 (herein called the "Transfer Agent").
WITNESSETH:
That for and in consideration of the mutual promises herein set forth,
the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall
have the following meanings:
1. "Approved Institution" shall mean an entity so named in a
Certificate. From time to time the Company may amend a previously delivered
Certificate by delivering to the Transfer Agent a Certificate naming an
additional entity or deleting any entity named in a previously delivered
Certificate.
2. "Board of Directors" shall mean the Board of Directors of the
Company.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Transfer Agent by the Company which is signed by any Authorized Person, as
hereinafter defined, and actually received by the Transfer Agent.
4. "Class" shall mean a subclass of shares within a particular Fund.
5. "Custodian" shall mean the financial institution appointed as
custodian under the terms and conditions of the Custody Agreement between the
financial institution and the Company, or its successor(s).
6. "Company Accountant" shall mean the entity appointed as accountant
under the terms and conditions of the Accounting Services Agreement between the
entity and the Company, or its successor(s).
<PAGE> 2
7. "Company Business Day" shall be deemed to be each day the Company is
open for trading.
8. "Manager" shall mean Bank of America, NT&SA, acting under the terms
and conditions of the Management Agreement and includes any successor and
assigns.
9. "Authorized Person" shall be deemed to be the Company's Chairman of
the Board, the Company's President, any Vice President of the Company, any
Assistant Vice President of the Company, the Company's Secretary, the Company's
Treasurer, the Company's Controller, any Assistant Controller of the Company,
any Assistant Treasurer of the Company, any Assistant Secretary of the Company,
and any other person duly authorized by the Board of Directors of the Company to
execute any Certificate, instruction, notice or other instrument on behalf of
the Company and named in the Certificate annexed hereto as Appendix A, as such
Certificate may be amended from time to time, and any person reasonably believed
by the Transfer Agent to be such a person.
10. "Prospectus" shall mean with respect to a Class of Shares, the last
Company prospectus actually received by the Transfer Agent from the Company with
respect to such Class of Shares and with respect to which the Company has
indicated a Registration Statement under the Securities Act of 1933, as amended,
has become effective, including the Statements of Additional Information,
incorporated by reference therein.
11. "Funds" shall mean the various portfolios of the Company as
described from time to time in the current and effective Prospectuses.
12. "Shares" shall mean all or any part of each Class of shares of
common stock of the Company listed in the Certificate, attached hereto as
Appendix B, as may be amended from time to time, which are from time to time
authorized and/or issued by the Company.
13. "Transfer Agent" shall mean PFPC Inc., as transfer agent and
dividend disbursing agent under the terms and conditions of this Agreement, its
successor(s) or assign(s).
14. "Out-of-Pocket Expenses" means amounts reasonably necessary and
actually paid to third parties by the Transfer Agent in the provision of the
Transfer Agent services or pursuant to this Agreement. Such amounts will not
include charges of legal counsel, but will otherwise include amounts paid for
the following purposes: (i) postage and all freight and other delivery and
bonding charges incurred by the Transfer Agent in delivering materials to and
from the Company and in delivering all materials to shareholders; (ii) all
direct telephone, telephone transmission, telecopy, or other electronic
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<PAGE> 3
transmission expenses incurred by the Transfer Agent in communication with the
Company's dealers, shareholders or others, as required for the Transfer Agent to
perform the services to be provided hereunder; (iii) all charges related to the
settlement of shareholder transactions, including but not limited to NSCC/FUND
SERV charges, bank wire charges, and checking account charges; (iv) charges
associated with satisfying Internal Revenue Service tax reporting requirements;
(v) expenses associated with Securities and Exchange Commission examinations of
Company books and records; (vi) paper stocks and printing costs for statements,
checks, envelopes, tax and other forms; and (vii) such other expenses paid or
incurred by Transfer Agent on behalf of the Company at the request of the
Manager.
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Company hereby appoints the Transfer Agent as transfer agent and
as dividend disbursing agent of all the Shares of the Company (except SRF Shares
of the Company's Intermediate Bond Fund- Class M-Special Series 7, Blue Chip
Fund- Class N Special Series 7, and Asset Allocation Fund- Class O Special
Series 7 (collectively, "SRF Shares") during the period of this Agreement.
Effective November 21, 1997 or such other time as agreed to between the Company
and the Transfer Agent, the Company appoints the Transfer Agent as transfer
agent and as dividend disbursing agent of the SRF Shares of the Company during
the period of this Agreement.
2. (a) The Transfer Agent hereby accepts appointment as transfer
agent and dividend disbursing agent and agrees to perform the duties thereof as
herein set forth, including those duties set forth in Schedule I(a) hereto.
(b) The services and specific capabilities to be provided
under this Agreement by the Transfer Agent shall include those specifically
listed in this Agreement.
3. Upon the request of the Transfer Agent, the Company shall deliver
the following documents to the Transfer Agent:
(a) A copy of the Articles of Incorporation of the Company and
all amendments thereto certified by the Secretary of the Company;
(b) A copy of the By-Laws of the Company certified by the
Secretary of the Company;
(c) A copy of a resolution of the Board of Directors of the
Company certified by the Secretary of the Company appointing the Transfer Agent
and authorizing the
-3-
<PAGE> 4
execution of this Transfer Agency Agreement;
(d) A Certificate signed by the Secretary or any Assistant
Secretary of the Company specifying with respect to each Class or Fund, the
number of authorized Shares, the number of such authorized Shares issued, and
the number of such authorized Shares issued and currently outstanding; the names
and specimen signatures of the Authorized Persons of the Company; and the name
and address of the legal counsel for the Company;
(e) Copies of the Company's Registration Statement, as amended
to date, and the most recently filed Post-Effective Amendment thereto, filed by
the Company with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and under the Investment Company Act of 1940, as amended,
together with any applications filed in connection therewith; and
(f) Opinion of counsel for the Company with respect to the
validity of the authorized and outstanding Shares, whether such Shares are fully
paid and non-assessable and the status of such Shares under the Securities Act
of 1933, as amended, and any other applicable federal law or regulation (i.e.,
if subject to registration, that they have been registered and that the
Registration Statement has become effective or, if exempt, the specific grounds
therefor).
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. The Company shall deliver to the Transfer Agent the following
documents on or before the effective date of any increase or decrease in the
total number of Shares authorized to be issued:
(a) A certified copy of the amendment to the Articles of
Incorporation giving effect to such increase or decrease;
(b) a representation from the Company that such increase or
decrease has been properly authorized;
(c) In the case of an increase, if the appointment of the
Transfer Agent is expressly limited to the previously authorized number of
Shares, a certified copy of a resolution of the Board of Directors of the
Company increasing the authority of the Transfer Agent.
2. Prior to the issuance of any additional Shares of the Company
pursuant to actions such as stock dividends or stock splits, and prior to any
reduction in the number of Shares outstanding, the Company shall deliver the
following documents to
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<PAGE> 5
the Transfer Agent:
(a) A certified copy of the resolution(s) adopted by the Board
of Directors and/or the shareholders of the Company authorizing such issuance of
additional Shares of the Company or such reduction, as the case may be; and
(b) a representation from the Company that such action has
been properly authorized;
3. The Company is authorized to issue (a) 10,000,000,000 shares
representing interests in the Treasury Money Market Fund- Pacific Horizon
shares; (b) 10,000,000,000 shares representing interests in the Treasury Money
Market Fund- Horizon Service shares; (c) 10,000,000,000 shares representing
interests in the Treasury Money Market Fund- Horizon shares; (d) 10,000,000,000
shares representing interests in the Treasury Money Market Fund- S shares; (e)
10,000,000,000 shares representing interests in the Treasury Money Market Fund-
X shares; (f) 10,000,000,000 shares representing interests in the Treasury Money
Market Fund- Y shares; (g) 20,000,000,000 shares representing interests in the
Prime Money Market Fund- Pacific Horizon shares; (h) 20,000,000,000 shares
representing interests in the Prime Money Market Fund- Horizon Service shares;
(i) 20,000,000,000 shares representing interests in the Prime Money Market Fund-
Horizon shares; (j) 20,000,000,000 shares representing interests in the Prime
Money Market Fund- S shares; (k) 20,000,000,000 shares representing interests in
the Prime Money Market Fund- X shares; (l) 20,000,000,000 shares representing
interests in the Prime Money Market Fund- Y shares; (m) 100,000,000 shares
representing interests in the Aggressive Growth Fund- A shares; (n) 100,000,000
shares representing interests in the Aggressive Growth Fund- M shares; (o)
100,000,000 shares representing interests in the Aggressive Growth Funds- K
shares; (p) 100,000,000 shares representing interests in the U.S. Government
Securities Fund- A shares; (q) 100,000,000 shares representing interests in the
U.S. Government Securities Fund- M shares; (r) 100,000,000 shares representing
interests in the U.S. Government Securities Fund- K shares; (s) 100,000,000
shares representing interests in the Capital Income Fund- A shares; (t)
100,000,000 shares representing interests in the Capital Income Fund- M shares;
(u) 100,000,000 shares representing interests in the Capital Income Fund- K
shares; (v) 100,000,000 shares representing interests in the California
Tax-Exempt Bond Fund- A shares; (w) 100,000,000 shares representing interests in
the California Tax-Exempt Bond Fund- M shares; (x) 100,000,000 shares
representing interests in the California Tax-Exempt Bond Fund- K shares; (y)
10,000,000,000 shares representing interests in the Tax-Exempt Money Fund-
Pacific Horizon shares; (z) 10,000,000,000 shares representing interests in the
Tax-Exempt Money Fund- Horizon Service shares; (aa) 10,000,000,000 shares
representing interests in the Tax-Exempt Money Fund- Horizon shares; (bb)
10,000,000,000 shares
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<PAGE> 6
representing interests in the Tax-Exempt Money Fund- S shares; (cc)
10,000,000,000 shares representing interests in the California Tax-Exempt Money
Market Fund- Pacific Horizon shares; (dd) 10,000,000,000 shares representing
interests in the California Tax-Exempt Money Market Fund- Horizon Service
shares; (ee) 10,000,000,000 shares representing interests in the California
Tax-Exempt Money Market Fund- Horizon shares; (ff) 10,000,000,000 shares
representing interests in the California Tax-Exempt Money Market Fund- S Shares;
(gg) 10,000,000,000 shares representing interests in the California Tax-Exempt
Money Market Fund- X Shares; (hh) 10,000,000,000 shares representing interests
in the Treasury Only Money Market Fund- Pacific Horizon shares; (ii)
10,000,000,000 shares representing interests in the Treasury Only Money Market
Fund- Horizon Services Shares; (jj) 10,000,000,000 shares representing interests
in the Treasury Only Money Market Fund-Horizon shares; (kk) 10,000,000,000
shares representing interests in the Government Money Market Fund- Pacific
Horizon shares; (ll) 10,000,000,000 shares representing interests in the
Government Money Market Fund- Horizon Services Shares; (mm) 10,000,000,000
shares representing interests in the Government Money Market Fund- Horizon
shares; (nn) 100,000,000 shares representing interests in the Intermediate Bond
Fund- A shares; (oo) 100,000,000 shares representing interests in the
Intermediate Bond Fund- M shares; (pp) 100,000,000 shares representing interests
in the Intermediate Bond Fund- K shares; (qq) 100,000,000 shares representing
interests in the Intermediate Bond Fund- SRF shares; (rr) 100,000,000 shares
representing interests in the Blue Chip Fund- A shares; (ss) 100,000,000 shares
representing interests in the Blue Chip Fund- M shares; (tt) 100,000,000 shares
representing interests in the Blue Chip Fund- K shares; (uu) 100,000,000 shares
representing interests in the Blue Chip Fund - SRF shares; (vv) 100,000,000
shares representing interests in the Asset Allocation Fund- A shares; (ww)
100,000,000 shares representing interests in the Asset Allocation Fund- M
shares; (xx) 100,000,000 shares representing interests in the Asset Allocation
Fund- K shares; (yy) 100,000,000 shares representing interests in the Asset
Allocation Fund- SRF shares; (zz) 100,000,000 shares representing interests in
the National Municipal Bond Fund- A shares; (aaa) 100,000,000 shares
representing interests in the National Municipal Bond Fund- M shares; (bbb)
100,000,000 shares representing interests in the National Municipal Bond Fund- K
shares; (ccc) 100,000,000 shares representing interests in the Utilities Fund- A
shares; (ddd) 100,000,000 shares representing interests in the Utilities Fund- M
Shares; (eee) 100,000,000 shares representing interests in the Utilities Fund- K
shares; (fff) 100,000,000 shares representing interests in the Growth and Income
Fund- A shares; (ggg) 100,000,000 shares representing interests in the Growth
and Income Fund- M shares; (hhh) 100,000,000 shares representing interests in
the Growth and Income Fund- K shares; (iii) 100,000,000 shares representing
interests in the International Equity Fund- A shares; (jjj) 100,000,000 shares
representing interests in the International
-6-
<PAGE> 7
Equity Fund- M shares; (kkk) 100,000,000 shares representing interests in the
International Equity Fund- K shares; (lll) 100,000,000 shares representing
interests in the Short-Term Government Fund- A shares; (mmm) 100,000,000 shares
representing interests in the Short-Term Government Fund- M shares; (nnn)
100,000,000 shares representing interests in the Short-Term Government Fund-K
shares; (ooo) 100,000,000 shares representing interests in the International
Bond Fund- A shares; (ppp) 100,000,000 shares representing interests in the
International Bond Fund- M shares; (qqq) 100,000,000 shares representing
interests in the International Bond Fund- K shares; (rrr) 100,000,000 shares
representing interests in the Corporate Bond Fund- A shares; (sss) 100,000,000
shares representing interests in the Corporate Bond Fund- M shares; and (ttt)
100,000,000 shares representing interests in the Corporate Fond- K Shares; each
with par value of $.001 per share. The Transfer Agent shall record issues of all
shares and shall notify the Company in case any proposed issue of shares by the
Company shall result in an over-issue as defined by Section 8-104(2) of Article
8 of the Maryland Commercial Law Article. In case any issue of shares would
result in such an over-issue, the Transfer Agent shall refuse to issue said
shares and shall not countersign and issue certificates (if any) for such
shares.
ARTICLE IV
ISSUANCE,
REDEMPTION AND TRANSFER OF SHARES
1. The Transfer Agent acknowledges that it has received a copy of the
Company's Prospectuses with respect to its currently authorized Funds and
Classes of Shares, which Prospectuses describe how sales and redemption of
Shares of the Company shall be made, and the Transfer Agent agrees to accept
purchase orders and redemption requests with respect to Company Shares on each
Company Business Day in accordance with such Prospectuses. The Company agrees to
notify the Transfer Agent as soon as possible under the circumstances of any
changes in the procedures set forth in the Prospectus regarding such purchase
and redemption procedures.
2. On each Company Business Day, a duly authorized officer or employee
of the Transfer Agent shall furnish the following information by telephone call
to an Authorized Person of the Company or by such other form to such other
person as shall be agreed upon from time to time by the Company and the Transfer
Agent:
(a) The total dollar amount to be applied to the purchase of
Shares of each Class or Fund on such day, computed by aggregating the amount so
specified in such of the purchase orders described in paragraph 1 of this
Article IV with respect to which payment has been, or will be, credited by the
Custodian
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<PAGE> 8
to the Company's custody account with the Custodian on such day. The Transfer
Agent shall also accept with respect to each Company Business Day, at such times
as are agreed upon from time to time by the Transfer Agent and the Company, a
computer tape consistent in all respects with the Transfer Agent's tape layout
package, as amended from time to time, upon prior written notice to the Company
or its Distributor, which is believed by the Transfer Agent to be furnished by
or on behalf of any Approved Institution. The Transfer Agent shall not be liable
for any loss or damage to the Company or its shareholders in the event that a
computer tape or electronic data transmission from an Approved Institution is
unable to be processed for any reason beyond the control of the Transfer Agent,
or if any of the information on such tape or transmission is found to be
incorrect.
(b) The total dollar amount of Shares of each Class or Fund to
be redeemed on such day, computed by aggregating the amount so specified in (i)
such of the redemption requests described in paragraph 1 of this Article IV with
respect to which the amount payable as redemption proceeds has been, or will be,
charged by the Custodian on such day, and (ii) all computer tapes described in
paragraph 2(a) of this Article IV with respect to which the amount payable as
redemption proceeds has been, or will be, charged by the Custodian on such day.
3. On each Company Business Day, the Transfer Agent shall, as of the
time at which the Company computes the net asset value of each Class or Fund of
the Company, issue to and redeem from the shareholder accounts specified in a
purchase order, redemption request or computer tape, which in accordance with
the Prospectuses is effective on such Company Business Day, the appropriate
number of full and fractional Shares based on the net asset value per Share of
such Class or Fund specified in an advice received on such Company Business Day
from the Company or the Company Accountant. Notwithstanding the foregoing, if a
redemption specified in a computer tape is for a dollar value of Shares in
excess of the dollar value of uncertificated Shares in the specified account,
the Transfer Agent shall not effect such redemption in whole or in part and
shall within twenty-four (24) hours orally advise the Approved Institution which
supplied such tape of the discrepancy.
4. In connection with a reinvestment of a dividend or distribution on
Shares of any Class or Fund of the Company, the Transfer Agent shall, as of each
Company Business Day, as specified in a Certificate or resolution described in
paragraph 1 of Article V, issue Shares of a Class or Fund to the appropriate
shareholder account, based on the net asset value per Share of such Class or
Fund specified in an advice received from the Company or its Company Accountant
on such Company Business Day.
5. On each Company Business Day, the Transfer Agent shall supply the
Company Accountant with a statement specifying
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<PAGE> 9
with respect to the immediately preceding Company Business Day (or the same day
if a money market portfolio): the total number of Shares of each Class or Fund
(including fractional Shares) issued and outstanding at the opening of business
on such day; the total number of Shares of each Class or Fund sold on such day,
pursuant to paragraph 3 of this Article IV; the total number of Shares of each
Class or Fund redeemed by the Transfer Agent on such day; the total number of
Shares of each Class or Fund, if any, sold on such day pursuant to paragraph 4
of this Article IV; and the total number of Shares of each Class or Fund issued
and outstanding.
6. In connection with each purchase and each redemption of Shares, and
each reinvestment of a dividend or distribution of Shares, the Transfer Agent
shall send to the affected shareholder such statements as are prescribed by the
federal securities laws applicable to transfer agents and as are described in
the applicable Prospectuses. If the Prospectuses indicate that certificates for
Shares are available and if specifically requested in writing by any
shareholder, or if otherwise required hereunder, the Transfer Agent shall
countersign, issue and mail by first-class mail to such shareholder at the
address set forth in the records of the Transfer Agent, a Share certificate for
any full Shares requested.
7. With respect to each Company Business Day, the Transfer Agent shall
furnish the Custodian on such Company Business Day or the next Company Business
Day (in accordance with the prospectus) with a written statement (which may be
by facsimile transfer) setting forth the number and dollar amount of each Class
or Fund of Shares to be redeemed on such Company Business Day in accordance with
paragraph 3 of this Article IV.
8. Upon receipt of a proper redemption request and moneys paid to it by
the Custodian in connection with a redemption of Shares (the Transfer Agent may
make payment for redeemed shares prior to receipt of moneys from the Custodian),
the Transfer Agent shall cancel any Shares certificates relating to such
redeemed Shares or make an equivalent designation on the appropriate records
with respect to any uncertificated Shares relating to such redeemed Shares and,
after making appropriate deduction for any withholding of taxes required of it
by applicable law, (a) in the case of a redemption of Shares pursuant to a
redemption described in paragraph 1 of this Article IV, make payment in
accordance with the Company's redemption and payment procedures described in the
Prospectuses, and (b) in the case of a redemption of Shares pursuant to a
computer tape described in paragraph 2(b) of this Article IV, make payment by
directing a federal funds wire order to the account previously designated by the
Approved Institution specified in the computer tape.
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<PAGE> 10
9. The Transfer Agent shall not be required to issue any Shares after
it has received from an Authorized Person of the Company or from an appropriate
federal or state authority written notification that the sale of Shares has been
suspended or discontinued, and the Transfer Agent shall be entitled to rely upon
such written notification.
10. Upon the issuance of any Shares in accordance with this Agreement,
the Transfer Agent shall not be responsible for the payment of any original
issue or other taxes required to be paid by the Company in connection with such
issuance of any Shares.
11. The Transfer Agent shall accept a computer tape consistent with the
Transfer Agent's tape layout package, as amended from time to time upon prior
notice to the Company or the Distributor, which is reasonably believed by the
Transfer Agent to be furnished by or on behalf of an Approved Institution and is
represented to be instructions with respect to the transfer of Shares from one
account of such Approved Institution to another such account, and shall effect
the transfers specified in said computer tape. The Transfer Agent shall not be
liable for any losses to the Company or its shareholders in the event that a
computer tape or electronic data transmission from an Approved Institution is
unable to be processed for any reason beyond the control of the Transfer Agent,
or if any of the information on such tape or transmission is found to be
incorrect.
12. (a) Except as otherwise provided in sub-paragraph (b) of this
paragraph and in paragraph 14 of this Article IV, Shares shall be transferred or
redeemed upon presentation to the Transfer Agent of Share certificates or
instructions properly endorsed for transfer or redemption, accompanied by such
documents as the Transfer Agent deems necessary to evidence the authority of the
person making such transfer or redemption, and bearing satisfactory evidence of
the payment of any transfer taxes. In the case of small estates where no
administration is contemplated, the Transfer Agent may, when furnished with an
appropriate surety bond and other appropriate information requested by the
Transfer Agent, and without further approval of the Company, transfer or redeem
Shares registered in the name of a decedent where the current market value of
the Shares being transferred does not exceed such amount as may from time to
time be prescribed by various states. The Transfer Agent reserves the right to
refuse to transfer or redeem Shares until it is satisfied that the endorsement
on the share certificate or instructions is valid and genuine, and for that
purpose it will require, unless otherwise instructed by an authorized officer of
the Company (which instruction shall not prohibit the Transfer Agent from
requesting a signature guarantee from a participant in a Medallion Program
approved by the Security Transfer Association), a guarantee of signature,
acceptable to the Transfer Agent and in compliance with applicable law. The
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Transfer Agent also reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the requested transfer or redemption is legally
authorized, and it shall incur no liability for the refusal, in good faith, to
make transfers or redemptions which the Transfer Agent, in its judgment, deems
improper or unauthorized, or until it is satisfied that there is no basis to any
claims adverse to such transfer or redemption. The Transfer Agent may, in
effecting transfers and redemptions of Shares, rely upon those provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers or the
Uniform Commercial Code, as the same may be amended from time to time and as is
applicable to the transfer in question, and the Company shall indemnify the
Transfer Agent for any act performed or omitted by it in good faith in reliance
upon such laws.
(b) Notwithstanding the foregoing or any other provision
contained in this Agreement to the contrary, the Transfer Agent shall be fully
protected by the Company in the event the Transfer Agent does not require any
instruments, documents, assurances, endorsements or guarantees, including,
without limitation, any signature guarantees, in connection with a redemption or
transfer of Shares whenever the Transfer Agent reasonably believes that
requiring the same would be inconsistent with the transfer and redemption
procedures as described in the applicable Prospectus.
13. Notwithstanding any provision contained in this Agreement to the
contrary, the Transfer Agent shall not be required or expected to require, as a
condition to any transfer of any Shares pursuant to paragraph 12 of this Article
IV or any redemption of any Shares pursuant to a computer tape described in this
Agreement, any documents, including, without limitation, any documents of the
kind described in sub-paragraph (a) of paragraph 12 of this Article IV, to
evidence the authority of the person requesting the transfer or redemption
and/or the payment of any share transfer taxes, and shall be fully protected in
acting in accordance with the applicable provisions of this Article IV.
14. (a) As used in this Agreement, the terms "computer tape" and
"computer tape believed by the Transfer Agent to be furnished by an Approved
Institution" shall include any tape or electronic transmission generated by the
Transfer Agent to reflect information believed by the Transfer Agent to have
been input by an Approved Institution, via a remote terminal or other similar
link, into a data processing, storage, or collection system, or similar system
(the "System"), located on the Transfer Agent's premises or utilized by the
Transfer Agent. For purposes of paragraph 2 of this Article IV, such computer
tape shall be deemed to have been furnished at such times as are agreed upon
from time to time by the Transfer Agent and Company only if the information
reflected thereon was input into the System at such times as are agreed upon
from time to time by the Transfer Agent and the Company.
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(b) Nothing contained in this Agreement shall constitute any
agreement or representation by the Transfer Agent to permit, or to agree to
permit, any Approved Institution to input information into a System.
(c) The Transfer Agent reserves the right to approve in
advance any Approved Institution, such approval not to be unreasonably withheld.
The Transfer Agent also reserves the right to terminate any and all automated
data communications, at its discretion, upon a reasonable attempt to notify the
Company when in the opinion of the Transfer Agent continuation of such
communications would jeopardize the accuracy and/or integrity of the Company's
records on the System.
15. Any interest or other earnings on bank cash balances or otherwise
in connection with purchases or redemptions of Shares, dividends payable with
respect to Shares or on any other "float" with respect to the Company shall be
for the benefit and account of the Company."
ARTICLE V
DIVIDENDS AND DISTRIBUTIONS
1. The Company shall furnish to the Transfer Agent a copy of a
resolution of its Board of Directors, certified by the Secretary or any
Assistant Secretary, either (i) setting forth with respect to a Class or Fund of
Shares the date of the declaration of a dividend or distribution, the date of
accrual or payment, as the case may be, thereof, the record date as of which
Shareholders entitled to payment or accrual shall be determined, the amount per
Share of such dividend or distribution, the payment date on which all previously
accrued and unpaid dividends are to be paid, and the total amount, if any,
payable to the Transfer Agent on such payment date, or (ii) authorizing the
declaration of dividends and distributions on a daily or other periodic basis
and authorizing the Transfer Agent to rely on a Certificate setting forth the
information described in subsection (i) of this paragraph.
2. Upon the payment date specified in such Certificate or resolution,
the Company shall, in the case of a cash dividend or distribution, cause the
Custodian to pay to the Transfer Agent an amount of cash, if any, sufficient for
the Transfer Agent to make the payment, if any, as of the payment date,
specified in such Certificate or resolution, to the shareholders who were of
record on the record date who are entitled to receive the cash dividend or
distribution. The Transfer Agent shall, upon receipt of any such cash, make
payment of such cash dividends or distributions to the shareholders of record as
of the record date by: (i) mailing a check, payable to the registered
shareholder, to the address of record or dividend
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mailing address, or transmitting payment through the Automated Clearing House
System, (ii) wiring such amounts, or transmitting such amounts through the
Automated Clearing House System, to the accounts previously designated by an
Approved Institution, or (iii) other appropriate means as provided in the
applicable Fund's prospectus. The Transfer Agent shall not be liable for any
improper payments made in good faith and without negligence, in accordance with
a Certificate or resolution described in the preceding paragraph. If the
Transfer Agent shall not receive from the Custodian sufficient cash to make
payment of any cash dividend or distribution to all shareholders of a Class or
Fund of Shares of the Company as of the record date who are entitled to receive
the cash dividend or distribution, the Transfer Agent shall, upon notifying the
Company, withhold payment to all shareholders of record as of the record date
until sufficient cash is provided to the Transfer Agent.
3. It is understood that the Transfer Agent shall in no way be
responsible for the determination of the rate or form of dividends or capital
gain distributions due to the shareholders. It is expressly agreed and
understood that the Transfer Agent is not liable for any loss as a result of
processing a distribution based on information provided in the Certificate or by
a Company Accountant that is incorrect. The Company agrees to pay the Transfer
Agent for any and all costs, both direct and Out-of-Pocket Expenses, incurred in
such corrective work as necessary to remedy such error.
4. It is understood that the Transfer Agent shall file such appropriate
information returns concerning the payment of dividend and capital gain
distributions with the proper federal, state and local authorities as are
required by law to be filed by the Company but shall in no way be responsible
for the collection or withholding of taxes due on such dividends or
distributions due to shareholders, except and only to the extent required by
applicable law. To the extent such collection or withholding of taxes is
required of the Transfer Agent, it shall pay on a timely basis to the
appropriate authority any amounts required to be remitted to the authority.
ARTICLE VI
CONCERNING THE COMPANY
1. The Company represents to the Transfer Agent that:
(a) It is a corporation duly organized and existing under the
laws of the State of Maryland.
(b) It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
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<PAGE> 14
(c) All requisite corporate proceedings have been held to
authorize it to enter into and perform this Agreement.
(d) It is an investment company registered under the
Investment Company Act of 1940 (the "1940 Act"), as amended.
(e) A registration statement under the Securities Act of 1933,
as amended, with respect to the Shares is effective. The Company shall notify
the Transfer Agent if such registration statement or any state securities
registrations have been terminated or a stop order has been entered with respect
to the Shares.
2. Each copy of the Articles of Incorporation of the Company and any
amendment thereto provided by the Company to the Transfer Agent shall be
certified by the Secretary of State (or other appropriate official) of the state
of organization, and if such Articles of Incorporation and/or amendments are
required by law also to be filed with a county or other officer or official
body, a certificate of such filing shall be filed with a certified copy
submitted to the Transfer Agent. Each copy of the Articles of Incorporation and
By-Laws and copies of all amendments thereto, and copies of resolutions of the
Board of Directors of the Company, shall be certified by the Secretary or
Assistant Secretary of the Company.
3. It shall be the sole responsibility of the Company to deliver to the
Transfer Agent the Company's currently effective Prospectuses and, for purposes
of this Agreement, the Transfer Agent shall not be deemed to have notice of any
information contained in such Prospectuses until they are actually received by
the Transfer Agent.
ARTICLE VII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent represents and warrants to the Company that:
(a) It is a corporation duly organized and existing under the
laws of the State of Delaware.
(b) It is empowered under applicable law and by its Charter
and By-laws to enter into and perform this Agreement.
(c) All requisite corporate proceedings have been held to
authorize it to enter into and perform this Agreement.
(d) It is duly registered as a transfer agent under Section
17A of the Securities Exchange Act of 1934, as amended. The Transfer Agent shall
promptly give written notice to the Company and the Manager in the event that
its registration
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<PAGE> 15
is revoked or a proceeding is commenced that could result in such revocation.
2. The Transfer Agent shall not be liable and shall be indemnified in
acting upon any computer tape, writing or document reasonably believed by it to
be genuine and to have been signed or made by the proper person or persons and
shall not be held to have any notice of any change of authority of any person
until receipt of written notice thereof from the Company or such person. It
shall also be protected in processing Share certificates which bear the proper
countersignature of the Transfer Agent and which it reasonably believes to bear
the proper manual or facsimile signature of the Authorized Persons of the
Company.
3. The Transfer Agent upon notice to and consent of the Company, which
consent will not be unreasonably withheld, may establish such additional
procedures, rules and regulations governing the transfer or registration of
Share certificates as it may deem advisable and consistent with such rules and
regulations generally adopted by mutual fund transfer agents.
4. The Transfer Agent shall keep such records as are specified in
Schedules I and II hereto in the form and manner and for such period as it may
deem advisable and is agreeable to the Company but not inconsistent with the
rules and regulations of appropriate government authorities, in particular Rules
31a-2 and 31a-3 under the 1940 Act, as amended. The Transfer Agent may deliver
to the Company from time to time at its discretion, for safekeeping or
disposition by the Company in accordance with law, such records, papers, Share
certificates which have been cancelled in transfer, exchange or redemption, or
other documents accumulated in the execution of its duties as such Transfer
Agent, as the Transfer Agent may deem expedient, other than those which the
Transfer Agent is required to maintain pursuant to applicable laws and
regulations. The Company shall assume all responsibility for any failure
thereafter to produce any record, paper, cancelled Share certificate, or other
document so returned, if and when required. The records maintained by the
Transfer Agent pursuant to this paragraph 4, which have not been previously
delivered to the Company pursuant to the foregoing provisions of this paragraph
4, shall be considered to be the property of the Company, shall be made
available upon request for inspection by the officers, employees, and auditors
of the Company or other persons authorized by the Company and shall be delivered
to the Company upon request and in any event upon the date of termination of
this Agreement, as specified in Article VIII of this Agreement, in the form and
manner kept by the Transfer Agent on such date of termination or such earlier
date as may be requested by the Company. Upon reasonable request by the Company,
the Transfer Agent shall provide in hard copy or on microfilm, whichever the
Transfer Agent shall elect, any records included in any such delivery which are
maintained by the
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Transfer Agent on a computer disk or are similarly maintained.
5. (a) The Transfer Agent shall not be liable for any loss or damage,
including counsel fees, resulting from its actions or omissions to act or
otherwise, except for any loss or damage arising out of its bad faith,
negligence, willful misfeasance or reckless disregard of its duties under this
Agreement.
(b) Notwithstanding anything to the contrary, neither the Transfer
Agent nor its affiliates shall be liable for any consequential, special or
indirect losses or damages, whether or not the likelihood of such losses or
damages was known by the Transfer Agent or its affiliates.
6. In performing its services hereunder, the Transfer Agent shall seek
to attain the Performance Objectives set forth in Schedule III hereto. The
Transfer Agent's failure to meet any Transfer Agent performance objective shall
not in and of itself constitute willful misconduct or negligence under this
Agreement.
7. (a) The Company shall indemnify and hold harmless the Transfer
Agent, its officers, directors and employees from and against all claims
(whether with or without basis in fact or law), demands, expenses (including
attorneys' fees) and liabilities of any and every nature which the Transfer
Agent may sustain or incur or which may be asserted against the Transfer Agent
by any person as a result of any action taken or omitted to be taken by the
Transfer Agent in good faith and without negligence or willful misconduct or in
reliance upon (i) any provision of this Agreement; (ii) the Prospectuses; (iii)
any instruction or order including, without limitation, any computer tape
reasonably believed by the Transfer Agent to have been received from an Approved
Institution; (iv) any instrument or order reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
Authorized Person of the Company; (v) any Certificate or other instruction of an
Authorized Person; or (vi) any opinion of legal counsel for the Company or the
Transfer Agent. The Company shall indemnify and hold harmless the Transfer Agent
from and against all claims (whether with or without basis in fact or law),
demands, expenses (including attorneys' fees) and liabilities of any nature
which the Transfer Agent may sustain or incur or which may be asserted against
the Transfer Agent by any person by reason of or as a result of any action taken
or omitted to be taken by the Transfer Agent in good faith in connection with
its appointment or in reasonable reliance upon any law, act, regulation or any
interpretation of the same even though such law, act or regulation may have been
altered, changed, amended or repealed thereafter.
(b) The Transfer Agent shall indemnify and hold harmless the
Company, its officers, directors and employees from
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<PAGE> 17
and against all claims (whether with or without basis in fact or law), demands,
expenses (including attorneys' fees) and liabilities of any and every nature
which the Company may sustain or incur or which may be asserted against the
Company by any person as a result of any action taken or omitted to be taken by
the Transfer Agent which constitutes bad faith, negligence, reckless disregard
or willful misfeasance or arising out of a failure of the Transfer Agent to
comply with this Agreement or a breach by the Transfer Agent of any
representation or warranty contained in this Agreement or the attached Exhibits
or Schedules.
(c) Neither party ("Indemnified Party") shall settle nor make
any compromise of any claim, demand, expense or liability to which it may seek
indemnity pursuant to paragraph 7(a) or (b) of this Article VII (each, an
"Indemnifiable Claim") without the express written consent of the other party
("Indemnifying Party"). The Indemnified Party shall notify the Indemnifying
Party within 15 days or a reasonable time (whichever is longer) of receipt of
notification of an Indemnifiable Claim, provided that the failure by the
Indemnified Party to furnish such notification shall not impair its right to
seek indemnification from the Indemnifying Party unless the Indemnifying Party's
ability to adequately defend the Indemnifiable Claim is impaired as a result of
such failure, and further provided, that if as a result of the Indemnified Party
failure to provide the Indemnifying Party with timely notice of the initiation
of litigation, a judgment by default is entered, prior to seeking
indemnification from the Indemnifying Party, the Indemnified Party, at its own
cost and expense, shall oppose such judgment. The Indemnifying Party shall have
the right to defend any Indemnifiable Claim at its own expense, provided that
such defense shall be conducted by counsel selected by the Indemnifying Party
and reasonably acceptable to the Indemnified Party. The Indemnified Party may
join in such defense at its own expense, but to the extent that it shall so
desire, the Indemnifying Party shall direct such defense. The Indemnifying Party
shall not settle any Indemnifiable Claim without the express written consent of
the Indemnified Party if the Indemnified Party determines that such settlement
would have an adverse effect on the Indemnified Party beyond the scope of this
Agreement. In such event, each of the Indemnifying Party and the Indemnified
Party shall be responsible for their own defense at their own cost and expense,
and such claim shall not be deemed an Indemnifiable Claim hereunder. If the
Indemnifying Party fails or refuses to defend an Indemnifiable Claim, the
Indemnified Party may provide its own defense at the cost and expense of the
Indemnifying Party.
(d) Notwithstanding any provision in this Agreement to the
contrary, the Indemnifying Party shall not indemnify the Indemnified Party
against any liability or expense arising out of the Indemnified Party's
negligence, willful
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misfeasance, bad faith, gross negligence or reckless disregard of its duties and
obligations under this Agreement. The Indemnified Party shall indemnify and hold
harmless the Indemnifying Party from and against any and all claims (whether
with or without basis in fact or law), losses, damages, costs, charges, counsel
fees, payments, expenses and liability arising out of or attributable to any
action or failure or omission to act by the Indemnified Party as a result of the
Indemnified Party's bad faith, negligence, willful misfeasance, gross negligence
or reckless disregard of its duties under this Agreement.
(e) Notwithstanding any provision in this Agreement to the
contrary, the Transfer Agent may not avoid liability under this Agreement for
any loss or damage by reason of its reliance on (i) a Certificate signed by an
Authorized Person that is associated with or employed by the Transfer Agent or
any of its affiliates (an "Affiliated Authorized Person"); (ii) any other
instruction of an Affiliated Authorized Person or (iii) information provided by
a Company Accountant that is associated with or employed by the Transfer Agent
or any of its affiliates (an "Affiliated Company Accountant"), if such loss or
damage was the result of an Affiliated Authorized Person's or an Affiliated
Company Accountant's negligence, willful misfeasance, bad faith, or reckless
disregard of its duties and obligations under this Agreement.
8. Excluded from the consideration of whether the Transfer Agent has
been negligent or has breached this Agreement shall be any period of time, and
only such period of time, during which the Transfer Agent's performance is
materially affected by reason of circumstances beyond its control (collectively,
"Causes"), including without limitation mechanical breakdowns of equipment
(including any alternative power supply and operating systems software), flood
or catastrophe, acts of God, failures of transportation, communication or power
supply, strikes, lockouts, work stoppages or other similar circumstances.
9. The obligations of the parties hereto under paragraphs 2, 5, 6, 7
and 8 of Article VII shall survive termination of this Agreement.
10. At any time, the Transfer Agent may apply to an Authorized Person
of the Company that is not associated with or employed by the Transfer Agent or
any of its affiliates, for written instructions with respect to any matter
arising in connection with the Transfer Agent's duties and obligations under
this Agreement, and the Transfer Agent shall not be liable for any action taken
or omitted by it in good faith in accordance with such written instructions.
Such application by the Transfer Agent for written instructions from an
Authorized Person of the Company may set forth in writing any action proposed to
be taken or omitted by the Transfer Agent with respect to its duties or
obligations under this Agreement and the date on and/or after
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which such action shall be taken. The Transfer Agent shall not be liable for any
action taken or omitted in accordance with a proposal included in any such
application on or after the date specified therein unless, prior to taking or
omitting any such action, the Transfer Agent has received written instructions
in response to such application specifying the action to be taken or omitted.
The Transfer Agent may consult with counsel of the Company, or upon notice to
and consent of the Company and Manager, its own counsel, at the expense of the
Company and shall be fully protected with respect to anything done or omitted by
it in good faith in accordance with the advice or opinion of counsel to the
Company or its own counsel.
11. The Transfer Agent shall issue and mail subscription warrants for
Shares of capital stock, Shares representing stock dividends, exchanges or
splits, or act as conversion agent upon receiving written instructions from an
Authorized Person and such other documents as the Transfer Agent may deem
necessary.
12. The Transfer Agent shall supply shareholder lists to the Company
upon receiving a request therefor from an Authorized Person of the Company.
13. (a) The Transfer Agent shall treat confidentially and as
proprietary information of the Company records and other information relative to
the Company and to persons who are at any time shareholders of the Company, and
shall not use such records and information for any purpose other than the
performance of its responsibilities and duties hereunder. In case of any request
or demand for the inspection of the shareholder records of the Company, the
Transfer Agent shall to the extent permitted by applicable law endeavor to
notify the Company promptly and to secure instructions from an Authorized Person
as to such inspection. The Transfer Agent reserves the right, however, to
exhibit the shareholder records to any person whenever it may be exposed to
civil or criminal contempt proceedings for failure to comply or when requested
to divulge information and records to duly constituted authorities; provided,
however, that in connection with any such disclosure the Transfer Agent shall,
to the extent permitted by applicable law, promptly notify the Company and the
Manager that such disclosure has been made or is to be made.
(b) The Company shall treat confidentially and as proprietary
information relative to the Transfer Agent and shall not use such information
for any purposes other than the performance of its responsibilities and duties
hereunder.
(c) The obligations of confidentiality in Paragraphs 13(a) and
(b) shall survive termination or cancellation of this Agreement and shall not
apply to any information which a party has in its possession when disclosed to
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it by the other party, information which a party develops, information which is
or becomes known to the public other than by breach of this Agreement, or
information rightfully received by either party from a third-party without the
obligation of confidentiality.
14. At the request of an Authorized Person of the Company, the Transfer
Agent shall address and mail such appropriate notices to shareholders as the
Company may direct.
15. Notwithstanding any of the foregoing provisions of this Agreement,
the Transfer Agent shall be under no duty or obligation to inquire into, and
shall not be liable for:
(a) The legality of the issue or sale of any Shares, the
sufficiency of the amount to be received therefor, or the authority of the
Approved Institution or of the Company to request such sale or issuance;
(b) The legality of a transfer of Shares, or of a redemption
of any Shares, the propriety of the amount to be paid therefor, or the authority
of the Approved Institution or of the Company to request such transfer or
redemption;
(c) The legality of the declaration of any dividend by the
Company, or the legality of the issue of any Shares in payment of any share
dividend; or
(d) The legality of any recapitalization or readjustment of
Shares.
16. The Transfer Agent shall be entitled to receive and the Company
hereby agrees to pay to the Transfer Agent for its performance hereunder,
including its performance of the duties and functions set forth in Schedule I
hereto, (i) its reasonable Out-of-Pocket Expenses (including legal expenses and
attorneys' fees) incurred in connection with its performance hereunder and (ii)
such compensation as may be agreed upon in writing from time to time by the
Transfer Agent and the Company.
17. The Transfer Agent shall have no duties or responsibilities
whatsoever except such duties and responsibilities as are specifically set forth
in this Agreement, and no covenant or obligation shall be implied in this
Agreement against the Transfer Agent.
18. Purchase and Price of Services.
(a) The Company shall compensate the Transfer Agent for, and
the Transfer Agent will provide, beginning on the execution date of this
Agreement and continuing until the termination of this Agreement as provided
herein, the Services set forth herein in Schedule I(a).
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(b) The current unit prices for the Services shall be as set
forth in a separate fee letter (the "Fee Schedule"). At least 90 days prior to
the end of each calendar year, the Transfer Agent may negotiate with the Company
to adjust the Fee Schedule for the following calendar year upon the approval of
the Board of Directors of the Company. Notwithstanding the above, at any time
the Transfer Agent shall be entitled to increased fees or one-time charges due
to changes in legal or regulatory requirements; provided that such increased
fees or one-time charges shall be subject to the approval of the Board of
Directors of the Company, which approval shall not be unreasonably withheld.
19. Billing and Payment.
(a) The Transfer Agent shall bill the Company as follows: (i)
monthly in arrears for Accounts maintained and in arrears for any Out-of-Pocket
Expenses incurred by the Transfer Agent; provided, however, that with respect to
Out-of-Pocket Expenses, the Transfer Agent shall provide the Company monthly
with an amount to be advanced to the Transfer Agent for estimated postage
expenses for the following month. Documentation to support reconciliation of
actual postal charges shall be provided to the Company monthly. The Transfer
Agent may from time to time request the Company to make additional advances when
appropriate.
(b) The Company shall pay the Transfer Agent in immediately
available funds at Wilmington, Delaware within thirty (30) days of the date of
the bill, provided the bill is received in proper order and on a timely basis.
ARTICLE VIII
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving
to the other party notice in writing specifying the date of such termination,
which shall be not less than 90 days after the date of receipt of such notice.
Notwithstanding the foregoing, the Company may at any time terminate this
Agreement in accordance with the provisions of Schedule III hereto.
2. If either party fails to observe, keep or perform any material term
or condition of this Agreement, or if a voluntary or involuntary petition is
commenced by or against either party under Title 11 of the United States Code or
a party becomes insolvent, or should any substantial part of either party's
property be subject to any levy, seizure, assignment, application or sale for or
by any creditor or government agency, the other party may terminate this
Agreement in whole or in part. The party seeking to terminate this Agreement
shall give the
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other party written notice of any of the foregoing claimed to be a basis for
termination, and the Agreement shall terminate 30 days after the receipt of the
notice if the party receiving the notice has then failed to correct or remedy
the situation. The party charged with alleged material breach may initiate the
procedures in Article IX Paragraph 5 and, in that case, termination shall not be
effective during the pendency of such procedures. In the event such notice is
given by the Company, it shall be accompanied by a copy of a resolution of the
Board of Directors of the Company, certified by the Secretary or any Assistant
Secretary, electing to terminate this Agreement.
3. In the event such notice is given by the Transfer Agent, the Company
shall, on or before the termination date, deliver to the Transfer Agent a copy
of a resolution of its Board of Directors certified by the Secretary or an
Assistant Secretary designating a successor transfer agent or transfer agents.
In the absence of such designation by the Company, the Company shall, upon the
date specified in the notice of termination of this Agreement and delivery of
the records maintained hereunder, be deemed to be its own transfer agent and the
Transfer Agent shall thereby be relieved of all duties and responsibilities
pursuant to this Agreement.
4. In the event this Agreement is terminated as provided herein, upon
the written request of the Company, the Transfer Agent shall deliver the records
of the Company on electromagnetic media to the Company or its successor transfer
agent. The Company shall be responsible to the Transfer Agent for the reasonable
costs and expenses associated with the preparation and delivery of such media,
including copies of computer ready formats, to the extent such costs were
approved by the Company prior to such costs being incurred. Upon termination as
described in this Article VIII, for so long as the Transfer Agent continues to
perform any one or more of the services contemplated by this Agreement or any
Schedule hereto, the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in full force and
effect. Fees and out-of-pocket expenses incurred by the Transfer Agent but
unpaid by the Company upon such termination shall be immediately due and payable
upon and notwithstanding such termination. Subsequent to such termination, for a
reasonable fee the Transfer Agent shall provide the Company with reasonable
access to any Company documents or records remaining in its possession and
previously provided to the Company.
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ARTICLE IX
MISCELLANEOUS
1. Representatives of the Company's independent outside auditors
("Auditors") shall have the right from time to time to perform on-site audits at
the facility of the Transfer Agent which do not result in an unreasonable
disruption of the business of the Transfer Agent. Such audits shall be conducted
in accordance with an audit program, the scope and frequency of which shall be
agreed upon from time to time in good faith by the parties. The Auditors may
obtain a reasonable number of copies of records and accounts directly related to
the services to be supplied hereunder by the Transfer Agent. Except as provided
in clause (c) below, nothing in this paragraph shall be deemed to permit the
Auditors to have access to any records or information concerning (a) any other
customer of the Transfer Agent, (b) the manner or method used by the Transfer
Agent in establishing the fees it charges any customer, including the Company or
(c) the Transfer Agent's internal operating procedures, provided that the
Transfer Agent shall permit officers or employees of the Auditors to have access
to such internal operating procedures to the extent necessary for the proper
completion of such audit, and the expression of their unqualified opinion in the
Company's semi-annual report on Form N-SAR and the performance of any other
services required by applicable law, provided such Auditors have agreed to keep
such internal operating procedures confidential and treat such information as
proprietary information of the Transfer Agent.
2. During the term of this Agreement, at no additional cost to the
Company, the Transfer Agent shall provide a facility capable of safeguarding the
transfer agency and dividend disbursing records of the Company in case of damage
to the primary facility providing those services (the "Back-Up Facility").
Transfer of the transfer agency and dividend records of the Company to the
Back-Up Facility shall be at the Transfer Agent's expense, shall commence
immediately after damage to the primary facility results in an inability to
provide the transfer agency and dividend disbursing services, and shall be
completed within 72 hours of commencement. After the primary facility has
recovered, the Transfer Agent shall again utilize it to provide the transfer
agency and dividend disbursing services to the Company at no additional cost to
the Company. The Transfer Agent shall use reasonable efforts to provide the
services described in this Agreement from the Back-Up Facility.
3. The Transfer Agent represents that it has and is currently
registered as a transfer agent with the Securities and Exchange Commission
("SEC") and has complied with the SEC's regulations for registered transfer
agents. The Transfer Agent agrees that it will continue to be registered with
the SEC as a transfer agent for the duration of this Agreement. Should the
-23-
<PAGE> 24
Transfer Agent fail to be registered with the SEC as a transfer agent at any
time during this Agreement, the Company may, upon written notice to the Transfer
Agent, immediately terminate this Agreement.
4. The following procedures will be adhered to in all disputes arising
under this Agreement which the parties cannot resolve informally. The aggrieved
party shall notify the other party in writing of the nature of the dispute with
as much detail as possible about the deficient performance of the other party.
Representatives of the parties shall meet (in person or by telephone) within
seven days of the date of the written notification to reach an agreement about
the nature of the deficiency and the corrective action to be taken by the
respective parties. The representatives of the parties shall produce a report
about the nature of the dispute in detail to their respective management. If the
representatives of the parties are unable to agree on corrective action, the
managers to whom the representatives of the parties report or their successors
("Management") shall meet or otherwise act to facilitate an agreement within 14
days of the date of the written notification. If Management cannot resolve the
dispute, or agree upon a written plan of corrective action to do so, within
seven days after their initial meeting or other action, or if the agreed upon
completion dates in the written plan of corrective action are exceeded, either
party may request arbitration as provided for in this Agreement. Except as
otherwise specifically provided, neither party shall terminate this Agreement
for breach or initiate arbitration or other dispute resolution procedures unless
and until this dispute resolution procedure has been employed or waived in
writing by both parties.
5. (a) Any controversy or claim between or among the parties, arising
out of or relating to this Agreement or any agreements or instruments relating
hereto or delivered in connection herewith shall at the request of any party be
determined by arbitration. The arbitration shall be conducted in accordance with
the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any
choice of law provision in this Agreement, and under the auspices and rules of
the American Arbitration Association then in effect. The parties submit to
personal jurisdiction in San Francisco, California. Each party may serve a
single request for production of documents. If disputes arise concerning these
requests, the arbitrator(s) shall have sole and complete discretion to determine
the disputes. The arbitrator(s) shall give effect to statutes of limitation in
determining any claim, and any controversy concerning whether an issue is
arbitrable shall be determined by the arbitrator(s). The arbitrator(s) shall
deliver a written opinion setting forth findings of fact and the rationale for
the decision. The arbitrator(s) shall reconsider the decision once upon the
motion and at the expense of a party.
-24-
<PAGE> 25
(b) The confidentiality provisions of Article VII Paragraph 13
of this Agreement shall apply to the arbitration proceeding, all evidence taken
and the opinion. Judgment upon the decision rendered by the arbitrator(s) may be
entered in any court having jurisdiction. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.
(c) No provision of this paragraph 5 of Article IX shall limit
the right of a party to this Agreement to obtain provisional or ancillary
remedies from a court of competent jurisdiction before, after, or during the
pendency of any arbitration. The exercise of a remedy does not waive the right
of either party to resort to arbitration.
(d) If a legal action or arbitration is commenced in
connection with the enforcement of this Agreement or any instrument or agreement
required under this Agreement, the prevailing party shall be entitled to
attorneys' fees actually incurred (including allocated costs for in-house legal
services), costs and necessary disbursements incurred in connection with such
action or proceeding, as determined by the court or arbitrator(s).
6. The Company agrees that prior to effecting any change in any
Prospectus which would increase or alter the duties and obligations of the
Transfer Agent hereunder, it shall advise the Transfer Agent of such proposed
change prior to the intended date of the same.
-25-
<PAGE> 26
7. (a) Notices of any kind to be given to the Manager hereunder shall
be in writing and shall be duly given if mailed or delivered to the Manager at
the following address:
Bank of America NT&SA With a copy to:
Mutual Funds Administration Arthur A. Fritz, Esq.
Unit 39277 Bank of America NT&SA
333 S. Beaudry Ave. 555 South Flower Street
25th Floor 8th Floor
Los Angeles, CA 90017 Los Angeles, CA 90071
Attn: Sandra C. Brown
or at such other address or to such individual as shall be so specified by the
Manager.
(b) Notices of any kind to be given to the Transfer Agent
hereunder shall be in writing and shall be duly given if mailed or delivered to
the Transfer Agent at the following address:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Attention: Robert J. Perlsweig
or at such other address or to such individual as shall be so specified by the
Transfer Agent.
(c) Notices of any kind to be given to the Company shall be in
writing and shall be duly given if mailed or delivered to the Company at the
following address:
Pacific Horizon Funds, Inc. With a copy to:
400 Bellevue Parkway Drinker Biddle & Reath LLP
Wilmington, DE 19809 1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107
Attention: Michael P. Malloy
8. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties to this Agreement.
9. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns. This Agreement shall not be
assignable by either party without the written consent of the other party. This
Agreement will automatically terminate in the event of its assignment, as
described hereunder, or as such term is defined in the 1940 Act.
-26-
<PAGE> 27
10. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware (without reference to principles of
conflicts of law).
11. This Agreement may be executed in any number of counterparts each
of which shall be deemed to be an original; but such counterparts shall,
together, constitute only one instrument.
12. The provisions of this Agreement are intended to benefit only the
Transfer Agent and the Company, and no rights shall be granted to any other
person by virtue of this Agreement.
-27-
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the day
and year first above written.
PFPC INC. PACIFIC HORIZON FUNDS, INC.
By: /s/Robert J. Perlsweig By: /s/Cornelius J. Pings
---------------------- ----------------------
(Signature) (Signature)
Robert J. Perlsweig Cornelius J. Pings
---------------------- ----------------------
(Name) (Name)
EUP President
---------------------- ----------------------
(Title) (Title)
-28-
<PAGE> 29
TRANSFER AGENCY AGREEMENT
APPENDIX A
I, Cornelius J. Pings, President, and I, W. Bruce McConnel, III,
Secretary, of PACIFIC HORIZON FUNDS, INC., a Maryland corporation (the
"Company"), do hereby certify that:
The following individuals have been duly authorized by the Board of
Directors of the Company in conformity with the Company's Articles of
Incorporation and By-Laws to execute any Certificate, instruction, notice or
other instrument, including an amendment to Appendix B or Schedule I hereto, or
to give oral instructions on behalf of the Company, and the signatures set forth
opposite their respective names are their true and correct signatures.
NAME SIGNATURE
Cornelius J. Pings /s/Cornelius J. Pings
- ------------------------- -------------------------
Stephen M. Wynne /s/Stephen M. Wynne
- ------------------------- -------------------------
Jay F. Nusblatt /s/Jay F. Nusblatt
- ------------------------- -------------------------
W. Bruce McConnel, III /s/W. Bruce McConnel, III
- ------------------------- -------------------------
Gary M. Gardner /s/Gary M. Gardner
- ------------------------- -------------------------
J. Robert Dugan /s/J. Robert Dugan
- ------------------------- -------------------------
Sandra C. Brown /s/Sandra C. Brown
- ------------------------- -------------------------
PACIFIC HORIZON FUNDS, INC.
By: /s/Cornelius J. Pings
-------------------------
Cornelius J. Pings
President
Dated as of: By: /s/W. Bruce McConnel, III
October 25, 1997 -------------------------
W. Bruce McConnel, III
Secretary
-29-
<PAGE> 30
TRANSFER AGENCY AGREEMENT
APPENDIX B
I, Cornelius J. Pings, President, and I, W. Bruce McConnel, III,
Secretary, of PACIFIC HORIZON FUNDS, INC., a Maryland corporation (the
"Company"), do hereby certify that:
The following is a list of the Classes and Funds of the Company issued
and/or authorized as of the date of this Transfer Agency Agreement:
CLASS FUND
Class A Treasury Fund-Pacific Horizon
Shares
Class A-Special Series 1 Treasury Fund-Horizon Service
Shares
Class A-Special Series 2 Treasury Fund-Horizon Shares
Class A-Special Series 3 Treasury Fund-S Shares
Class A-Special Series 4 Treasury Fund-X Shares
Class A-Special Series 5 Treasury Fund-Y Shares
Class B Prime Fund-Pacific Horizon Shares
Class B-Special Series 1 Prime Fund-Horizon Service Shares
Class B-Special Series 2 Prime Fund-Horizon Shares
Class B-Special Series 3 Prime Fund-S Shares
Class B-Special Series 4 Prime Fund-X Shares
Class B-Special Series 5 Prime Fund-Y Shares
Class D Aggressive Growth Fund-A Shares
Class D-Special Series 3 Aggressive Growth Fund-M Shares
Class D-Special Series 5 Aggressive Growth Fund-K Shares
Class E U.S. Government Securities Fund-A
Shares
Class E-Special Series 3 U.S. Government Securities Fund-M
Shares
-30-
<PAGE> 31
Class E-Special Series 5 U.S. Government Securities Fund-K
Shares
Class F Capital Income Fund-A Shares
Class F-Special Series 3 Capital Income Fund- M Shares
Class F-Special Series 5 Capital Income Fund-K Shares
Class G California Tax-Exempt Bond Fund-A
Shares
Class G-Special Series 3 California Tax-Exempt Bond Fund-M
Shares
Class G-Special Series 5 California Tax-Exempt Bond Fund-K
Shares
Class I Tax-Exempt Money Fund-Pacific
Horizon Shares
Class I-Special Series 1 Tax-Exempt Money Fund-Horizon
Service Shares
Class I-Special Series 2 Tax-Exempt Money Fund-Horizon
Shares
Class I-Special Series 3 Tax-Exempt Money Fund-S Shares
Class J California Tax-Exempt Money Market
Fund-Pacific Horizon Shares
Class J-Special Series 1 California Tax-Exempt Money Market
Fund-Horizon Service Shares
Class J-Special Series 2 California Tax-Exempt Money Market
Fund-Horizon Shares
Class J-Special Series 3 California Tax-Exempt Money Market
Fund-S Shares
Class J-Special Series 4 California Tax-Exempt Money Market
Fund-X Shares
Class K Treasury Only Fund-Pacific Horizon
Shares
Class K-Special Series 1 Treasury Only Fund-Horizon Service
Shares
Class K-Special Series 2 Treasury Only Fund-Horizon Shares
Class L Government Fund-Pacific Horizon
Shares
-31-
<PAGE> 32
Class L-Special Series 1 Government Fund-Horizon Service
Shares
Class L-Special Series 2 Government Fund-Horizon Shares
Class M Intermediate Bond Fund-A Shares
Class M-Special Series 3 Intermediate Bond Fund-M Shares
Class M-Special Series 5 Intermediate Bond Fund-K Shares
Class M-Special Series 7 Intermediate Bond Fund-SRF Shares
Class N Blue Chip Fund-A Shares
Class N-Special Series 3 Blue Chip Fund-M Shares
Class N-Special Series 5 Blue Chip Fund-K Shares
Class N-Special Series 7 Blue Chip Fund-SRF Shares
Class O Asset Allocation Fund-A Shares
Class O-Special Series 3 Asset Allocation Fund-M Shares
Class O-Special Series 5 Asset Allocation Fund-K Shares
Class O-Special Series 7 Asset Allocation Fund-SRF Shares
Class Q National Municipal Bond Fund-A
Shares
Class Q-Special Series 3 National Municipal Bond Fund-M
Shares
Class Q-Special Series 5 National Municipal Bond Fund-K
Shares
Class R Utilities Fund-A Shares
Class R-Special Series 3 Utilities Fund-M Shares
Class R-Special Series 5 Utilities Fund-K Shares
Class S Growth and Income Fund-A Shares
Class S-Special Series 3 Growth and Income Fund-M Shares
Class S-Special Series 5 Growth and Income Fund-K Shares
Class T International Equity Fund-A Shares
-32-
<PAGE> 33
Class T-Special Series 3 International Equity Fund-M Shares
Class T-Special Series 5 International Equity Fund-K Shares
Class U Short-Term Government Fund-A Shares
Class U-Special Series 3 Short-Term Government Fund-M Shares
Class U-Special Series 5 Short-Term Government Fund-K Shares
Class V International Bond Fund-A Shares
Class V-Special Series 3 International Bond Fund-M Shares
Class V-Special Series 5 International Bond Fund-K Shares
Class W Corporate Bond Fund-A Shares
Class W-Special Series 3 Corporate Bond Fund-M Shares
Class W-Special Series 5 Corporate Bond Fund-K Shares
By:/s/Cornelius J. Pings
-------------------------
Cornelius J. Pings
President
Dated as of: By:/s/W. Bruce McConnel, III
October 25, 1997 -------------------------
W. Bruce McConnel, III
Secretary
-33-
<PAGE> 34
SCHEDULE I(a)
DESCRIPTION OF SERVICES
In consideration of the fees to be paid in such manner and at such
times as the Company and the Transfer Agent may agree, the Transfer Agent shall
provide the services set forth below:
Examine and process new accounts, subsequent payments, liquidations,
transfers, exchanges, telephone transactions, draft check redemptions, automatic
withdrawals, certificate deposits,NSCC trades, wire order trades, direct trades,
dividends, capital gains, daily trade confirmations, dividend statements, dealer
statements.
DAILY ACTIVITY
Maintain the following shareholder information on computer recordkeeping systems
or in such other manner as the Transfer Agent shall determine:
Name and Address, including Zip Code;
Balance of uncertificated Shares;
Balance of certificated Shares;
Certificate number, number of Shares, issuance date of each certificate
outstanding and cancellation date for each certificate no longer outstanding, if
issued;
Balance of Shares having paid a commission;
Balance of dollars available for redemption;
Dividend code (daily accrual, monthly reinvest, monthly cash or quarterly cash);
Type of account code (regular account, Automatic Withdrawal Plan);
Dealer, Branch and Salesperson information;
Establishment date indicating the date an account was opened, carrying forward
pre-conversion data as available;
Original establishment date for accounts opened by exchange;
W-9 withholding status and periodic reporting;
State of residence code;
-34-
<PAGE> 35
Social Security or taxpayer identification number, and indication of
certification (SSN also usable as a reference for on-line account lookup);
Historical transactions on the account for the most recent 13 months, or other
period as mutually agreed to from time-to-time;
Indication as to whether phone transactions can be accepted for this account;
Beneficial owner code, i.e. male, female, joint tenant, etc.;
An alternate or "secondary" account number issued by a dealer (or bank, etc.) to
a customer for use in inquiry and transaction input by "remote accessors"
(Company client institutions with remote terminal access or transmission
capability).
FUNCTIONS
Answer all investor and dealer telephone and/or written inquiries, except those
concerning Company policy or requests for investment advice which will be
referred to the Company or those which the Company chooses to answer, and
provide a staff until 8:00 pm Eastern time on each business day in connection
therewith.
Deposit Company Share certificates into accounts upon receipt of instructions
from the investor or other authorized person, if issued.
Examine and process transfers of Shares ensuring that all transfer requirements
and legal documents have been supplied.
Process and confirm address changes.
Process standard account record changes as required, i.e. dividend codes, dealer
and salesperson codes, etc.
Microfilm source documents for transactions, such as account applications and
correspondence.
Use of master account application to establish individual participant accounts.
Perform backup withholding for those accounts which federal government
regulations indicate is necessary.
Perform withholdings on liquidations, if applicable, for employee benefit plans.
Prepare and mail shareholder reporting forms relative to processing performed,
including 5498s, 1042s, and 1099s.
-35-
<PAGE> 36
Solicit missing taxpayer identification numbers.
Provide remote access inquiry to Company records via Company supplied hardware.
REPORTS PROVIDED
Daily Journals
Reflecting all Shares and dollar activity for the previous day
Blue Sky Report
Supply information monthly for Company's preparation of Blue Sky Reporting
N-SAR Report
Supply monthly correspondence, redemption and liquidation information for use in
Company's N-SAR Report
12b-1 Report/ Supply monthly dealer
Average Asset Reporting reallowance, commission and other fee reporting
Additionally, the following will be provided at the Company's request to the
Company at no charge (any such service may be outsourced to third parties
provided it is at no additional charge to the Company):
1. Shareholder listings:
- by beneficial owner code
- by tax status code
- by state code
- by establishment date
- by dividend code
- by account plan type
- top ten shareholders.
2. Dealer Transaction Totals.
3. Monthly average daily balance reports.
Prepare and mail copies of summary statements to dealers and investment
advisers;
Generate and mail confirmation statements for all financial transactions. Send
copies of financial transaction confirmations to the dealer specified, as well
as investment advisor and possibly other indicated interested parties, if
requested;
Monthly management report as Company and Transfer Agent agree that will provide
summary information of Company activity and quality of services delivered.
-36-
<PAGE> 37
DIVIDEND ACTIVITY
Reinvest or pay in cash including reinvesting in other funds within the fund
group serviced by the Transfer Agent as described in each Company prospectus.
Distribute capital gains simultaneously with income dividend.
DEALER SERVICES
Prepare and mail confirmation statements to dealers daily.
Prepare and mail copies of statements to dealers, same frequency as investor
statements.
Allow on-line access to institutions designated by the Company from time to
time.
SHAREHOLDER MEETINGS
Proxy mailing.
Prepare certified list of Shareholders, hard copy or microfiche as requested by
the Company.
Address and mail proxies and related material. Tabulate returned proxies and
supply daily reports when sufficient proxies have been received (material must
be adaptable to mechanical equipment as reasonably specified by the Transfer
Agent)
PERIODIC ACTIVITIES
Mail transaction confirmation statements daily to investors.
Address and mail two (2) periodic financial reports (an annual report and
semi-annual report) to fully disclosed recordholders (material must be adaptable
to Transfer Agent's mechanical equipment as reasonably specified by the Transfer
Agent).
Mail periodic statement to investors.
Compute, prepare and furnish all necessary reports to Governmental authorities:
Forms 1096, 1099DIV, 1099B, 1042 and 1042S.
Enclose various marketing material as designated by the Company in statement
mailings, i.e. monthly and quarterly statements (material must be adaptable to
mechanical equipment as reasonably specified by the Transfer Agent).
-37-
<PAGE> 38
SCHEDULE II
RECORDS MAINTAINED BY TRANSFER AGENT
- - Account applications
- - Cancelled certificates plus stock powers and supporting documents
- - Checks including check registers, reconciliation records, any
adjustment records and tax withholding documentation
- - Indemnity bonds for replacement of lost or missing checks
- - Liquidation, redemption, withdrawal and transfer requests including
stock powers, signature guarantees and any supporting documentation
- - Proxy records for shareholder meetings held within the previous twelve
(12) months (held with the Transfer Agent's Compliance Department)
- - State and federal tax records
- - Journals (or other records of original entry) containing itemized daily
record of all sales and redemptions
- - Separate ledger accounts (or other records) showing number of shares
held by each shareholder of record (including details with respect to periodic
investment plans, dividend reinvestment plans, etc.)
-38-
<PAGE> 39
SCHEDULE III
TRANSFER AGENT PERFORMANCE OBJECTIVES
PACIFIC HORIZON FUNDS, INC.
The performance objectives set forth below represent what the Company believes
should be reasonably obtainable by the Transfer Agent, given the typical daily
variables associated with any transfer agent operation (i.e., transaction volume
fluctuations).
IF THE TRANSFER AGENT FAILS TO MEET THE PERFORMANCE LEVELS DESCRIBED BELOW AS
"ACCEPTABLE" FOR ONE OR MORE OF THE LISTED FUNCTIONS BASED ON A
TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR MONTH PERIOD, THE TRANSFER
AGENT SHALL CREDIT THE COMPANY ON THE COMPANY'S INVOICE FOR THE NEXT MONTH TEN
PERCENT (10%) OF THE SERVICE FEES THE TRANSFER AGENT INVOICED THE COMPANY FOR
THE MONTH THE PERFORMANCE LEVELS WERE NOT MET.
IF THE TRANSFER AGENT FAILS TO MEET THE PERFORMANCE LEVELS DESCRIBED BELOW AS
"MARGINAL" FOR ANY ONE OR MORE OF THE LISTED FUNCTIONS BASED ON A
TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR MONTH PERIOD, THE TRANSFER
AGENT SHALL CREDIT THE COMPANY ON THE COMPANY'S INVOICE FOR THE NEXT MONTH
TWENTY PERCENT (20%) OF THE SERVICE FEES THE TRANSFER AGENT INVOICED THE COMPANY
FOR THE MONTH PRIOR TO THE MONTH THE PERFORMANCE LEVELS WERE NOT MET.
This Agreement may be immediately terminated upon written notice by the Company
to the Transfer Agent in the event that the TRANSFER AGENT FAILS TO MEET THE
PERFORMANCE LEVELS DESCRIBED BELOW AS "UNACCEPTABLE" FOR ANY ONE OR MORE OF THE
LISTED FUNCTIONS BASED ON A TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR
MONTH PERIOD and not cured by the Transfer Agent within a subsequent period of
30 days. Notice of such failure to meet performance objectives shall be provided
in writing by the Company to the Transfer Agent.
<PAGE> 40
SCHEDULE III (cont.)
Performance Standards
<TABLE>
<CAPTION>
======================================================================================================
Function Objective Acceptable Marginal Unacceptable
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Account Set Processed 97.5% 95.0% 92.5%
Up/Processing day of
receipt
- ------------------------------------------------------------------------------------------------------
Transaction Processed 97.5% 95.0% 92.5%
Processing day of
receipt
- ------------------------------------------------------------------------------------------------------
Maintenance Processed 85.0% 80.0% 75.0%
Processing within 2
business
days
- ------------------------------------------------------------------------------------------------------
Quality of Error rate 99.0% 98.0% 97.0%
Entry-New of:
Accounts
- ------------------------------------------------------------------------------------------------------
Quality of Error rate 99.0% 98.0% 97.0%
Entry-Financial of:
Transactions
- ------------------------------------------------------------------------------------------------------
Quality of Error rate 99.0% 97.0% 96.0%
Entry-Clerical of:
Transactions
- ------------------------------------------------------------------------------------------------------
Research Within 1 90.0% 80.0% 75.0%
Turnaround* business day
======================================================================================================
</TABLE>
* For items that occurred after PFPC became Transfer Agent.
<PAGE> 1
Exhibit (H)(7)
FUND ACCOUNTING AGREEMENT
AGREEMENT made as of this 15th day of September, 1997 by and between
BANK OF AMERICA NT&SA ("BofA"), having its principal place of business at 555
California Street, San Francisco, California 94104 and The Bank of New York, a
New York corporation authorized to do a banking business, having its principal
place of business at 48 Wall Street, New York, New York 10286 (hereinafter
called the "Bank").
WITNESSETH:
WHEREAS, BofA serves in the capacity of Administrator to Pacific
Horizon Funds, Inc. (the "Fund");
WHEREAS, the Bank is in the business of providing, among other things,
recordkeeping and fund accounting services to mutual funds; and
WHEREAS, BofA and the Bank wish to establish a relationship whereby the
Bank will provide fund accounting services to the various Portfolios of Pacific
Horizon Funds, Inc., listed on Appendix A to this Agreement (individually,
"Portfolio" and collectively "Portfolios");
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, BofA and the Bank hereby agree as follows:
1. BofA hereby appoints the Bank as its agent for the benefit of
the Fund to perform the duties hereinafter set forth.
<PAGE> 2
2. The Bank hereby accepts appointment as agent of BofA for the benefit
of the Fund and agrees to perform the duties hereinafter set forth.
3. Subject to the provisions of paragraphs 5 and 6 below, the Bank shall
compute the net asset value per share of each Series of shares (the "Series")
of the Fund and shall value the securities held by the Fund (the "Securities")
at such times and dates and in the manner specified in the then currently
effective Prospectus of the Fund.
4. Subject to the provisions of paragraphs 5 and 6 below, the Bank shall
also compute the net income and capital gains of each Series for dividend
purposes and the net income and capital gains per share at such times and dates
and in the manner specified in the then currently effective Prospectus of the
Fund.
5. To the extent valuation of Securities or computation of a Series' net
asset value, net income or capital gains for dividend purposes, or net income
or capital gains per share as specified in the Fund's then currently effective
Prospectus is at any time inconsistent with any applicable laws or regulations,
BofA shall immediately so notify the Bank in writing. Thereafter BofA shall (a)
either furnish the Bank at all appropriate times with the values of such
Securities, each Series' net asset value, net income or capital gains for
dividend purposes or net income or capital gains per share, as the case may be,
or (b) subject to the prior approval of the Bank, instruct the Bank in writing
to value Securities and compute each Series' net asset value, net income or
capital gains for dividend purposes, and net income or capital gains per share
in a manner which BofA then represents in writing to be consistent with all
applicable laws and regulations. BofA may also from time to time, subject to
the prior approval of the Bank, instruct the Bank in writing to compute the
value of the Securities, a Series' net asset value, net income or capital
- 2 -
<PAGE> 3
gains for dividend purposes, or net income or capital gains per share in a
manner other than as specified in paragraphs 3 and 4 of this Agreement. By
giving such instruction, BofA shall be deemed to have represented that such
instruction is consistent with all applicable laws and regulations and the then
currently effective Prospectus of the Fund. BofA shall have sole responsibility
for determining the method of valuation of Securities and the method of
computing each Series' net asset value, net income and capital gains for
dividend purposes and net income and capital gains per share.
6. BofA shall furnish the Bank with any and all instructions,
explanations, information, specifications, and documentation deemed necessary
by the Bank in the performance of its duties hereunder, including, without
limitation, the amounts or written formula for calculating the amounts and
times of accrual of a Series liabilities and expenses. BofA shall also furnish
the Bank with bid, offer, or market values of Securities if the Bank notifies
BofA that same are not available to the Bank from a security pricing or similar
service listed on Schedule 1 hereto and utilized by the Bank at the time such
information is required for calculations hereunder. At any time and from time
to time, BofA also may furnish the Bank with bid, offer, or market values of
Securities and instruct the Bank to use such information in its calculations
hereunder. The Bank shall at all times have the right to terminate its
utilization of, or subscriptions to, any securities pricing or similar service
listed on Schedule 1 hereto.
7. The Bank shall advise the Fund, the Fund's custodian and the Fund's
transfer agent of the net asset value, net income and capital gains for
dividend purposes, and net income and capital gains per share of each Series
upon completion of the computations required to be made by the Bank pursuant to
this Agreement.
- 3 -
<PAGE> 4
8. The Bank shall as agent of BofA and for the benefit of the
Fund, maintain and keep current the books, accounts and other documents, if
any, listed in Appendix A hereto and made a part hereof, as such Appendix A
may be amended from time to time, and preserve any such books, accounts and
other documents in accordance with the applicable provisions of Rule 31a-2 of
the General Rules and Regulations under the Investment Company Act of 1940, as
amended (the "Rules"). Such books, accounts and other documents shall be made
available upon reasonable request for inspection by officers, employees and
auditors of the Fund and/or of BofA during the Bank's normal business hours.
9. All records maintained and preserved by the Bank pursuant to
this Agreement, including but not limited to those in an electronic format,
which the Fund is required to maintain and preserve in accordance with the
above-mentioned Rules shall be and remain the property of the Fund and shall
be surrendered to the Fund or to BofA promptly upon request by BofA or by the
Fund in the form in which such records have been maintained and preserved. Upon
reasonable request of BofA or the Fund, the Bank shall provide in electronic
media, hard copy, or on micro-film, whichever the Bank shall elect, any records
included in any such delivery which are maintained by the Bank on a computer
disc, or are similarly maintained, and BofA shall reimburse the Bank for its
expenses of providing such hard copy or micro-film.
10. The Bank, in performing the services required of it under the
terms of this Agreement, shall be entitled to rely fully on the accuracy and
validity of any and all instructions, explanations, information, specifications
and documentation furnished to it by BofA and shall have no duty or obligation
to review the accuracy, validity or propriety of such instructions,
explanations, information, specifications or documentation, including, without
limitation, evaluations of Securities; the amounts or formula for calculating
the amounts and times of accrual of Series' liabilities and expenses; the
amounts
- 4 -
<PAGE> 5
receivable and the amounts payable on the sale or purchase of Securities; and
amounts receivable or amounts payable for the sale or redemption of Fund shares
effected by or on behalf of the Fund. In the event the Bank's computations
hereunder rely, in whole or in part, upon information, including, without
limitation, bid, offer or market values of Securities or other assets, or
accruals of interest or earnings thereon, from a pricing or similar service
listed on Schedule 1 hereto, the Bank shall not be responsible for, under any
duty to inquire into, or deemed to make any assurances with respect to, the
accuracy or completeness of such information, provided, however, that in the
event any such information provided by the pricing or similar service listed on
Schedule 1 hereto utilized by the Bank (the "Initial Information") exceeds, or
causes the Fund's net asset value to exceed, the tolerance permitted under the
variance tests then generally utilized by the Bank in connection with
agreements similar to this Agreement, the Bank shall obtain such information
from another service listed on Schedule 1 hereto. If such information from such
other service is within a permitted tolerance to the Initial Information under
variance tests then generally utilized by the Bank in connection with
agreements similar to this Agreement, the Bank shall utilize the Initial
Information in its calculations hereunder; if such information is not within
such tolerance, the Bank shall notify BofA and use such information as BofA may
specify.
11. The Bank shall not be required to inquire into any valuation of
Securities or other assets by the Fund or any third party described in
preceding paragraph 10 hereof, even though the Bank in performing services
similar to the services provided pursuant to this Agreement for others may
receive different valuations of the same or different securities of the same
issuers.
12. The Bank, in performing the services required of it under the terms
of this Agreement, shall not be responsible for determining whether any
interest accruable to the Fund is or
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<PAGE> 6
will be actually paid, but will accrue such interest until otherwise instructed
by BofA.
13. (a) The Bank shall not be responsible for delays or errors which
occur by reason of circumstances beyond its control in the performance of its
duties under this Agreement, including, without limitation, labor difficulties
external to the Bank, mechanical breakdowns, flood or catastrophe, acts of God,
failures of transportation, communication or power supply, or other similar
circumstances. Nor shall the Bank be responsible for delays or failures to
supply the information or services specified in this Agreement where such
delays or failures are caused by the failure of any person(s) other than the
Bank to supply any instructions, explanations, information, specifications or
documentation deemed necessary by the Bank in the performance of its duties
under this Agreement.
(b) Notwithstanding preceding paragraph 13(a), the Bank shall
maintain during the period of this Agreement at its own cost and expense
commercially reasonable back-up capability and commercially reasonable
emergency recovery and contingency plans.
14. No provision of this Agreement shall prevent the Bank from offering
services similar or identical to those covered by this Agreement to any other
corporations, associations or entities of any kind. Any and all operational
procedures, techniques and devices developed by the Bank in connection with the
performance of its duties and obligations under this Agreement, including those
developed in conjunction with the Fund, shall be and remain the property of the
Bank, and the Bank shall be free to employ such procedures, techniques and
devices in connection with the performance of any other contract with any other
person whether or not such contract is similar or identical to this Agreement.
- 6 -
<PAGE> 7
15. The Bank may, with respect to questions of law, apply to and
obtain the advice and opinion of counsel to the Fund or its own counsel and
shall be entitled to rely on the advice or opinion of such counsel. The costs
of any such advice or opinion shall be borne by the Bank.
16. (a) Unless otherwise provided in this Agreement, the Bank
shall act only upon oral instructions and written instructions.
(b) The Bank shall be entitled to rely upon any oral
instructions it receives from an Authorized Person (or from a person reasonably
believed by the Bank to be an Authorized Person) pursuant to this Agreement. The
Bank may assume that any oral instruction or written instruction received
hereunder is not in any way inconsistent with the provisions of organizational
documents or this Agreement or of any vote, resolution or proceeding of the
Fund's of BofA's Board of Directors or shareholders or with any prior oral or
written instructions or other instructions of BofA unless and until the Bank
receives written instructions to the contrary.
(c) BofA shall forward to the Bank written instructions
confirming oral instructions so that the Bank receives the written instructions
by the close of business on the same day that such oral instructions are
received. The fact that such confirming written instructions are not received by
the Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the oral instruction. Where oral instructions or
written instructions reasonably appear to have been received from an Authorized
Person, the Bank shall incur no liability to BofA or the Fund in acting upon
such oral instructions or written instructions provided that the Bank's actions
comply with the other provisions of this Agreement.
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<PAGE> 8
(d) As used herein the term "Authorized Person" shall be any person,
whether or not an officer or employee of BofA, duly authorized to give oral
and/or written instructions on behalf of BofA, such person to be designated in
a certificate of Authorized Persons which contains a specimen signature of such
person.
17. The Bank shall not be liable for any loss, damage or expense,
including counsel fees and other costs and expenses of a defense against any
claim or liability, resulting from, arising out of, or in connection with its
performance hereunder, including its actions or omissions, the incompleteness or
inaccuracy of any specifications or other information furnished by the Fund, or
for delays caused by circumstances beyond the Bank's control, unless such loss,
damage or expense arises out of the bad faith, negligence, or willful
misconduct of the Bank. In no event shall the Bank be liable to the Company or
any third party for special, indirect, or consequential damages, or for lost
profits or loss of business, arising under or in connection with this
Agreement, even if previously informed of the possibility of such damages and
regardless of the form of action.
18. Without limiting the generality of the foregoing, BofA shall
indemnify the Bank against and save the Bank harmless from any loss, damage or
expense, including counsel fees and other costs and expenses of a defense
against any claim or liability, arising from any one or more of the following:
(a) Errors in records or instructions, explanations, information,
specifications or documentation of any kind, as the case may be, supplied to
the Bank by any third party described in preceding paragraph 10 hereof or by
or on behalf of the Fund;
(b) Action or inaction taken or omitted to be taken by the Bank
pursuant to written or oral instructions of the Fund
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<PAGE> 9
or otherwise without bad faith, negligence or willful misconduct;
(c) Any action taken or omitted to be taken by the Bank in
good faith in accordance with the advice or opinion of counsel for the Fund or
its own counsel;
(d) Any improper use by the Fund or its agents, distributor or
investment advisor of any valuations or computations supplied by the Bank
pursuant to this Agreement;
(e) The method of valuation of the Securities and the method of
computing each Series' net asset value, net income or capital gains for
dividend purposes, and net income or capital gains per share; or
(f) Any valuations of Securities, net asset value, net income
or capital gains for dividend purposes, or net income or capital gains per share
provided by the Fund.
19. In consideration for all of the services to be performed by the
Bank as set forth herein the Bank shall be entitled to receive reimbursement
for all out-of-pocket expenses agreed to and approved in advance by BofA and
such compensation as may be agreed upon in writing from time to time between
the Bank and BofA.
20. Attached hereto as Appendix B is a list of persons duly authorized
by the Board of Directors or by-laws of BofA to execute this Agreement and give
any written or oral instructions, or written or oral specifications, by or on
behalf of BofA. From time to time BofA may deliver a new Appendix B to add or
delete any person and the Bank shall be entitled to rely on the last Appendix B
actually received by the Bank.
21. BofA represents and warrants to the Bank that it has all requisite
power to execute and deliver this Agreement, to
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<PAGE> 10
give any written or oral instructions contemplated hereby, and to perform the
actions or obligations contemplated to be performed by it hereunder, and has
taken all necessary action to authorize such execution, delivery, and
performance.
22. Unless The Bank of New York is acting as the sole custodian for the
Fund, on each day on which the Bank is to make calculations hereunder, BofA
shall deliver or cause the Fund to deliver to the Bank, at least one-half hour
before the Bank is to make any such calculations, a signed written
specification of the Securities of each Series. The Bank shall be entitled to
rely on such specifications in making its calculations hereunder for such day.
If The Bank of New York is acting as the sole custodian for the Fund, the Bank
shall be entitled to rely on specifications of Securities furnished by The Bank
of New York as custodian.
23. This Agreement shall not be assignable by BofA without the prior
written consent of the Bank, or by the Bank without the prior written consent
of BofA.
24. Either of the parties hereto may terminate this Agreement by giving
the other party a notice in writing specifying the date of such termination,
which shall not be less than ninety (90) days after the date of giving of such
notice. Upon the date set forth in such notice, the Bank shall deliver to the
Fund all records then property of the Fund and, upon such delivery, the Bank
shall be relieved of all duties and responsibilities under this Agreement.
25. This Agreement may not be amended or modified in any manner except by
written agreement executed on behalf of both parties hereto.
26. This Agreement is executed in the State of New York and all laws and
rules of construction of the State of New York
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<PAGE> 11
(other than those relating to choice of laws) shall govern the rights, duties
and obligations of the parties hereto.
27. The performance and provisions of this Agreement are intended to
benefit only the Bank, BofA and the Fund, and no rights shall be granted to any
other person by virtue of this Agreement.
28. The Bank shall provide to the Fund's independent certified public
accountants copies of such reports as the Bank shall have provided hereunder,
and copies of such supporting documentation as shall have been utilized by the
Bank in preparing such reports.
30. The Bank agrees to treat all records and all information received
hereunder relative to the Fund, its shareholders and its customers as
confidential, and shall not authorize the use of such records or information
for any purpose other than the performance of its responsibilities and duties
hereunder. Notwithstanding any other provision in this Agreement, however, the
Bank may divulge such information to its auditors, its counsel, its regulators,
or any securities regulators, or to any other person when it is advised by its
counsel that it may be liable for a failure to do so.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
BANK OF AMERICA NT&SA
By: /s/ Sandra C. Brown
----------------------
Sandra C. Brown
Attest:
/s/ Colleen O'Neill
- ----------------------
Colleen O'Neill
THE BANK OF NEW YORK
By: /s/ Jorge E. Ramos
-------------------------
JORGE E. RAMOS, VP
Attest:
/s/ [ILLEGIBLE]
- ----------------------
<PAGE> 13
APPENDIX A TO FUND ACCOUNTING AGREEMENT
BETWEEN
THE BANK OF NEW YORK
AND
BANK OF AMERICA NT&SA
I. The Bank of New York (the "Bank"), as agent for BANK OF AMERICA NT&SA
for the benefit of Pacific Horizon Funds, Inc. (the "Fund"), shall maintain the
following records on a daily basis for each Series.
1. Report of priced portfolio securities
2. Statement of net asset value per share
3. Net income of the Fund for dividend purposes
4. Net income per share
5. Yield of the Fund
II. The Bank shall maintain the following records on a monthly basis for
each Series:
1. General Ledger
2. General Journal
3. Cash Receipts Journal
4. Cash Disbursements Journal
5. Subscriptions Journal
6. Redemptions Journal
7. Accounts Receivable Reports
8. Accounts Payable Reports
9. Open Subscriptions/Redemption Reports
10. Transaction (Securities) Journal
11. Broker Net Trades Reports
III. The Bank shall prepare a Holdings Ledger on a quarterly basis, and a
Buy-Sell Ledger (Broker's Ledger) on a semiannual basis for each Series.
Schedule D shall be produced on an annual basis for each Series.
<PAGE> 14
The above reports may be printed according to any other required
frequency to meet the requirements of the Internal Revenue Service, The
Securities and Exchange Commission and the Fund's Auditors.
IV. For internal control purposes, the Bank uses the Account Journals
produced by The Bank of New York Custody System to record daily settlements of
the following for each Series:
1. Securities bought
2. Securities sold
3. Interest received
4. Dividends received
5. Capital stock sold
6. Capital stock redeemed
7. Other income and expenses
All portfolio purchase for the Fund are recorded to reflect expected
maturity value and total cost including any prepaid interest.
<PAGE> 15
APPENDIX B
I, , of BANK OF AMERICA NT&SA, a Maryland
corporation (the "Fund"), do hereby certify that:
The following individual serve in the following positions with the
Fund, and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures. Each
such person is authorized to give written or oral instructions or written or
oral specifications by or on behalf of the Fund to the Bank.
Name Position Signature
- --------------- --------------- ---------------
<PAGE> 16
SCHEDULE 1
Muller Data Corp.
IDC Corp.
J.J. Kenney Co., Inc.
Merrill Lynch
Standard & Poor's Corp.
Reuter's
Bloomberg
<PAGE> 17
Appendix A
List of Portfolios
Pacific Horizon National Municipal Bond Fund
Pacific Horizon Treasury Fund
Pacific Horizon Prime Fund
Pacific Horizon Capital Income Fund
Pacific Horizon Treasury Only Fund
Pacific Horizon Aggressive Growth Fund
Pacific Horizon California Tax Exempt Money Market
Pacific Horizon Tax Exempt Bond Fund
Pacific Horizon Tax Exempt Money Fund
Pacific Horizon Government Fund
Pacific Horizon U.S. Government Securities Fund
<PAGE> 1
Exhibit (h)(8)
ADMINISTRATION AGREEMENT
This Agreement is made as of September 15, 1997 between PACIFIC
HORIZON FUNDS, INC., a Maryland corporation (the "Company"), and BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank").
WHEREAS, the Company is an open-end management investment company and
is so registered under the Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, the Company offers and maintains multiple investment
portfolios as specified in its registration statement on Form N-1A (the
"Funds"); and
WHEREAS, the Company offers for sale separate series of shares of
common stock in each Fund (the "Shares"); and
WHEREAS, pursuant to a Distribution Agreement dated September 15, 1997
(the "Distribution Agreement") between the Company and Provident Distributors,
Inc. ("Provident"), the Company has retained Provident as its Distributor to
provide for the sale and distribution of the Shares; and
WHEREAS, the Company desires to retain the Bank as its Administrator
to provide it with administrative services for the Funds and the Bank is
willing to provide such services for the Funds;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
I. ADMINISTRATION
1. APPOINTMENT OF ADMINISTRATOR.
The Company hereby appoints the Bank as Administrator of each Fund on
the terms and for the period set forth in this Agreement, and the Bank
hereby accepts such appointment and agrees to provide the services and
have the duties set forth in this Section I performed for the
compensation provided in this Section. The Company understands that the
Bank now acts and shall continue to act as administrator of various
investment companies and fiduciary of other managed accounts, and the
Company has no objection to the Bank's so acting so long as its
services under this Agreement are not impaired thereby. In addition, it
is understood that the persons employed by the Bank to assist in the
performance of its duties hereunder shall not devote
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<PAGE> 2
their full time to such services and nothing herein contained shall be
deemed to limit or restrict the right of the Bank or any affiliate of the
Bank to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
2. SERVICES AND DUTIES.
A. Subject to the supervision and control of the Company's Board of
Directors, the Bank shall provide facilities, equipment and personnel
to carry out those administrative services that are for the benefit
of all series of Shares in each of the Funds, provided that such
services shall not include those investment advisory functions which
are to be performed by the Company's Investment Adviser, the services
of Provident as Distributor pursuant to the Distribution Agreement,
those services to be performed by the Bank of New York and PNC Bank,
National Association ("Custodians") pursuant to the Company's Custody
Agreements, those services to be performed by BISYS Fund Services,
Inc. or any successor transfer agent ("Transfer Agent") pursuant to
the Company's Transfer Agency Agreement and those services normally
performed by the Company's counsel, auditors and successors of such
aforementioned service providers. The responsibilities of the Bank
include, without limitation, the following services:
1. Participation in the periodic updating of the prospectuses and
statements of additional information for the Funds (the
"Prospectuses") and accumulation of information for and, subject
to approval by the Company's Treasurer and legal counsel,
coordination of the preparation, filing, printing and
dissemination of reports to the Funds' shareholders and the
Securities and Exchange Commission (the "Commission"), including
but not limited to annual reports and semi-annual reports on
Form N-SAR, notices pursuant to Rule 24f-2 and proxy materials;
2. Computation of each Fund's net asset value per share on each
business day and, with respect to the Company's money market
funds determination of the variance of each Fund's amortized
cost value per share from its market value per share;
3. Calculation of the expenses, dividends and capital gain
distributions of each Fund;
2
<PAGE> 3
4. The Bank shall calculate expenses and dividends and capital gain
distributions to be paid to each Fund's shareholders in conformity with
subchapter M of the Internal Revenue Code.
5. Payment of all approved expenses of maintaining the offices of the Company,
wherever located, and arrangement for payment by the Company of all Board
approved expenses payable by the Funds;
6. Determination, after consultation with legal counsel for the Company, of
the jurisdictions in which notice must be provided and fees paid in
connection with the sale of shares to investors. Responsibility for the
registration, notification, qualification or payment in connection with the
sale of shares and for the maintenance of the qualification of the Shares
for sale under the securities laws of such jurisdictions; (Payment of Share
registration fees and any fees for qualifying or continuing the
qualification of the Company shall be made by the Company);
7. To the extent permitted by law, provision of the services of persons who
may be appointed as officers of the Company by the Company's Board of
Directors;
8. Preparation and filing of the Company's federal, state and local income
tax returns;
9. Preparation and, subject to approval of the Company's Treasurer,
dissemination of the Company's and each Fund's quarterly financial
statements and schedules of investments to the Company's directors, and
preparation of such other reports relating to the business and affairs of
the Company and each Fund as the officers and directors of the Company may
from time to time reasonably request; and
10. Provision of internal legal and accounting compliance services;
11. Providing and supervising a facility to receive purchase and redemption
orders via toll-free IN-WATS telephone lines;
12. Overseeing the performance of the Custodians, and Transfer
3
<PAGE> 4
Agent including without limitation a review of all correspondence from
the Transfer Agent of shareholders for accuracy and timeliness in
handling inquiries and review of dividend checks, statements and
purchase and redemption orders for proper turn-around;
13. Making available information concerning each Fund to shareholders;
distributing written communications to each Fund's shareholders such
as periodic listings of each Fund's portfolio securities, annual and
semi-annual reports, and Prospectuses and supplements thereto; and
handling shareholder problems and calls relating to administrative
matters;
14. Providing and supervising the services of employees ("relationship
coordinators") whose principal responsibility and function will be to
preserve and strengthen each Fund's relationships with its
shareholders;
15. Providing for the preparing, supervising and mailing of confirmations
for all purchase and redemption orders from shares; and
16. Providing and supervising the operation of an automated data
processing system to process purchase and redemption orders for
shares.
B. Assuring that persons are available to transmit redemption requests to the
Transfer Agent as promptly as practicable;
C. Assuring that persons are available to transmit orders accepted for the
purchase of Shares to the Transfer Agent as promptly as practicable;
D. Preparing regular reports for internal use and for distribution to the
Company's Board of Directors concerning shareholder activity;
E. Responding to shareholder inquiries sent to the Company;
F. The Bank shall oversee the maintenance by the Custodians and Transfer Agent
of the books and records required under the 1940 Act in connection with
performance of the Custody Agreements and
4
<PAGE> 5
Transfer Agency Agreement, and shall maintain (or oversee the maintenance
by such other persons as may from time to time be approved by the Company's
Board of Directors) such other books and records (other than those required
to be maintained by the Funds' investment adviser) as may be required by
law or may be required for the proper operation of the business and affairs
of the Funds. Without limiting the foregoing, the Bank shall on behalf of
the Funds and at the Funds' expense use reasonable efforts to obtain from
the Company's prior administrator all books and records pertaining to the
Funds that are required to be maintained under the 1940 Act and that are in
the prior administrator's possession (provided, however, (i) that the Bank
shall not be liable to the Company for the Bank's failure to obtain all the
books and records from the prior administrator so long as the Bank used
reasonable efforts to obtain such books and records and (ii) that the Bank
shall not be obligated to initiate or pursue litigation against the
Company's prior administrator to obtain such books and records) and shall
be responsible for the proper maintenance of such records throughout the
term of this Agreement. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Bank agrees that all such books and records which
it maintains, or is responsible for maintaining, for the Company and the
Funds are the property of the Company and further agrees to surrender
promptly to the Company any of such books and records upon the Company's
request. The Bank further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act said books and records required to be
maintained by Rule 31a-1 under said Act. The Company shall have the right
at any time to inspect the records (including work papers and the other
related documents) in the possession of the Administrator relating to the
Company.
G. In performing its services and duties hereunder as Administrator for the
Funds, the Bank will act in conformity with the Company's Charter, Bylaws
and Prospectuses and with the instructions and directions of the Board of
Directors of the Company, and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal or state laws
and regulations;
H. The Bank shall at its expense enter into and shall maintain in effect with
appropriate parties one or more agreements making reasonable provision for
emergency use of electronic data processing equipment to the extent
appropriate equipment is available. In the event of equipment failures, the
Bank shall, at no additional expense to the Company, take reasonable steps
to minimize service interruptions but
5
<PAGE> 6
shall have no liability with respect thereto;
I. The Bank shall act as liaison with the Fund's independent
public accountants and shall take all reasonable action in the
performance of its duties under this Agreement to assure that
the necessary information with respect to its duties hereunder
is made available to such accountants for the expression of
their opinion, as required by the Fund;
J. The Bank shall assist the Custodians and Transfer Agent and the
Company's Investment Adviser, counsel and auditors and any
other service providers as required to carry out the business
and operations of the Funds;
K. The Bank shall assist in developing compliance procedures for
each of the classes of the Company's Funds and shall monitor
such compliance procedures, which will include without
limitations, compliance with each Fund's investment objective,
policies and limitations procedures, guidelines, restrictions,
tax matters, and applicable laws and regulations.
L. The Bank shall review and evaluate the daily pricing of
securities for each Fund; and
M. The Bank, at the expense of the Company, shall maintain each
Fund's fidelity bond as required by the 1940 Act and shall
maintain errors and omissions insurance on behalf of the
Company.
3. SUBCONTRACTORS.
It is understood that the Bank may from time to time employ or associate
with itself such person or persons as the Bank may believe to be
particularly qualified to assist in the performance of this Agreement;
provided, however, that, i) the compensation of such person or persons
shall be paid by the Bank, ii) notwithstanding anything herein to the
contrary the Bank shall be as fully responsible to the Company for the
acts and omissions of any subcontractor as the Bank is for its own acts
and omissions, and iii) the Board of Directors of the Company shall give
prior approval for the use of or change in any sub-administrator or fund
accountant to be employed by the Bank on behalf of the Company. Without
limiting the generality of the foregoing, it is understood that the Bank
has entered into an agreement with PFPC Inc. and Bank of New York ("Fund
Accountants") under which said institutions will provide certain
accounting, bookkeeping, pricing and
6
<PAGE> 7
dividend and distribution calculation services with respect to the
Funds at the expense of the Funds.
Furthermore, it is understood that the Bank has entered into an
agreement with PFPC Inc. to provide certain sub-administration services,
including but not limited to, facilities, record keeping, registration,
tax preparation, and oversight services at the expense of the Bank.
4. EXPENSES ASSUMED AS ADMINISTRATOR.
Except as otherwise stated in this subsection 4, the Bank shall pay all
expenses incurred by it in performing its services and duties hereunder
as Administrator including the cost of any independent pricing service
used in connection with the Funds. Other expenses to be incurred in the
operation of the Funds (other than those borne by the Company's
investment adviser) including taxes, interest, brokerage fees and
commissions, if any, fees of directors who are not officers, directors,
partners, employees or holders of 5 percent or more of the outstanding
voting securities of the Company's investment adviser or the Bank or
their subcontractors or any of their affiliates, Securities and
Exchange Commission fees and state blue sky registration and
qualification fees, advisory fees, fees payable to shareholder
organizations, fees for special management services, 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 shareholder
services, including without limitation telephone and personnel
expenses, costs of preparing and printing Prospectuses, or any
supplement or amendment thereto, necessary for the continued effective
registration of the Shares under the federal or state securities laws,
costs of printing and distributing any Prospectus, supplement or
amendment thereto for existing shareholders of the Fund described
therein, costs of shareholder reports and corporate meetings and any
extraordinary expenses will be borne by the Funds. It is understood
that certain advertising, marketing, shareholder servicing,
administration and/or distribution expenses to be incurred in
connection with the Shares may be paid by the Company as provided in
any Plan which may in the sole discretion of the Company be adopted in
accordance with Rule 12b-1 under the 1940 act and that such expenses
will be paid apart from any fees under this Agreement.
5. COMPENSATION. For the services provided and the expenses assumed as
Administrator pursuant to this Agreement, the Company on behalf of each
Fund will pay the Bank a fee, computed daily and payable monthly as
7
<PAGE> 8
described in the fee schedule attached as Exhibit A.
II. CONFIDENTIALITY
The Bank shall treat confidentially and as proprietary information of
the Company all records and other information relative to the Company
and the Funds and prior or present shareholders or those persons or
entities who respond to Provident's inquiries concerning investment in
the Company except to the extent information is publicly available or
available to the Bank from sources other than the Funds, and will not
use such records and information for any purpose other than performance
of its responsibilities and duties hereunder or under any other
agreement with the Company, except after prior notification to and
approval in writing by the Company, which approval shall not be
unreasonably withheld and may not be withheld where the Bank may be
exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted
authorities or when so requested by the Company.
III. LIMITATIONS OF LIABILITY
The Bank shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Company or by any Fund in connection
with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or negligence on its part
in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also and officer, director, partner, employee or agent of the Bank who
may be or become an officer, director, employee or agent of the Company,
shall be deemed, when rendering services to the Company or to any Fund
or acting on any business of the Company or of any Fund (other than
services or business in connection with the Bank's duties as
Administrator hereunder or under any other agreement with the Company)
to be rendering such services to or acting solely for the Company or
Fund and not as an officer, director, partner, employee or agent or one
under the control or direction of the Bank even though paid by the Bank.
IV. DURATION AND TERMINATION
This Agreement shall become effective September 15, 1997 and, unless
sooner terminated as provided herein, shall continue until October 31,
1998. Thereafter, if not terminated, this Agreement shall continue
automatically as to a particular Fund 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 this 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
8
<PAGE> 9
Company or by vote of a "majority of the outstanding voting securities"
of such Fund; provided, however, that this Agreement may be terminated
by the Company at any time with respect to any Fund, without cause and
without the payment of any penalty, by vote of a majority of the entire
Board of Directors of the Company or by a vote of a "majority of the
outstanding voting securities" of such Fund on 60 days' written notice
to the Bank at any time, without the payment of any penalty and by the
Bank, on 90 days' written notice to the Company at any time, without the
payment of any penalty. This Agreement will immediately terminate in the
event of its "assignment." (As used in this Agreement, the terms
"majority of the outstanding voting securities," "interested person" and
"assignment" shall have the same meaning as such terms have in the 1940
Act.)
V. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
VI. NOTICES
Notices of any kind to be given to the Company hereunder by the Bank
shall be in writing and shall be duly given if mailed or delivered to
the Company at Association of American Universities, 1200 New York
Avenue, NW, Suite 550, Washington, D.C. 20005, Attention: Dr. Cornelius
J. Pings, President, with a copy to Drinker Biddle & Reath, LLP,
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
PA 19107, Attention: W. Bruce McConnel, III, Esq. or at such other
address or to such individual as shall be so specified by the Company to
the Bank. Notices of any kind to be given to the Bank hereunder by the
Company shall be in writing and shall be duly given if mailed or
delivered to the Bank at 333 S. Beaudry Avenue, 25th Floor, Unit 39277,
Los Angeles, CA 90017, Attention: Sandra C. Brown, or at such other
address or to such individual as shall be so specified by the Bank to
the Company.
VII. MISCELLANEOUS
The obligations of each Fund under this Agreement shall be several
(and not joint, or joint and several) obligations of each Fund. The
captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be
signed in one or more counterparts, each of which shall be an original
and all of which together shall be deemed one and the same document. If
any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected
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thereby. Subject to the provisions of Section IV hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by California law
(without regard to principles of conflicts of law); provided, however, that
nothing herein shall be construed in a manner inconsistent with the 1940
Act or any rule or regulation of the Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PACIFIC HORIZON FUNDS, INC.
By: /s/ Cornelius Pings
--------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Sandra C. Brown
-------------------------------
Name: Sandra C. Brown
Title: Vice President
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<PAGE> 11
EXHIBIT A
FEE SCHEDULE
MONEY MARKET FUNDS
The Company shall pay the Administrator a fee, computed daily and payable
monthly based on the net assets of the California Tax-Exempt Money Market Fund,
Government Fund, Prime Fund, Tax-Exempt Money Fund, Treasury Fund and Treasury
Only Fund at the following rates:
0.10% of the first $7 billion of each Fund's average net assets, plus 0.09% of
the next $3 billion of each Fund's average net assets, plus 0.08% of each
Fund's average net assets over $10 billion. Such fee as is attributable to each
Fund shall be a separate charge to each such Fund and shall be the several (and
not joint and several) obligation of each such Fund.
VARIABLE NAV FUNDS
The Company shall pay the Administrator a fee, computed daily and payable
monthly based on the net assets of the following Funds at the rate noted. Such
fee as is attributable to each Fund shall be a separate charge to each such
Fund and shall be the several (and not joint and several) obligation of each
such Fund.
Aggressive Growth Fund and California Tax-Exempt Bond Fund:
0.30%
Capital Income Fund, Corporate Bond Fund, International Equity Fund, National
Municipal Bond Fund, Short Term Government Fund and U.S. Government Securities
Fund:
0.20%
Asset Allocation Fund, Blue Chip Fund and Intermediate Bond Fund:
0.15%
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<PAGE> 1
Exhibit (h)(9)
SUB-ADMINISTRATION AGREEMENT
AGREEMENT made as of September 15, 1997 by and between Bank of America
National Trust and Savings Association (the "Administrator") and PFPC Inc., a
Delaware corporation (the "Sub-Administrator").
WHEREAS, the Administrator entered into an Administration Agreement dated
September 15, 1997 (the "Administration Agreement") to provide administration
services to Pacific Horizon Funds, Inc. (the "Company"), which is an investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), and which is comprised of multiple investment portfolios as
specified in its Registration Statement on Form N-1A (each a "Fund" and
collectively the "Funds");
WHEREAS, the Administration Agreement provides that the Administrator may
from time to time employ or associate with itself such person or persons as it
may believe to be particularly fitted to assist in the performance of the
Administration Agreement;
WHEREAS, the Administrator desires to retain the Sub-Administrator to
provide certain administration services for the Funds and the Sub-Administrator
is willing to provide such services, all as more fully set forth below; and
WHEREAS, the Sub-Administrator is experienced in providing administration
services to investment companies and possesses facilities sufficient to provide
such services.
NOW THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties hereby agree as follows:
I. DEFINITIONS. AS USED IN THIS AGREEMENT:
1. "1933 Act" means the Securities Act of 1933, as amended.
2. "1934 Act" means the Securities Exchange Act of 1934, as amended.
3. "Authorized Person" means any officer of the Company and any other
person duly authorized by the Company's Board of Directors to give
Oral Instructions and Written Instructions on behalf of the Company
and identified as such to the Sub-Administrator.
4. "CEA" means the Commodities Exchange Act, as amended.
5. "Oral Instructions" mean oral instructions received by the
Sub-Administrator from an Authorized Person or from a person
reasonably believed by the Sub-Administrator to be an Authorized
Person.
6. "SEC" means the Securities and Exchange Commission.
7. "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act and
the CEA.
8. "Shares" mean the shares of stock of any series or class of the
Company.
9. "Written Instructions" mean written instructions signed by an
Authorized Person and received by the Sub-Administrator. The
instructions may be delivered by hand, mail, tested telegram, cable,
telex or facsimile sending device.
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<PAGE> 2
II. SUB-ADMINISTRATION
1. Appointment of Sub-Administrator
The Administrator retains the Sub-Administrator for the term of this
Agreement and the Sub-Administrator hereby agrees to perform the
services and duties set forth in this Agreement for the compensation
provided in this Agreement.
2. Compliance with Rules and Regulations
The Sub-Administrator undertakes to comply with all applicable
requirements of the Securities Laws, and any other laws, rules and
regulations of state and federal governmental authorities having
jurisdiction with respect to the duties to be performed by the
Sub-Administrator hereunder. Except as specifically set forth herein,
the Sub-Administrator assumes no responsibility for such compliance by
the Company, the Administrator, or the Company's Transfer Agent,
Custodians or Fund Accountants, unless specifically agreed to by
written agreement.
3. Services and Duties
A. The Sub-Administrator shall promptly notify the Administrator and
the Company of any inquiries or contacts by governmental officers
regarding the Funds unless prohibited by law. The
Sub-Administrator shall not reply to any such governmental
inquires without the consent of the Administrator and the Company
unless required to do so by law (in which event it shall give the
Administrator and the Company prior written notice of its
response unless prohibited by law), or except as otherwise
permitted by Section 5.
B. Subject to supervision and control of the Company's Board of
Directors and the Administrator, the Sub-Administrator will
provide facilities, equipment, statistical and research data,
clerical, accounting and bookkeeping services, internal auditing
and legal services, and personnel to carry out all
sub-administrative services set forth below, provided however,
that the Administrator will retain responsibility for review and
oversight of all such services:
i. Overseeing the performance of the Company's Custodians and
Transfer Agent with respect to the Funds.
ii. Making available information concerning each Fund to its
shareholders; distributing written communications to each
Fund's shareholders such as periodic listings of each
Fund's securities, annual and semi-annual reports, and
prospectuses and supplements thereto; and handling
shareholder problems and calls relating to administrative
matters.
iii. The Sub-Administrator shall participate in the periodic
updating of the Funds' prospectuses and statements of
additional information and shall accumulate information
for and, subject to approval by the Company's Treasurer
and legal counsel, coordinate the preparation,
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<PAGE> 3
filing, printing and dissemination of reports to the
Funds' shareholders and the Commission, including but not
limited to annual reports and semi-annual reports on Form
N-SAR, notices pursuant to Rule 24f-2 and proxy materials
pertaining to the Funds.
iv. The Sub-Administrator shall confirm the calculation of
dividends and capital gain distributions to be paid to
each Fund's shareholders in conformity with Sub-chapter M
of the Internal Revenue Code of 1986 (as amended).
v. The Sub-Administrator shall arrange for payment by the
Company of all expenses payable by the Company.
vi. The Sub-Administrator, after consultation with legal
counsel for the Company and the Administrator, shall
determine the jurisdictions in which notice must be
provided and fees paid in connection with the sale of
shares to retail or institutional investors and, in
connection therewith, shall be responsible for the
maintenance of the registration or qualification of the
Shares for sale under the securities laws of any state.
Payment of Share registration fees and any fees for
qualifying or continuing the qualification of the Company
shall be made by the Company.
vii. Provision of the services of persons who may be appointed
as officers of the Company by the Company's Board of
Directors to the extent permitted by law.
viii. The Sub-Administrator shall oversee the maintenance by the
Company's Custodians and Transfer Agent of the books and
records pertaining to the Funds required under the 1940
Act in connection with the performance of the Custody
Agreements and Transfer Agency Agreement, and shall
maintain such other books and records with respect to the
Funds (other than those required to be maintained by the
Company's Investment Adviser, accounting agents,
Custodians, Transfer Agent or other service providers) as
may be required by the 1940 Act and other applicable
securities laws, rules and regulations in connection with
the services provided hereunder. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the
Sub-Administrator agrees that all such books and records
which it maintains, or is responsible for maintaining, for
the Company and the Funds are the property of the Company
and further agrees to surrender promptly to the Company
any of such books and records upon the Company's request.
The Sub-Administrator further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act said
books and records.
ix. The Sub-Administrator shall prepare the Fund's federal,
state and local income tax returns.
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<PAGE> 4
x. The Sub-Administrator shall prepare and, subject to
approval of the Company's Treasurer, disseminate to the
Company's Directors each Fund's quarterly financial
statements and schedules of investments, and shall prepare
such other reports relating to the business and affairs of
the Funds (not otherwise appropriately prepared by the
Company's Investment Adviser, counsel, auditors or others)
as the Officers and Directors of the Company may from time
to time reasonably request in connection with performance
of its duties.
xi. The Sub-Administrator shall assist the Company's
Administrator, Custodians and Transfer Agent and the
Company's Investment Adviser, counsel and auditors as
reasonably requested to carry out the business and
operations of the Funds.
xii. In performing its duties as Sub-Administrator for the
Funds, subject to Section 3.2 the Sub-Administrator
will act in conformity with the Company's Charter,
By-laws, prospectuses and statements of additional
information, and the instructions and directions of the
Administrator and the Board of Directors of the Company.
In addition, subject to the limitation set forth in the
second sentence of Section 2.2 the Sub-Administrator will
conform to and comply with the requirements of the 1940
Act and all other applicable federal or state laws and
regulations.
xiii. The Sub-Administrator shall assist in developing
compliance procedures for each of the classes of the
Company's Funds relating to compliance with 1940 Act
provisions and the rules thereunder, the investment
policies and limitations stated in a particular Fund's
prospectus, such Fund's status as a regulated investment
company under Sub-chapter M of the Internal Revenue Code
of 1986 (as amended), and any other matters as agreed to
between the Administrator and the Sub-Administrator from
time to time and shall monitor such compliance procedures,
but shall not be responsible for a Fund's compliance.
xiv. The Sub-Administrator shall review the daily pricing of
securities for each Fund.
4. Compensation
For the services provided and the expenses assumed as
Sub-Administrator, the Administrator shall pay the Sub-Administrator a
fee, computed daily and payable monthly, at the annual rate of:
2.75 bp of the first $10 billion of average net assets;
2.00 bp of the next $5 billion of average net assets;
1.75 bp of the next $5 billion of average net assets;
1.50 bp of the next $5 billion of average net assets;
1.25 bp for assets over $25 billion.
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<PAGE> 5
5. Services Not Exclusive
The Sub-Administrator shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided
herein or authorized by the Company's Board of Directors from time to
time, have no authority to act for or represent the Company in any way
or otherwise be deemed its agent. The services furnished by the
Sub-Administrator hereunder are not deemed exclusive, and the
Sub-Administrator shall be free to furnish similar services to others
so long as its services under this Agreement are not impaired thereby.
6. Expenses Assumed as Sub-Administrator
Except as otherwise stated in this Agreement, the Sub-Administrator
shall pay all expenses incurred by it in performing its services and
duties hereunder as Sub-Administrator in connection with the Funds.
Such expenses shall not include any expenses of the Funds, including
but not limited to printing and dissemination charges, fees, taxes and
charges of regulatory authorities, and extraordinary expenses.
The Sub-Administrator shall pay all costs and expenses of maintaining
the offices of the Company and shall arrange for payment by the
Company of all expenses payable by the Company.
7. Right to Inspect
The Administrator and the Company shall have the right at any time
during the Sub-Administrator's normal business hours to inspect the
records (including work papers and the other related documents) in the
possession of the Sub-Administrator relating to the Company. Copies of
such records (including upon request copies in electronic format to
the extent such records were ever maintained in such format) will be
provided upon reasonable request of the Company or the Administrator
at the expense of the requesting party.
8. Disaster Recovery
The Sub-Administrator shall at its expense enter into and shall
maintain in effect with appropriate parties one or more agreements
making reasonable provision for emergency use of electronic data
processing equipment to the extent appropriate equipment is available.
In the event of equipment failures, the Sub-Administrator shall, at no
additional expense to the Administrator or the Company, take
reasonable steps to minimize service interruptions but shall have no
liability with respect thereto.
III. INSTRUCTIONS
1. Unless otherwise provided in this Agreement, the Sub-Administrator
shall act only upon Oral Instructions and Written Instructions.
2. The Sub-Administrator shall be entitled to rely upon any Oral
Instructions and Written Instructions it receives from an Authorized
Person (or from a person
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<PAGE> 6
reasonably believed by the Sub-Administrator to be an Authorized
Person) pursuant to this Agreement. The Sub-Administrator may assume
that any Oral Instruction or Written Instruction received hereunder is
not in any way inconsistent with the provisions of organizational
documents or this Agreement or of any vote, resolution or proceeding
of the Company's Board of Directors or of the Company's shareholders
or with any prior Oral or Written Instructions or other instructions
of the Administrator, unless and until the Sub-Administrator receives
Written Instructions to the contrary.
3. The Administrator shall forward or cause the Company to forward to the
Sub-Administrator Written Instructions confirming Oral Instructions
(except where such Oral Instructions are given by the
Sub-Administrator) so that the Sub-Administrator receives the Written
Instructions by the close of business on the same day that such Oral
Instructions are received. The fact that such confirming Written
Instructions are not received by the Sub-Administrator shall in no way
invalidate the transactions or enforceability of the transactions
authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an
Authorized Person, the Sub-Administrator shall incur no liability to
the Administrator or the Company in acting upon such Oral Instructions
or Written Instructions provided that the Sub-Administrator's actions
comply with the other provisions of this Agreement.
IV. RIGHT TO RECEIVE ADVICE
1. Advice of the Administrator or the Company
If the Sub-Administrator is in doubt as to any action it should or
should not take, the Sub-Administrator may request directions or
advice, including Oral Instructions or Written Instructions, from the
Administrator or the Company.
2. Advice of Counsel
If the Sub-Administrator shall be in doubt as to any question of law
pertaining to any action it should or should not take, the
Sub-Administrator may request advice at its own cost from such counsel
of its own choosing (who may be counsel for the Administrator, the
Company or the Sub-Administrator, at the option of the
Sub-Administrator).
3. Conflicting Advice
In the event of a conflict between directions, advice or Oral
Instructions or Written Instructions the Sub-Administrator receives
from the Administrator or the Company and the advice the
Sub-Administrator receives from counsel, the Sub-Administrator may
rely upon and follow the advice of counsel. In the event the
Sub-Administrator so relies on the advice of counsel, the
Sub-Administrator shall remain liable for any action or omission on
the part of the Sub-Administrator which constitutes willful
misfeasance, bad faith, negligence or reckless disregard by the
Sub-Administrator of any duties, obligations or responsibilities set
forth in this Agreement.
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<PAGE> 7
4. Protection of the Sub-Administrator
The Sub-Administrator shall be protected in any action it takes or does
not take in reliance upon directions, advice or Oral Instructions or
Written Instructions it receives from the Administrator or the Company
or from counsel and which the Sub-Administrator believes, in good faith,
to be consistent with those directions, advice or Oral Instructions or
Written Instructions. Nothing in this section shall be construed so as
to impose an obligation upon the Sub-Administrator (i) to seek such
directions, advice or Oral Instructions or Written Instructions, or
(ii) to act in accordance with such directions, advice or Oral
Instructions or Written Instructions unless, under the terms of another
provision of this Agreement, the same is a condition of the
Sub-Administrator's properly taking or not taking such action. Nothing
in this subsection shall excuse the Sub-Administrator when an action or
omission on the part of the Sub-Administrator constitutes willful
misfeasance, bad faith, negligence or reckless disregard by the
Sub-Administrator of any duties, obligations or responsibilities set
forth in this Agreement.
V. CONFIDENTIALITY
The Sub-Administrator shall treat confidentially and as proprietary
information of the Company all records and other information relative to
the Company and the Funds and prior or present shareholders or those
persons or entities who respond to inquires concerning investment in the
Funds, and shall not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder or under any
agreement with the Company, except after prior notification to and
approval by the Board of Directors of the Company. The Administrator shall
use its best efforts to cause the Company not to unreasonably withhold such
approval, it being understood that prior approval is not required where not
permitted by law and that such approval will not be withheld (and shall be
deemed to have been given) where the Sub-Administrator may be exposed to
civil or criminal contempt proceedings for failure to comply or when the
Sub-Administrator is requested to divulge such information by duly
constituted authorities. Notwithstanding the foregoing, the
Sub-Administrator will not turn over records to third parties including
regulatory or investigatory bodies without the prior approval of the
Administrator, which approval shall not be unreasonably withheld, shall not
be withheld where the Sub-Administrator may be exposed to civil or criminal
contempt proceedings for failure to comply or when the Sub-Administrator is
requested to divulge such information by duly constituted authorities, and
shall not be required where not permitted by law (provided that if the
Administrator's approval is not required, the Sub-Administrator shall give
notice to the Administrator regarding the turning over of such records
unless such notice is not permitted by law).
VI. LIMITATION OF LIABILITY
The Sub-Administrator shall be under no duty to take any action on behalf
of or have any responsibility with respect to the Administrator, the
Company or any Fund except as specifically set forth herein or as may be
specifically agreed to in writing by the Sub-Administrator. The
Sub-Administrator acknowledges that the performance of this Agreement is
for the benefit of the Funds, that the Sub-Administrator shall be directly
liable and responsible to the Administrator and the Company for performance
of its obligations
7
<PAGE> 8
hereunder, and that either the Funds (or the Company on behalf of the
Funds) or the Administrator may therefore enforce in its own name and for
itself such liability and responsibility against the Sub-Administrator;
provided that, the Sub-Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Administrator or
any Fund in connection with the matters to which this Agreement relates,
except loss resulting from willful misfeasance, bad faith or negligence on
its part in the performance of its obligations and duties under this
Agreement or reckless disregard of such obligations and duties. Without
limiting the generality of any other provision of this Agreement, the
Sub-Administrator will not be liable for losses, or for delays, errors or
loss of data, that are beyond its control, nor will the Sub-Administrator
be liable for the validity or invalidity or authority or lack thereof of
any Oral Instruction or Written Instruction or any notice or other
instrument which conforms to the applicable requirements of this Agreement
and which the Sub-Administrator reasonably believes to be genuine. Any
person, even though also an officer, director, partner, employee or agent
of the Sub-Administrator, who may be or may become an officer, trustee,
employee or agent of the Company, shall be deemed, when rendering services
to the Company or to any Fund, or acting on any business of the Company or
any Fund (other than services or business, not including acting as an
officer of the Company, in connection with the Sub-Administrator's duties
hereunder or under any agreement with the Company) to be rendering such
services to or acting solely for the Company or Fund and not as an officer,
director, partner, employee or agent or one under the direction or control
of the Sub-Administrator even though paid by the Sub-Administrator.
Notwithstanding anything in this Agreement to the contrary, the
Sub-Administrator shall not be liable for any consequential, special or
indirect losses or damages whether or not the likelihood of such losses or
damages was known by the Sub-Administrator.
VII. TERMINATION
This Agreement shall continue with respect to each Fund until terminated
with respect to such Fund by either party hereto, or by the Company, giving
notice in writing specifying the date of such termination, which date shall
be not less than 60 days after the date of the giving of such notice. This
Agreement shall not be assignable by the Sub-Administrator to any person,
including without limitation to any affiliate of the Sub-Administrator,
without the written consent of the Administrator and the Company,
authorized or approved by a resolution of the Board of Directors of the
Company; and any attempt by the Sub-Administrator to assign any of its
rights and duties under this Agreement without such prior written consent
shall not be effective. The indemnification provisions contained in Section
8 of this Agreement shall survive any termination of this Agreement. After
termination of this Agreement, for so long as the Sub-Administrator, with
the written consent of the Administrator, in fact continues to perform any
one or more of the services contemplated by this Agreement or any schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in
full force and effect. Compensation due the Sub-Administrator and unpaid by
the Administrator upon such termination shall be immediately due and
payable upon and notwithstanding such termination. The Sub-Administrator
shall be entitled to collect from the Administrator, in addition to the
compensation described under Section 2.4 hereof, the amount of all the
Sub-Administrator's cash disbursements for services approved in advance by
the Administrator in connection with the Sub-Administrator's activities in
effecting such termination, including without limitation, the delivery to
the Administrator and/or its designees of the Company's property, records,
instruments and documents, or any copies
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<PAGE> 9
thereof. Subsequent to such termination, for a reasonable fee, the
Sub-Administrator shall provide the Administrator and the Company with
reasonable access to any Company documents or records remaining in its
possession. Any work papers, documents or records prepared by the
Sub-Administrator on behalf of the Company in order to maintain the
regulatory records of the Funds become the property of the Company. In
the event of termination, the Sub-Administrator shall promptly, upon
written request, turn over such work papers, documents and records to
the Company.
VIII. INDEMNIFICATION
The Administrator agrees to indemnify and hold harmless the
Sub-Administrator from all taxes, charges, expenses, assessments,
claims and liabilities (including, without limitation, liabilities
arising under the Securities Laws and any state and foreign securities
and blue sky laws, and amendments thereto) and expenses, including
(without limitation) attorneys' fees and disbursements, arising
directly or indirectly from any action which the Sub-Administrator
takes or does not take (i) at the request or on the direction of or
in reliance on the advice of the Administrator or the Company or (ii)
upon Oral or Written Instructions, provided that the Sub-Administrator
shall not be indemnified against any liability to the Administrator,
to the Company or to its shareholders (or any expenses incident to
such liability) arising out of the Sub-Administrator's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties
and obligations under this Agreement.
The Sub-Administrator agrees to indemnify and hold harmless the
Administrator for any amounts that the Administrator is required to
indemnify the Company under the Administration Agreement to the extent
that the Sub-Administrator would be responsible to the Company for
such amounts under Section 6 hereof, provided that for any single
incident the Company shall be entitled to only a single recovery.
IX. LIAISON WITH ACCOUNTANTS
The Sub-Administrator shall act as liaison with the Company's
independent public accountants and shall take all reasonable action in
the performance of its duties under this Agreement to assure that the
necessary information with respect to its duties hereunder is made
available to such accountants for the expression of their opinion, as
required by the Company.
X. DELIVERY OF DOCUMENTS
The Administrator has provided or, where applicable, will provide the
Sub-Administrator with the following:
1. a copy of the Company's most recent effective registration
statement;
2. a copy of each Fund's advisory and/or sub-advisory agreements;
3. a copy of the distribution agreement with respect to each class
of Shares representing an interest in a Fund or class;
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<PAGE> 10
4. a copy of any additional administration agreement with respect to a
Fund or class;
5. a copy of any shareholder servicing or transfer agency agreement made
in respect of the Company or a Fund or class; and
6. copies (certified or authenticated, where applicable) of any and all
amendments or supplements to the foregoing.
XI. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing previously approved
by the Board of Directors of the Company and signed by the party against
whom enforcement of the change, waiver, discharge or termination is sought.
XII. NOTICES
Notices of any kind to be given to the Administrator hereunder by the
Sub-Administrator shall be in writing (including telecopy) and shall be
duly given if mailed or delivered to the Administrator at the following
address:
Bank of America NT&SA
333 South Beaudry Ave.
25th Floor, Unit 39277
Los Angeles, California 90017
Attention: Sandra Chappel Brown
Fax #: (213) 345-7280
with a copy to:
Bank of America NT&SA
Legal Department
555 South Flower Street
8th Floor
Los Angeles, California 90071
Attention: Arthur A. Fritz, Esq.
Fax #: (213) 228-2530
or at such other address or to such individual as shall be so specified by
the Administrator to the Sub-Administrator.
Notices of any kind to be given to the Sub-Administrator hereunder by the
Administrator shall be in writing (including telecopy) and shall be duly
given if mailed or delivered to the Sub-Administrator at the following
address:
PFPC Inc.
400 Bellevue Pkwy.
Wilmington, DE 19809
Attention: Steve Wynne
Fax #: (302) 791-1856
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with a copy to:
Legal Department
1600 Market Street
28th Floor
Philadelphia, PA 19103
Attention: Gary Gardner, Esq.
Fax #: (215) 585-7260
or at such other address or to such individual as shall be so specified
by the Sub-Administrator to the Administrator.
A copy of all notices to the Administrator or the Sub-Administrator shall
be given to the Company. Notices of any kind to be given to the Company
by the Administrator or Sub-Administrator shall be in writing (including
telecopy) and shall be duly given if mailed or delivered to the Company
at the following address:
Dr. Cornelius Pings
Association of American Universities
1200 New York Avenue, NW, Suite 550
Washington, DC 20005
Fax #: (202) 408-8184
with a copy to:
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107
Fax #: (215) 988-2757
or at such other address or such individual as shall be so specified by
the Company to the Administrator and Sub-Administrator.
XIII. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute
one and the same instrument.
XIV. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
XV. FACSIMILE SIGNATURES
The facsimile signature of any party to this Agreement shall constitute
the valid and binding execution hereof by such party.
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XVI. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be affected
thereby. This Agreement shall be governed by Delaware law (without
reference to principles of conflicts of law); provided, however, that
nothing herein shall be construed in a manner inconsistent with the 1940
Act or any rule or regulation of the SEC thereunder.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PFPC INC.
/s/ Robert J. Perlsweig
---------------------------------------
(name) Robert J. Perlsweig
---------------------------------------
(title) Executive Vice President
---------------------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
/s/ Sandra C. Brown
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(name) Sandra C. Brown
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(title)
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EXHIBIT (h)(10)
ACCOUNTING SERVICES AGREEMENT
This Agreement is made as of September 15, 1997 by and between BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank"), a Delaware corporation,
PFPC INC. ("PFPC"), a Delaware corporation, which is an indirect wholly-owned
subsidiary of PNC Bank Corp., and PACIFIC HORIZON FUNDS, INC. (the "Fund").
WHEREAS, Bank desires to retain PFPC to provide fund accounting
services for the Portfolios of the Fund listed on Appendix A, as amended from
time to time (the "Portfolios"), and PFPC is willing to provide such services,
all as more fully set forth below;
WHEREAS, PFPC is experienced in providing fund accounting services to
investment companies and possesses facilities sufficient to provide such
services; and
WHEREAS, the Board of Directors of the Fund has approved the
appointment of PFPC to provide fund accounting services on behalf of the Fund
for the Portfolios.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall mean
any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund, provided, however, that if the Governing Board determines that Oral
Instructions or Written
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Instructions require the approval of more than one person, the term "Authorized
Person" shall mean such persons as are in combination so authorized. Such
persons are listed in the Certificate attached hereto as the Authorized Persons
Appendix to each Services Attachment to this Agreement. If PFPC provides more
than one service hereunder, the Fund's designation of Authorized Persons may
vary by service.
(b) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(c) "Governing Board". The Term "Governing Board" shall mean the
Fund's Board of Directors, or, where duly authorized, a competent committee
thereof.
(d) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PFPC from an Authorized Person or from a person
reasonably identified to PFPC as an Authorized Person.
(e) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(f) "Securities and Commodities Laws". The term "Securities and
Commodities Laws" shall mean the "1933 Act" which shall mean the Securities Act
of 1933, the "1934 Act" which shall mean the Securities Exchange Act of 1934,
the "1940 Act" which shall mean the Investment Company Act of 1940, and the
"CEA" which shall mean the Commodities Exchange Act, in each case as amended.
(g) "Shares". The terms "Shares" shall mean the shares of any series
or class of common stock of the Fund.
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(h) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by one or more Authorized Persons as required
by the Governing Board from time to time and received by PFPC. The instructions
may be delivered by hand, mail, tested telegram, cable, telex or facsimile
sending device.
2. Appointment. Bank hereby appoints PFPC to provide fund accounting
services for the Portfolios, in accordance with the terms set forth in this
Agreement. PFPC accepts such appointment and agrees to furnish such services.
3. Delivery of Documents. Bank has provided or, where applicable, will
provide PFPC with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PFPC or its affiliates to
provide fund accounting services for the Portfolios;
(b) a copy of the Fund's most recent effective registration
statement for the Portfolios;
(c) a copy of the Administration Agreement; and
(d) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
PFPC undertakes to comply with all applicable requirements of
the Securities and Commodities Laws and any other laws, rules and regulations of
state and federal governmental authorities having jurisdiction with respect to
all duties to be performed by PFPC
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hereunder. Except as specifically set forth herein, PFPC assumes
no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement or by
resolution of the Governing Board which has been submitted to PFPC, PFPC shall
act only upon Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written
Instructions. PFPC may assume that any Oral or Written Instruction received
hereunder is not in any way inconsistent with the provisions of organizational
documents or this Agreement or of any vote, resolution or proceeding of the
Fund's Governing Board or any committee thereof or of the Fund's shareholders.
Bank shall forward, or shall cause the Fund to forward, to PFPC Written
Instructions confirming Oral Instructions so that PFPC receives the Written
Instructions by the close of business on the same day that such Oral
Instructions are received. The fact that such confirming Written Instructions
are not received by PFPC shall in no way invalidate the transactions or
enforceability of the transactions authorized by the Oral Instructions. PFPC
shall incur no liability to Bank or to the Fund in acting upon Oral or Written
Instructions.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it
should or should not take, PFPC may request Oral or Written Instructions.
(b) Advice of Counsel. If PFPC shall be in doubt as to any questions
of law pertaining to any action it should or should not take, PFPC may request
advice at its own cost from such counsel of its own choosing (who may be counsel
for the Fund or PFPC, at the option of PFPC).
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(c) Conflicting Advice. In the event of a conflict between Oral or
Written Instructions PFPC receives from the Fund, and the written advice it
receives from counsel, PFPC shall be entitled to rely upon and follow such
advice of counsel after notice to the Fund.
(d) Protection of PFPC. PFPC shall be protected in any action it
takes or does not take in reasonable reliance upon Oral or Written Instructions
it receives from the Fund or written advice of counsel.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PFPC (i) to seek Oral or Written Instructions, or (ii) to act in
accordance with such Oral or Written Instructions unless, under the terms of
other provisions of this Agreement, the same is a condition of PFPC's properly
taking or not taking such action.
Nothing in this sub-section shall excuse PFPC when an action or
omission on the part of PFPC constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties or obligations under this
Agreement.
7. Records. The books and records pertaining to the Fund, which are in
the possession of PFPC, shall be the property of the Fund. Bank, the Fund or the
Fund's Authorized Persons, shall have access to such books and records at all
times during PFPC's normal business hours. Upon the reasonable request of Bank
or the Fund, copies of any such books and records shall be provided by PFPC to
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Bank or the Fund or to an Authorized Person of the Fund, at the expense of the
requesting party. Consistent with Treasury regulation Section
1.864-2(c)(2)(iii)(5), such books and records shall be maintained at an office
located in Ireland for any Portfolio identified in writing by Bank or the Fund
to PFPC.
PFPC shall keep the following records:
(a) all above-referenced books and records with respect to the
Fund's books of account;
(b) records of the Fund's securities transactions. PFPC shall
preserve any such books and records in accordance with the requirements of Rule
31a-2 under the 1940 Act.
8. Confidentiality. PFPC agrees to keep confidential and to
treat as proprietary information of the Fund all records of the Fund and
information relative to the Fund and its shareholders (past, present and
potential), unless the release of such records or information is otherwise
authorized by the Governing Board. Should PFPC be required to provide such
information or records to duly constituted authorities (who may institute civil
or criminal contempt proceedings for failure to comply), PFPC shall not be
required to seek the Fund's consent prior to disclosing such information but
shall be required to give Bank and the Fund prior written notice of PFPC's
intent to disclose such information.
9. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit-related schedules. PFPC shall take all reasonable
action in the performance of its
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obligations under this Agreement to assure that the necessary information is
made available to such accountants for the expression of their opinion, as such
may be required by the Fund from time to time.
10. Disaster Recovery. As soon as reasonably possible, PFPC shall at
its expense enter into and shall maintain in effect with appropriate parties one
or more agreements making reasonable provision of emergency use of electronic
data processing equipment to the extent appropriate equipment is available. In
the event of equipment failures, PFPC shall, at no additional expense to the
Fund, take reasonable steps to minimize service interruptions but shall have no
liability with respect thereto.
11. Compensation. As compensation for services rendered by PFPC during
the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be
approved by Bank in writing and consistent with resolutions adopted by the
Fund's Governing Board.
12. Indemnification. Bank agrees to indemnify and hold harmless PFPC
and its nominees from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws and any state and foreign securities and blue
sky laws, and amendments thereto), and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PFPC takes or does not take (i) at the request or on the direction
of or in reliance on the advice of Bank or the Fund or (ii) upon Oral or Written
Instructions, provided that neither
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PFPC, nor any of its nominees, shall be indemnified against any liability to
Bank, to the Fund or to its shareholders (or any expenses incident to such
liability) arising out of PFPC's own willful misfeasance, negligence or reckless
disregard of its duties and obligations under this Agreement.
13. Responsibility of PFPC. PFPC shall be under no duty to take any
action on behalf of Bank or the Fund except as specifically set forth herein or
as may be specifically agreed to by PFPC, in writing. PFPC shall be obligated to
exercise care and diligence in the performance of its duties hereunder and shall
be responsible for failure to perform its duties under this Agreement arising
out of PFPC's negligence. Notwithstanding the foregoing, PFPC shall not be
responsible for losses beyond its control, provided that PFPC has acted in
accordance with the standard of care set forth above; and provided further that
PFPC shall only be responsible for that portion of losses or damages suffered by
the Fund that are attributable to the negligence of PFPC.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC, in connection with its duties under this
Agreement, shall not be liable for (a) the validity or invalidity or authority
or lack thereof of any Oral or Written Instruction, notice or other instrument
which conforms to the applicable requirements of this Agreement, and which PFPC
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national
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emergencies, labor difficulties, fire, flood or catastrophe, acts of God,
insurrection, war, riots or failure of the mails, transportation, communication
or power supply.
PFPC acknowledges that the performance of this Agreement is for the
benefit of the Fund, that PFPC shall be directly liable and responsible to the
Fund and to Bank for the performance of its obligations hereunder, and that
either the Fund or Bank may therefore enforce, in its own name and for itself
such liability and responsibility against PFPC.
Notwithstanding anything in this Agreement to the contrary, PFPC
expressly disclaims all responsibility for consequential damages, including but
not limited to any that may result from performance or non-performance of any
duty or obligation whether expressed or implied in this Agreement and also
expressly disclaims any express or implied warranty of products or services
provided in connection with the Agreement.
14. Description of Accounting Services.
(a) Services on a Continuing Basis. PFPC will perform the following
accounting functions if requested by Bank or the Fund:
(i) Journalize the Fund's investment, capital share and income
and expense activities;
(ii) Verify investment buy/sell trade tickets when received from
the Fund's investment advisor and transmit trades to the
Fund's custodian for proper settlement;
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(iii) Maintain individual ledgers for investment securities in
both U.S. dollars and foreign currency terms;
(iv) Maintain historical tax lots for each security and foreign
currency;
(v) Reconcile cash and investment balances of the Fund with the
custodian, and provide the Fund's investment advisor with
the beginning cash balance available for investment purposes
in both U.S. dollar and foreign currency terms;
(vi) Update the cash availability throughout the day as required
by the Fund's advisor;
(vii) Post to and prepare the Fund's Statement of Assets and
Liabilities and the Statement of Operations in U.S. dollar
terms;
(viii) Calculate various contractual expenses (e.g., advisory and
custody fees);
(ix) Record expense accruals as provided by Fund management;
(x) Record all disbursements from the Fund upon Written
Instructions;
(xi) Calculate capital gains and losses and foreign exchange
gains and losses;
(xii) Determine the Fund's net income in both U.S. dollar and
foreign currency terms;
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(xiii) Obtain security market quotes and foreign exchange rates
from independent pricing services approved by the Fund's
Governing Board, or if such quotes are unavailable, then
obtain them from the Advisor or as otherwise directed by
resolution of the Governing Board, and in either case
calculate the market value of the Fund's investments in both
U.S. dollar and foreign currency terms;
(xiv) Transmit or mail a copy of the daily portfolio valuation
and any other required reports to the Advisor and Bank;
(xv) Compute the net asset value of the Fund in U.S. dollars and
the dividend rate per share;
(xvi) As appropriate, compute the Fund's yields, total return,
expense ratios, portfolio turnover rate, and, if required,
portfolio average dollar-weighted maturity; and
(xvii) Prepare a monthly financial statement in U.S. dollars,
which will include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
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(xviii) Provide certain financial information necessary to
facilitate the preparation of the Fund's annual U.S. Federal
income tax returns;
(b) Consistent with Treasury regulation Sections 1.864-
2(c)(2)(iii)(5), (6), (7) and (8), the accounting functions performed by PFPC
shall be performed at an office located in Ireland for any Portfolio identified
in writing by Bank or the Fund to PFPC.
15. Duration and Termination. This Agreement shall continue until
terminated by Bank, by the Fund or by PFPC on one hundred eighty (180) days
prior written notice to the other parties to the agreement.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
three days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered. Notices shall be addressed
(a) if to PFPC at PFPC's address, 103 Bellevue Parkway, Wilmington, Delaware
19809; (b) if to Bank, at Bank's address, 333 South Beaudry Ave., 25th Floor,
Los Angeles, California 90017, Attn: Sandra Chappell Brown; (b) if to
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the Fund at the address of the Fund; or (d) if to none of the foregoing, at such
other address as shall have been notified to the sender of any such Notice or
other communication.
17. Delegation. PFPC may delegate any or all of its duties under this
Agreement to any offshore affiliate for Portfolios identified in writing by Bank
or the Fund to PFPC, provided that PFPC shall retain responsibility therefor as
specified herein.
18. Amendments. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
19. Assignment. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by Bank without the written
consent of PFPC, or by PFPC without the written consent of Bank and of the Fund,
authorized or approved by a resolution of the Fund's Governing Board.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
22. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody with the approval of
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the Fund in one or more separate documents their agreement, if any, with respect
to delegated duties and/or Oral Instructions. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in Delaware and
governed by Delaware law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall inure to the benefit of the parties hereto and their respective
successors.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Sandra C. Brown
-------------------------------
Title:
PFPC INC.
By: /s/ Robert J. Perlsweig
-------------------------------
Title:Executive Vice President
PACIFIC HORIZON FUNDS, INC.
By: /s/ Jay F. Nusblatt
-------------------------------
Title:Treasurer
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APPENDIX A
Pacific Horizon Asset Allocation Fund
Pacific Horizon Corporate Bond Fund
Pacific Horizon International Equity Fund
Pacific Horizon Short-Term Government Fund
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AUTHORIZED PERSONS
APPENDIX
Name (Typed) Signature
- --------------------------------------- ------------------------------------
- --------------------------------------- ------------------------------------
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- --------------------------------------- ------------------------------------
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Exhibit (h)(11)
ASSUMPTION
AGREEMENT made as of March 1, 1998 among BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under
the laws of the United States ("Bank of America"), ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P., a California limited partnership registered as an
investment adviser pursuant to the Investment Advisers Act of 1940 ("Robertson
Stephens"), and PFPC Inc., a Delaware corporation ("PFPC"). Bank of America and
Robertson Stephens are each indirect, wholly-owned subsidiaries of BankAmerica
Corporation, a registered bank holding company.
WHEREAS, Pacific Horizon Funds, Inc. (the "Company") is
registered as an open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed as the
Company's administrator pursuant to an Administration Agreement dated September
15, 1997 (the "Administration Agreement") and PFPC has been previously appointed
as the Company's sub-administrator pursuant to a Sub-Administration Agreement
dated September 15, 1997 (the "Sub-Administration Agreement");
WHEREAS, Bank of America and Robertson Stephens desire to have
Robertson Stephens assume the rights, responsibilities, liabilities and
obligations of Bank of America under the Administration and Sub-Administration
Agreements;
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Robertson Stephens hereby assumes all rights,
responsibilities, liabilities and obligations of Bank of America under the
Administration and Sub-Administration Agreements.
2. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory Agreements and
Administration Agreement.
<PAGE> 2
IN WITNESS WHEREOF, intending to be legally bound hereby, the
parties hereto have caused this instrument to be executed by their officers
designated below as of the day and year first above written.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/Signature Illegible
------------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By:/s/Dana Welch
------------------------------
(Authorized Officer)
PFPC INC.
By:/s/Jay F. Nusblatt
------------------------------
(Authorized Officer)
-2-
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Exhibit (h)(12)
ASSUMPTION
AGREEMENT made as of April 28, 1998 among BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under
the laws of the United States ("Bank of America"), ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P., a California limited partnership registered as an
investment adviser pursuant to the Investment Advisers Act of 1940 ("Robertson
Stephens"), and PFPC Inc., a Delaware corporation ("PFPC"). Bank of America and
Robertson Stephens are each indirect, wholly-owned subsidiaries of BankAmerica
Corporation, a registered bank holding company.
WHEREAS, Pacific Horizon Funds, Inc. (the "Company") is
registered as an open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed as the
Company's administrator pursuant to an Administration Agreement dated September
15, 1997 (the "Administration Agreement") and PFPC has been previously appointed
as the Company's sub-administrator pursuant to a Sub-Administration Agreement
dated September 15, 1997 (the "Sub-Administration Agreement");
WHEREAS, Robertson Stephens pursuant to as Assumption
Agreement dated March 1, 1998 assumed the rights, responsibilities, liabilities
and obligations of Bank of America under the Administration and
Sub-Administration Agreements;
WHEREAS, Bank of America and Robertson Stephens desire to have
Bank of America assume the rights, responsibilities, liabilities and obligations
of Robertson Stephens under the Administration and Sub-Administration
Agreements; and
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Bank of America hereby assumes all rights,
responsibilities, liabilities and obligations of Robertson Stephens under the
Administration and Sub-Administration Agreements.
2. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Administration and Sub-Administration
Agreements.
<PAGE> 2
IN WITNESS WHEREOF, intending to be legally bound hereby, the
parties hereto have caused this instrument to be executed by their officers
designated below as of the day and year first above written.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/Signature Illegible
-----------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By:/s/Dana Welch
-----------------------------
(Authorized Officer)
PFPC INC.
By:/s/Jay F. Nusblatt
-----------------------------
(Authorized Officer)
-2-
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DRINKER BIDDLE & REATH LLP
1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107
(215) 988-2700
Fax (215) 988-2757
EXHIBIT (i)
June 25, 1998
Pacific Horizon Funds, Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
Re: Pacific Horizon Funds, Inc. - Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to Pacific Horizon Funds, Inc., a Maryland
corporation (the "Company"), in connection with the registration by the Company
of its shares of common stock, par value $.001 per share, under the Securities
Act of 1933, as amended.
The Articles of Incorporation of the Company authorize the issuance of
four hundred billion (400,000,000,000) shares of common stock. The Board of
Directors of the Company has the power to classify or reclassify any authorized
shares of common stock into one or more classes of shares and to divide and
classify shares of any class into one or more series of such class. Pursuant to
such authority, the Board of Directors (i) has previously classified three
hundred thirty-four billion, five hundred million (334,500,000,000) of such
authorized shares into seventy-two (72) classes (the "Classes"), each Class
representing interests in a separate portfolio of investments (the
"Portfolios"), and (ii) has classified each Class of shares into one or more of
ten series of shares, known as Pacific Horizon Shares, Horizon Service Shares,
Horizon Shares, S Shares, X Shares, Y Shares, A Shares, B Shares, K Shares and
SRF Shares (the "Series"). Shares of Common stock of the Classes and Series are
referred to herein as the "Shares". The Board has previously authorized the
issuance of Shares to the public.
<PAGE> 2
Pacific Horizon Funds, Inc.
June 25, 1998
Page 2
We have reviewed the Company's Articles of Incorporation, as amended and
supplemented (the "Articles of Incorporation"), Amended and Restated By-Laws
(the "By-Laws"), resolutions of its Board of Directors and shareholders, and
such other legal and factual matters as we have deemed appropriate.
This opinion is based exclusively on the Maryland General Corporation Law
and the federal law of the United States of America.
We have also assumed the following for this opinion:
1. The Shares have been, and will continue to be, issued in accordance
with the Company's Articles of Incorporation and By-Laws and resolutions of the
Company's Board of Directors and shareholders relating to the creation,
authorization and issuance of the Shares.
2. The Shares have been, or will be, issued against consideration therefor
as described in the Company's prospectuses relating thereto, and such
consideration was, or will be, in each case at least equal to the applicable net
asset value and the applicable par value.
3. The number of outstanding Shares has not and will not exceed the number
of Shares authorized for the particular Class or Series.
On the basis of the foregoing, it is our opinion that (i) the Shares
outstanding on the date hereof have been validly and legally issued and are
fully paid and non-assessable by the Company and (ii) any Shares issued and sold
after the date hereof will be validly and legally issued, fully paid and
non-assessable by the Company.
We advise you that W. Bruce McConnel, III, a partner of this firm, is
Secretary of the Company.
We hereby consent to the filing of this opinion as an exhibit to
Post-Effective Amendment No. 60 to the Company's Registration Statement on Form
N-1A.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
--------------------------------
Drinker Biddle & Reath LLP
<PAGE> 1
EXHIBIT 11 (a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statements of Additional Information that are
included in Post-Effective Amendment No. 60 to the Registration Statement (No.
2-81110) on Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, of Pacific Horizon Funds, Inc. This consent
does not constitute a consent under section 7 of the Securities Act of 1933, and
in consenting to the use of our name and the references to our Firm under such
caption we have not certified any part of the Registration Statement and do not
otherwise come within the categories of persons whose consent is required under
said section 7 or the rules and regulations of the Securities and Exchange
Commission thereunder.
/s/ DRINKER BIDDLE & REATH LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
July 1, 1998
<PAGE> 1
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statements of Additional Information that are
included in Post-Effective Amendment No. 60 to the Registration Statement (No.
2-81110) on Form N-1A under the Securities Act of 1933, as amended, of Pacific
Horizon Funds, Inc.
/s/ O'Melveny & Myers LLP
-------------------------
O'Melveny & Myers LLP
Los Angeles, California
June 29, 1998
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 60 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated April 21, 1998, relating to the financial
statements and financial highlights appearing in the February 28, 1998 Annual
Reports to Shareholders of the Pacific Horizon Aggressive Growth Fund, Pacific
Horizon Capital Income Fund, Pacific Horizon U.S. Government Securities Fund,
Pacific Horizon California Municipal Bond Fund (formerly California Tax-Exempt
Bond Fund), Pacific Horizon National Municipal Bond Fund, Pacific Horizon
Short-Term Government Fund, Pacific Horizon International Equity Fund, Pacific
Horizon Flexible Income Fund (formerly Corporate Bond Fund), Pacific Horizon
Blue Chip Fund, Pacific Horizon Asset Allocation Fund, and Pacific Horizon
Intermediate Bond Fund, eleven of the portfolios comprising Pacific Horizon
Funds, Inc., and of our reports dated April 21, 1998 relating to the financial
statements and supplementary data appearing in the February 28, 1998 Annual
Reports to Investors of the Blue Chip Portfolio and Investment Grade Bond
Portfolio, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in the Prospectuses and under the headings "Independent Accountants"
and "Financial Statements and Experts" in the Statements of Additional
Information.
Price Waterhouse LLP
New York, New York
June 29, 1998
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 60 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated April 21, 1998, relating to the financial
statements and financial highlights appearing in the February 28, 1998 Annual
Reports to Shareholders of the Pacific Horizon Prime Fund, Pacific Horizon
Treasury Fund, Pacific Horizon Treasury Only Fund, Pacific Horizon Government
Fund, Pacific Horizon Tax-Exempt Money Fund, and Pacific Horizon California
Tax-Exempt Money Market Fund, six of the portfolios comprising Pacific Horizon
Funds, Inc., which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in the Prospectuses and under the headings "Independent Accountants"
and "Financial Statements and Experts" in the Statement of Additional
Information.
Price Waterhouse LLP
New York, New York
June 29, 1998
<PAGE> 1
EXHIBIT (M)(7)
Adopted June 22, 1998
PACIFIC HORIZON FUNDS, INC.
DISTRIBUTION AND SERVICES PLAN
This Distribution and Services Plan (the "Plan") has been adopted by
the Board of Directors of Pacific Horizon Funds, Inc. (the "Company") in
connection with the Class D - Special Series 3, Class E - Special Series 3,
Class F - Special Series 3, Class G - Special Series 3, Class M - Special Series
3, Class N - Special Series 3, Class O - Special Series 3, Class Q - Special
Series 3, Class R - Special Series 3, Class S - Special Series 3, Class T -
Special Series 3, Class U - Special Series 3, Class V - Special Series 3 and
Class W - Special Series 3 shares of the Aggressive Growth, U.S. Government
Securities, Capital Income, California Municipal Bond, Intermediate Bond, Blue
Chip, Asset Allocation, National Municipal Bond, Utilities, Growth and Income,
International Equity, Short-Term Government, International Bond and Flexible
Income Funds, respectively (such shares hereinafter called "Shares" and such
funds the "Funds"), in conformance with Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act").
Section 1. Expenses. The Company may incur expenses under the Plan
in an amount not to exceed 1.00% annually of the average daily net assets of a
Fund's outstanding Shares.
Section 2. Distribution Payments. The Company may pay any
organization a fee of up to .75% annually of the average daily net assets of a
Fund's outstanding Shares (a "Distribution Fee"). Such Distribution Fee shall be
calculated and accrued daily, paid monthly and shall be in consideration for
distribution services and the assumption of related expenses (including the
payment of commissions and transaction fees) in conjunction with the offering
and sale of Shares of the Funds. In determining the amounts payable on behalf of
a Fund under the Plan, the net asset value of such Shares shall be computed in
the manner specified in the Company's then current Prospectuses and Statement of
Additional Information describing such Shares.
Section 3. Distribution Expenses and Activities Covered by Plan.
Payments to an organization under Section 2 shall be used to cover expenses and
activities primarily intended to result in the sale of Shares, including the
payment of commissions and transaction fees. Such expenses and activities may
include but are not limited to: (a) direct out-of-pocket promotional expenses
incurred by the Distributor in advertising and marketing Shares; (b) expenses
incurred in connection with preparing, printing, mailing, and distributing or
publishing advertisements and sales literature; (c) expenses incurred in
connection with printing and mailing Prospectuses and Statements of Additional
Information to other than current shareholders; (d) periodic payments or
commissions to one or more securities dealers, brokers, financial institutions
or other industry professionals, such as investment advisors, accountants, and
estate planning firms (severally, "a Distribution Organization") with respect to
a Fund's Shares beneficially owned by
<PAGE> 2
customers for whom the Distribution Organization is the Distribution
Organization of record or holder of record of such Shares; (e) the direct or
indirect cost of financing the payments or expenses included in (a) and (d)
above; or (f) for such other services as may be construed by any court or
governmental agency or commission, including the Securities and Exchange
Commission (the "Commission"), to constitute distribution services under the
1940 Act or rules and regulations thereunder. Such payments shall be made
pursuant to the distribution agreement in substantially the form attached
("Distribution Agreement").
Section 4. Administrative Services Covered by Plan. The Company may
also pay securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, a "Service Organization") for administrative support services
provided with respect to its customers' Shares. Such administrative support
services shall be provided pursuant to the administrative servicing agreement in
substantially the form attached ("Administrative Servicing Agreement"). Any
organization providing distribution assistance may also become a Service
Organization and receive administrative servicing fees pursuant to a Servicing
Agreement under this Plan.
Section 5. Administrative Servicing Fees Covered by Plan. Fees paid
to a Service Organization shall be in consideration for the administrative
support services provided pursuant to its Administrative Servicing Agreement and
may be paid at an annual rate of up to .25% of the average daily net assets of a
Fund's outstanding Shares owned of record or beneficially by that Service
Organization's customers for whom such Service Organization is the dealer of
record or holder of record or with whom it has a servicing relationship. Such
fees shall be calculated and accrued daily, paid monthly, and computed in the
manner set forth in the Administrative Servicing Agreement.
Section 6. Expenses Allocated, Compliance. Amounts paid by a Fund
must be for distribution and/or shareholder administrative support services
rendered for or on behalf of the holders of the Fund's Shares. However, joint
distribution financing with respect to such Shares (which may involve other
investment funds or companies that are affiliated persons of the Company or
affiliated persons of the Distributor) shall be permitted in accordance with
applicable regulations of the Commission as in effect from time to time.
Section 7. Reports to Company. So long as this Plan is in effect,
the Administrator shall provide the Company's Board of Directors, and the
Directors shall review, at least quarterly, a written report of the amounts
expended pursuant to the Plan and the purposes for which such expenditures were
made.
Section 8. Approval of Plan. This Plan will become effective with
respect to a particular Fund's Shares (a) on the date the public offering of
such shares commences, and (b) upon the approval by a majority of the Board of
Directors, including a majority of those directors who are not "interested
persons" (as defined in the 1940 Act) of the Company and who have no direct or
indirect financial interest in the operation of the Plan or in any agreements
entered into in connection with the Plan (the "Disinterested Directors"),
pursuant to a vote cast in person at a meeting called for the purpose of voting
on the approval of the Plan.
<PAGE> 3
Section 9. Continuance of Plan. Unless sooner terminated in
accordance with the terms hereof, this Plan shall continue until October 31,
1998, and thereafter, shall continue in effect for so long as its continuance is
specifically approved at least annually by the Company's Board of Directors in
the manner described in Section 8(b) hereof.
Section 10. Amendments. This Plan may be amended at any time by the
Board of Directors provided that (a) any amendment to increase materially the
costs which the Shares of a Fund may bear for distribution pursuant to the Plan
shall be effective only upon approval by a vote of a majority of the outstanding
Shares affected by such matter, and (b) any material amendments of the terms of
the Plan shall become effective only upon approval in the manner described in
Section 8(b) hereof.
Section 11. Termination. This Plan, as to any Fund, is terminable
without penalty at any time by (a) a vote of a majority of the Disinterested
Directors, or (b) a vote of a majority of the outstanding Shares of such Fund.
Section 12. Selection/Nomination of Directors. While this Plan is in
effect, the selection and nomination of those Disinterested Directors shall be
committed to the discretion of such Disinterested Directors.
Section 13. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect.
<PAGE> 4
Approved June 22, 1998
PACIFIC HORIZON FUNDS, INC.
(the "Company")
ADMINISTRATIVE SERVICING AGREEMENT
to
DISTRIBUTION AND SERVICES PLAN
Ladies and Gentlemen:
We wish to enter into this Administrative Servicing Agreement with you
concerning the provision of administrative support services to your customers
("Clients") who may from time to time be the record or beneficial owners of "B"
shares (such shares referred to herein as the "Shares") of one or more of the
Company's investment portfolios (individually, a "Fund" and collectively, the
"Funds"), which are listed on Appendix A.
The terms and conditions of this Administrative Servicing Agreement are as
follows:
Section 1. You agree to provide administrative support services to your
customers who may from time to time own of record or beneficially a Fund's
Shares. Services provided may include some or all of the following: (i)
processing dividend and distribution payments from a Fund on behalf of Clients;
(ii) providing information periodically to your Clients showing their positions
in the Shares; (iii) arranging for bank wires; (iv) responding to routine Client
inquiries concerning their investment in Shares; (v) providing the information
to the Funds necessary for accounting or sub-accounting; (vi) if required by
law, forwarding shareholder communications from a Fund (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Clients; (vii) aggregating and processing
purchase, exchange, and redemption requests from Clients and placing net
purchase, exchange, and redemption orders for your customers; (viii) providing
customers with a service that invests the assets of their accounts in the Shares
pursuant to specific or pre-authorized instructions; (ix) establishing and
maintaining accounts and records relating to Clients that invest in Shares; (x)
assisting customers in changing dividend options, account designations and
addresses; or (xi) other similar services if requested by the Company.
Section 2. You will provide such office space and equipment, telephone and
personnel (which may be any part of the space, equipment and facilities
currently used in your business, or any personnel employed by you) as may be
reasonably necessary or beneficial in order to provide the aforementioned
services to Clients.
Section 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us, a Fund, or its Shares
except those contained in our then current prospectus for such Shares, copies of
which will be supplied by us to you, or in such
<PAGE> 5
supplemental literature or advertising as may be authorized by us in writing.
Section 4. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us in any
matter or in any respect. You will not engage in activities pursuant to this
Agreement which constitute acting as a broker or dealer under state law unless
you have obtained the licenses required by law. You and your employees will,
upon request, be available during normal business hours to consult with us or
our designees concerning the performance of your responsibilities under this
Agreement.
Section 5. In consideration of the services and facilities provided by you
hereunder, we will pay to you, and you will accept as full payment therefore, a
fee at the annual rate of up to .__% of the average daily net assets of the
particular Fund's outstanding Shares owned of record or beneficially by your
Clients from time to time for whom you are the dealer of record or holder of
record or with whom you have a servicing relationship. Said fee will be computed
daily and payable monthly. For purposes of determining the fees payable under
this Section 5, the average daily net asset value of the Clients' Shares will be
computed in the manner specified in our then current Registration Statement in
connection with the computation of the net asset value of the particular Fund's
Shares for purposes of purchases and redemptions. The fee rate stated above may
be prospectively increased or decreased by us, in our sole discretion, at any
time upon notice to you. Further, we may, in our discretion and without notice,
suspend or withdraw the sale of Shares, including the sale of such Shares to you
for the account of any Client(s).
Section 6. You acknowledge that you will provide to the Funds' Board of
Directors, at least quarterly, a written report of the amounts expended pursuant
to this Agreement and the purposes for which such expenditures were made. In
connection with such revenues, you will furnish us or our designees with such
information as we or they may reasonably request (including, without limitation,
periodic certifications confirming the provision to Clients of some or all of
the services described herein), and will otherwise cooperate with us and our
designees (including, without limitation, any auditors designated by us), in
connection with the preparation of reports to the Funds' Board of Directors
concerning this Agreement and the monies paid or payable by us pursuant hereto,
as well as any other reports or filings that may be required by law.
Section 7. We may enter into other similar Servicing Agreements with any other
person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you represent, warrant
and agree that: (i) in no event will any of the services provided by you
hereunder be primarily intended to result in the sale of Shares; (ii) the
compensation payable to you hereunder, together with any other compensation you
receive from Clients in connection with the investment of their assets in Shares
of the Funds, will be disclosed to your Clients, will be authorized by your
Clients and will not be excessive or unreasonable.
Section 9. This Agreement will become effective on the date a fully executed
copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until October 31, 1998, and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by the Funds in the
manner described in Section 12 hereof. This Agreement is terminable with respect
to any Class
<PAGE> 6
of Shares, without penalty, at any time by the Funds (which termination may be
by vote of a majority of our Disinterested Directors as defined in Section 12
hereof or by vote of the holders of a majority of the outstanding Shares of such
Class) or by you upon notice to the other party hereto. This Agreement will
terminate in the event of its assignment (as defined in the Investment Company
Act of 1940 (the "Act")).
Section 10. All notices and other communications to either you or us will be
duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address shown above.
Section 11. This Agreement will be construed in accordance with the laws of the
State of Maryland without giving effect to principles of conflict of laws.
Section 12. This Agreement has been approved by vote of a majority of (i) a
Company's Board of Directors and (ii) those Directors who are not "interested
persons" (as defined in the Act) of the Company and have no direct or indirect
financial interest in the operation of the Distribution and Services Plan
adopted by us regarding the provision of administrative support services to the
record or beneficial owners of Shares or in any agreements related thereto
("Disinterested Directors"), cast in person at a meeting called for the purpose
of voting on such approval.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, Provident Distributors, Inc., Four Falls Corporate Center, 6th Floor,
West Conshohocken, Pennsylvania 19428.
Very truly yours,
PACIFIC HORIZON FUNDS, INC.
By:____________________________________________________
Authorized Officer
Accepted and Agreed to:
____________________________________
Name of Organization
By:___________________________________________________
Authorized Officer
Date:_______________________________
______________________________________________________
Taxpayer Identification Number
<PAGE> 7
_____________________________________________
Account Number
_____________________________________________
Dealer Code
<PAGE> 8
Please check the appropriate boxes to indicate the Funds of the Company
for which you wish to act as a Service Organization with respect to the Shares:
[ ] Aggressive Growth Fund (Class D - Special Series 3)
[ ] U.S. Government Securities Fund (Class E - Special Series 3)
[ ] Capital Income Fund (Class F - Special Series 3)
[ ] California Municipal Bond Fund (Class G - Special Series 3)
[ ] Intermediate Bond Fund (Class M - Special Series 3)
[ ] Blue Chip Fund (Class N - Special Series 3)
[ ] Asset Allocation Fund (Class O - Special Series 3)
[ ] National Municipal Bond Fund (Class Q - Special Series 3)
[ ] Utilities Fund (Class R - Special Series 3)
[ ] Growth and Income Fund (Class S - Special Series 3)
[ ] International Equity Fund (Class T - Special Series 3)
[ ] Short-Term Government Fund (Class U - Special Series 3)
[ ] International Bond Fund (Class V - Special Series 3)
[ ] Flexible Income Fund (Class W - Special Series 3)
___________________________________________
(Service Organization Name)
By:________________________________________
___________________________________________
Authorized Officer
Dated:_____________________________________
A-1
<PAGE> 9
Approved June 22, 1998
PACIFIC HORIZON FUNDS, INC.
(the "Company")
DISTRIBUTION AGREEMENT
to
DISTRIBUTION AND SERVICES PLAN
Ladies and Gentlemen:
We wish to enter into this Distribution Agreement ("Agreement") with you
concerning the provision of distribution services in connection with Special
Series 3 shares ("Shares") of each of the Company's Funds which are listed on
Appendix A.
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide reasonable assistance in connection with
the distribution of Shares to your Clients as requested from time to time by us,
which assistance may include without limitation forwarding sales literature and
advertising provided by us for Clients, advancing commission payments to other
organizations in connection with the sale of shares and such other similar
services as we may reasonably request to the extent you are permitted to do so
under applicable statutes, rules and regulations.
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services and assistance to Clients.
Section 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us or the Shares except those
contained in the Company's applicable prospectuses and statements of additional
information for the Shares, copies of which will be supplied by us to you, or in
such supplemental literature or advertising as may be authorized by us in
writing.
Section 4. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us or our
distributor in any matter or in any respect. Each broker-dealer shall warrant
and represent that it is licensed as a dealer under applicable law. By your
written acceptance of this Agreement, you agree to and do release, indemnify and
hold us harmless and our distributor harmless from and against any and all
direct or indirect liabilities or losses resulting from requests, directions,
actions or inactions of or by you or your officers, employees or agents
regarding your responsibilities hereunder or the purchase, redemption, transfer
of registration of Shares (or orders relating to the same) by or on behalf of
Clients. You and your employees will, upon request, be available during normal
business hours to consult with us or our designees concerning the performance of
your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided by you
hereunder, we will pay to you, and you will accept as full payment therefor, a
fee at the annual rate of __% of the average daily net asset value of the Shares
beneficially owned by your Clients for whom you are the dealer of record or
holder of record or Clients of an affiliate of yours for whom your affiliate is
the dealer of record or holder of record (the "Clients' Shares"), which fee will
be computed daily and payable monthly. For purposes of determining the fees
payable under this Section 5, the average daily net asset value of the Clients'
Shares will be computed in the manner specified in the Company's Registration
Statement (as the same is in effect from time to time) in connection with the
computation of the net asset value of the particular Shares involved for
purposes of purchases and redemptions. The fee rate stated above may be
prospectively increased or decreased by us, in our sole discretion, at any time
upon notice to you. Further, we may, in our discretion and without notice,
suspend or withdraw the sale of Shares, including the sale of Shares for the
account of any Client or Clients.
Section 6. Any person authorized to direct the disposition of monies paid
or payable by us pursuant to this Agreement will provide to us and our
distributor, and our Directors will review, at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made. In addition, you will furnish us or our designees with such information as
we or they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Directors concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
<PAGE> 10
Section 7. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you represent,
warrant and agree that this Agreement has been entered into pursuant to Rule
12b-1 under the Investment Company Act of 1940, and is subject to the provisions
of said Rule, as well as any other applicable rules or regulations promulgated
by the Securities and Exchange Commission.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until October 31, 1998 and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by the Company in the
manner described in Section 12. This Agreement is terminable with respect to any
series of Shares, without penalty, at any time by the Company (which termination
may be by a vote of a majority of the Disinterested Directors as defined in
Section 12 or by vote of the holders of a majority of the outstanding Shares of
such series) or by us or you upon notice to the other party hereto. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the Act).
Section 10. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
Section 11. This Agreement will be construed in accordance with the laws
of the State of Maryland.
Section 12. This Agreement has been approved by vote of a majority of (i)
the Company's Board of Directors and (ii) those Directors of the Company who are
not "interested persons" (as defined in the Act) of the Company and have no
direct or indirect financial interest in the operation of the Distribution and
Services Plan adopted by the Company regarding the provision of distribution
services in connection with the Shares or in any agreement related thereto cast
in person at a meeting called for the purpose of voting on such approval
("Disinterested Directors").
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to Provident Distributors, Inc., Four Falls Corporate Center, 6th Floor, West
Conshohocken, Pennsylvania 19428.
Very truly yours,
PACIFIC HORIZON FUNDS, INC.
By: ____________________________
Date: ________________ Authorized Officer
Accepted and Agreed to:
Name of Organization
By: ____________________________
Date: ________________ Authorized Officer
_____________________________
Taxpayer Identification Number
______________________________
Account Number
______________________________
-2-
<PAGE> 11
Dealer Code
-3-
<PAGE> 12
APPENDIX A
Please check the appropriate boxes to indicate the Funds of the
Company for which you wish to act as a Distribution Organization with respect to
the Shares:
[ ] Prime Fund (Class B - Special Series 3)
[ ] Aggressive Growth Fund (Class D - Special Series 3)
[ ] U.S. Government Securities Fund (Class E - Special Series 3)
[ ] Capital Income Fund (Class F - Special Series 3)
[ ] California Municipal Bond Fund (Class G - Special Series 3)
[ ] Tax-Exempt Money Fund (Class I - Special Series 3)
[ ] Intermediate Bond Fund (Class M - Special Series 3)
[ ] Blue Chip Fund (Class N - Special Series 3)
[ ] Asset Allocation Fund (Class O - Special Series 3)
[ ] National Municipal Bond Fund (Class Q - Special Series 3)
[ ] Utilities Fund (Class R - Special Series 3)
[ ] Growth and Income Fund (Class S - Special Series 3)
[ ] International Equity Fund (Class T - Special Series 3)
[ ] Short-Term Government Fund (Class U - Special Series 3)
[ ] International Bond Fund (Class V - Special Series 3)
[ ] Flexible Income Fund (Class W - Special Series 3)
________________________________
(Distribution Organization Name)
By:_____________________________
________________________________
Authorized Officer
Dated:__________________________
-4-
<PAGE> 1
EXHIBIT (o)
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18f-3
FOR OPERATION OF A MULTI-CLASS SYSTEM
I. INTRODUCTION
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") adopted Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution structure without the need to obtain an exemptive order
under Section 18 of the 1940 Act. Rule 18f-3, which became effective on April 3,
1995, requires an investment company to file with the Commission a written plan
specifying all of the differences among classes, including the various services
offered to shareholders, different distribution arrangements for each class,
methods for allocating expenses relating to those differences and any conversion
features or exchange privileges. The Company operated a multi-class distribution
structure pursuant to an exemptive order granted by the Commission on November
17, 1989. On April 27, 1995, the Board of Directors of the Company authorized
the Company to operate its current multi-class distribution structure in
compliance with Rule 18f-3.
II. ATTRIBUTES OF CLASSES
A. GENERALLY
MONEY MARKET FUNDS
The Company is authorized to offer six classes of shares -- Pacific
Horizon Shares, Horizon Shares, Horizon Service Shares, Class S Shares, Class X
Shares and Class Y Shares -- in the Prime and Treasury Funds. The Company is
authorized to offer five classes of shares -- Pacific Horizon Shares, Horizon
Shares, Horizon Service Shares, Class S Shares, and Class X Shares in the
California Tax-Exempt Money Market Fund. The Company is authorized to offer four
classes of shares -- Pacific Horizon Shares, Horizon Shares, Horizon Service
Shares and Class S Shares -- in the Tax-Exempt Money Fund. The Company is
authorized to offer three classes of shares -- Pacific Horizon Shares, Horizon
Shares and Horizon Service Shares in the Treasury Only and Government Funds. The
Prime Fund, Treasury Fund, California Tax-Exempt Money Market Fund, Treasury
Only Fund, Government Fund,
- 1 -
<PAGE> 2
and Tax-Exempt Money Fund are each referred herein as a "Fund," and collectively
as the "Money Market Funds."
NON-MONEY MARKET FUNDS
The Company is authorized to offer four classes of shares -- Class A
Shares, Class B, Class K Shares and Class SRF Shares -- in the Asset Allocation,
Blue Chip and Intermediate (formerly, Flexible) Bond Funds. The Company is
authorized to offer three classes of shares -- Class A Shares, Class B and Class
K Shares -- in the Aggressive Growth, Capital Income, U.S. Government
Securities, Flexible Income (formerly, Corporate Bond), Utilities, Growth and
Income, International Bond, International Equity, California Municipal Bond
(formerly, California Tax-Exempt Bond) and National Municipal Bond Funds. The
Company is authorized to offer two classes of Shares -- Class A Shares and Class
B Shares -- in the Short-Term Government Fund. The Aggressive Growth, Capital
Income, U.S. Government Securities, Flexible Income (formerly, Corporate Bond),
Blue Chip, Asset Allocation, Intermediate (formerly, Flexible) Bond, Utilities,
Short-Term Government, Growth and Income, International Bond, International
Equity, California Municipal Bond (formerly, California Tax-Exempt Bond) and
National Municipal Bond Funds are each referred to herein as a "Fund," and
collectively as the "Non-Money Market Funds."
ALL FUNDS
In general, shares of each class shall be identical except for
different expense variables (which will result in different returns for each
series), certain related rights, certain distribution, administrative and
shareholder services and certain sales charges. More particularly, the Pacific
Horizon Shares, Horizon Shares, Horizon Service Shares, Class X Shares, Class S
Shares and Class Y Shares of the Money Market Funds and Class A Shares, Class B
Shares, Class K Shares and Class SRF Shares of the Non-Money Market Funds shall
represent interests in the same portfolio of investments of the particular Fund,
and shall be identical in all respects, except for: (a) the impact of expenses
assessed to the Pacific Horizon Shares pursuant to a Special Management Services
Plan, expenses assessed to the Horizon Service Shares, Class A Shares and Class
SRF Shares pursuant to the Shareholder Services Plan adopted for such classes,
expenses assessed to Class S Shares, Class X Shares, Class B Shares, and Class Y
Shares pursuant to the Distribution and Services Plan adopted for such classes,
expenses assessed to Class K Shares pursuant to the Distribution Plan and
Administrative and Shareholder Services Plan adopted for such class, the sales
charges imposed on Class A and Class B Shares and any other incremental expenses
subsequently identified that should be properly allocated to one class so long
as any subsequent changes in expense allocations are reviewed and
- 2 -
<PAGE> 3
approved by a vote of the Board of Directors, including a majority of the
independent directors; (b) the fact that a class shall vote separately on
matters which pertain to the Special Management Services Plan, Shareholder
Services Plan, Distribution and Services Plan, Distribution Plan, or
Administrative and Shareholder Services Plan adopted for that class and any
matter submitted to shareholders relating to such class's expenses; (c) the
different exchange privileges, sales charges and conversion features of the
class of shares; (d) the designation of each class of shares of the particular
Fund; and (e) the different shareholder services relating to a class of shares.
B. DISTRIBUTION AND SERVICING ARRANGEMENTS, EXPENSES AND SALES CHARGES
1. MONEY MARKET FUNDS
PACIFIC HORIZON SHARES
Pacific Horizon Shares are currently available for purchase by
individuals directly from the Company's distributor, by clients of Bank of
America National Trust and Savings Association ("Bank of America") through their
qualified trust and agency accounts and by clients of certain institutions such
as banks or broker-dealers ("Service Organizations"). Pacific Horizon Shares
shall not initially be subject to a sales charge (except as provided below) but
shall initially be subject to a servicing fee payable pursuant to a Special
Management Services Plan which shall not initially exceed 0.32% (on an annual
basis) of the average daily net asset value of each Fund's (other than the
California Tax-Exempt Money Market Fund) Pacific Horizon Shares outstanding from
time to time and 0.35% (on an annual basis) of the average daily net asset value
of the California Tax-Exempt Money Market Fund's Pacific Horizon Shares
outstanding from time to time.
Shareholder services covered by the Special Management Services Plan
initially shall consist of: (i) aggregating and processing purchase and
redemption requests for shares from clients and placing net purchase and
redemption orders with the distributor; (ii) providing clients with a service
that invests the assets of their accounts in such shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend payments from us on
behalf of clients; (iv) providing statements periodically to clients showing
their positions in such shares; (v) providing subaccounting with respect to
shares beneficially owned by clients or the information to the Company necessary
for subaccounting; (vi) if required by law, forwarding shareholder
communications from the Company (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax notices)
to clients; (vii) forwarding to clients proxy statements and proxies containing
any
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<PAGE> 4
proposals regarding the Special Management Services Plan; (viii) developing and
monitoring investor programs offered from time to time; (ix) providing dedicated
walk-in and telephone facilities to handle client inquires and serve client
needs; (x) providing and maintaining specialized systems for the automatic
investments of clients; (xi) maintaining the registration or qualification of a
class for sale under state securities laws; (xii) paying for the operation of
arrangements that facilitate same-day purchases by clients; (xiii) assuming the
expense of payments made to third parties for services provided in connection
with the investments of their customers in a class; and (xiv) providing various
other services (such as the provision of a facility to receive purchase and
redemption orders) for shareholders who have made a minimum initial investment
of less than $500,000; and (xv) providing such other similar services as the
Company may reasonably request to the extent permitted under applicable
statutes, rules or regulations.
Pacific Horizon Shares of the Prime Fund acquired through exchange
of shares ("B Shares") of the Time Horizon Funds offered with a contingent
deferred sales charge ("CDSC") will be subject to a maximum CDSC of up to 5.00%
upon redemption in accordance with the prospectus for B Shares of Time Horizon
Funds. For purposes of computing the CDSC, the length of time of ownership will
be measured from the date of the original purchase of B Shares and will not
include any period of ownership of the Y Shares of the Prime Fund.
HORIZON SHARES
Horizon Shares are currently offered to institutional investors and
shall not be available for purchase by individuals directly. Horizon Shares are
not currently subject to a sales charge or a fee payable pursuant to a
Shareholder Services Plan.
HORIZON SERVICE SHARES
Horizon Service Shares are currently offered to institutional
investors such as Bank of America or the Company's administrator (also referred
to as "Shareholder Organizations"), who are compensated by the Money Market
Funds for providing shareholder services pursuant to a Shareholder Services
Agreement to their customers who are the beneficial owners of the Horizon
Service Shares. Horizon Service Shares are not available for purchase by
individuals directly. Horizon Service Shares are not currently subject to a
sales charge but shall be subject to a shareholder servicing fee payable
pursuant to a Shareholder Services Plan adopted for that class which shall not
initially exceed 0.25% (on an annualized basis) of the average daily net asset
value of the Horizon Service Shares beneficially owned by the customers of
Shareholder Organizations.
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<PAGE> 5
The services provided by Shareholder Organizations may initially
include the following: (i) aggregating and processing purchase and redemption
requests from customers for Horizon Service Shares and placing net purchase and
redemption orders with the distributor; (ii) providing customers with a service
that invests the assets of their accounts in Horizon Service Shares pursuant to
specific or preauthorized instructions; (iii) processing dividend payments from
a Fund on behalf of customers; (iv) providing information periodically to
customers regarding their position in Horizon Service Shares; (v) arranging for
bank wires; (vi) responding to customer inquiries regarding services performed
by the Shareholder Organizations; (vii) providing sub-accounting with respect to
Horizon Service Shares beneficially owned by customers or the information
necessary for sub-accounting; (viii) forwarding shareholder communications from
a Fund to customers; and (ix) other similar services if requested by a Fund.
CLASS S SHARES
Class S Shares are currently available only to retail customers of
Bank of America, its affiliates or a Service Organization who purchase such
shares through a Sweep Account offered by Bank of America, its affiliates or the
Service Organization. Class S Shares shall not initially be subject to a sales
charge. Class S Shares shall initially be subject to distribution and
shareholder servicing fee payable pursuant to the Distribution and Services Plan
adopted for that class which shall not initially exceed 1.00% of the average
daily net asset value of outstanding Class S Shares. Distribution expenses
covered by the Distribution and Services Plan include: (i) direct out-of-pocket
promotional expenses incurred by the distributor in advertising and marketing
Class S Shares; (ii) expenses incurred in connection with preparing, printing,
mailing, and distributing or publishing advertisements and sales literature for
Class S Shares; (iii) expenses incurred in connection with printing and mailing
prospectuses and statements of additional information to other than current
Class S shareholders; (iv) 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, including any of the Company's service providers (severally, "a
Distribution Organization" and collectively, "Distribution Organizations"), with
respect to a Fund's Class S Shares beneficially owned by customers for whom the
Distribution Organization is the Distribution Organization of record or holder
of record of such Class S Shares; (v) the direct or indirect cost of financing
the payments or expenses included in (i) and (iv) above; and (vi) for such other
services as may be construed, by any court or governmental agency or commission,
including the Commission, to constitute distribution services under the 1940 Act
or rules and regulations thereunder.
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<PAGE> 6
Shareholder services covered by this Distribution and Services Plan
include: (i) processing dividend and distribution payments from a Fund on behalf
of its clients; (ii) providing information periodically to its clients showing
their positions in Class S Shares; (iii) arranging for bank wires; (iv)
responding to routine client inquiries concerning their investment in Class S
Shares; (v) providing the information to the Funds necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from a Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its clients;
(vii) aggregating and processing purchase, exchange and redemption requests from
its clients and placing net purchase, exchange and redemption orders for its
clients; (viii) providing customers with a service that invests the assets of
their accounts in S Shares pursuant to specific or pre-authorized instructions;
(ix) establishing and maintaining accounts and records relating to clients that
invest in Class S Shares; (x) assisting clients in changing dividend options,
account designations and addresses; (xi) developing, maintaining and operating
systems necessary to support Sweep Accounts; and (xii) other similar services if
requested by the Company.
CLASS X SHARES
Class X Shares are currently available only to customers of BA
Investment Services, Inc. or Service Organizations who purchase such shares
through a Sweep Account offered by BA Investment Services, Inc. or Service
Organizations. Class X Shares shall not initially be subject to a sales charge.
Class X Shares also shall initially be subject to a distribution and shareholder
servicing fee payable pursuant to the Distribution and Services Plan adopted for
that class which shall not initially exceed 0.55% of the average daily net asset
value of outstanding Class X Shares. Distribution services and shareholder
services under the Distribution and Services Plan for Class X Shares are the
same as those covered by the Distribution and Services Plan for Class S Shares.
CLASS Y SHARES
Class Y Shares are currently available only to institutional
customers of Bank of America, its affiliates or a Service Organization who
purchase such shares through a Sweep Account offered by Bank of America, its
affiliates or the Service Organization. Class Y Shares shall not initially be
subject to a sales charge. Class Y Shares also shall initially be subject to a
distribution and shareholder servicing fee payable pursuant to the Distribution
and Services Plan adopted for that class which shall not initially exceed 1.00%
of the average daily net asset value of outstanding Class Y Shares. Distribution
expenses and shareholder services covered by the Distribution and Services
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<PAGE> 7
Plan for Class Y Shares are identical to those covered by the Distribution and
Services Plan for Class S Shares.
Y Shares of the Prime Fund acquired through exchange of shares ("B
Shares") of the Company offered with a contingent deferred sales charge ("CDSC")
will be subject to a maximum CDSC of up to 5.50% upon redemption in accordance
with the prospectus for B Shares of the Company. For purposes of computing the
CDSC, the length of time of ownership will be measured from the date of the
original purchase of B Shares and will not include any period of ownership of
the Y Shares of the Prime Fund.
2. NON-MONEY MARKET FUNDS
CLASS A SHARES
Class A Shares are currently offered to the general public and shall
initially be subject to a front-end sales charge which shall not initially
exceed 5.50% of the offering price of Class A Shares. Class A Shares are also
currently subject to a fee payable pursuant to a Shareholder Services Plan which
currently does not initially exceed 0.25% (on an annual basis) of the average
daily net asset value of the Class A Shares.
Services covered by the Shareholder Services Plan adopted for the
class currently 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 Class A Shares. Support services
provided by Service Organizations may include, among other things: (i)
establishing and maintaining accounts and records relating to clients that
invest in Fund shares; (ii) processing dividend and distribution payments from
the Funds on behalf of clients; (iii) providing information periodically to
clients regarding their positions in shares; (iv) arranging for bank wires; (v)
responding to client inquiries concerning their investments in Fund shares; (vi)
providing the information to the Funds necessary for accounting or
subaccounting; (vii) if required by law, forwarding shareholder communications
from the Funds (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to clients;
(viii) assisting in processing exchange and redemption requests from clients;
(ix) assisting clients in changing dividend options, account designations and
addresses; and (x) providing such other similar services.
CLASS B SHARES
Class B Shares of the Non-Money Market Funds shall initially be
offered to the general public and may be offered through broker-dealers or other
organizations acting on behalf of their customers. Class B Shares shall be
subject to a CDSC which
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<PAGE> 8
initially shall be payable on certain share redemptions made within six years
(with respect to the Equity Funds) and five years (with respect to the fixed
income funds) of the purchase date at a rate which shall not initially exceed
5.00% (with respect to the equity funds) and 4.0% (with respect to the fixed
income funds) of the lower of (1) the net asset value of the redeemed shares or
(2) the original purchase price of the redeemed shares. Class B Shares are also
currently subject to a fee payable pursuant to a Distribution and Services Plan
which currently does not initially exceed 1.00% (on an annual basis) of the
average daily net asset value of the Class B Shares.
Distribution expenses under the Distribution and Services Plan include: (i)
direct out-of-pocket promotional expenses incurred by the distributor in
advertising and marketing Class B shares; (ii) expenses incurred in connection
with preparing, printing, mailing, and distributing or publishing advertisements
and sales literature for Class B shares; (iii) expenses incurred in connection
with printing and mailing prospectuses and statements of additional information
to other than current Class B shareholders; (iv) periodic payments or
commissions to one or more Distribution Organizations with respect to a Fund's
Class B Shares beneficially owned by customers for whom the Distribution
Organization is the Distribution Organization of record or holder of record of
such Class B Shares; (v) the direct or indirect cost of financing the payments
or expenses included in (i) and (iv) above; or (vi) for such other services as
may be construed, by any court or governmental agency or commission, including
the Commission, to constitute distribution services under the 1940 Act or rules
and regulations thereunder.
Shareholder services provided pursuant to this Distribution and
Services Plan include: (i) processing dividend and distribution payments from a
Fund on behalf of its clients; (ii) providing information periodically to its
clients showing their positions in Class B Shares; (iii) arranging for bank
wires; (iv) responding to routine client inquiries concerning their investment
in Class B Shares; (v) providing the information to the Fund necessary for
accounting or sub-accounting; (vi) if required by law, forwarding shareholder
communications from a Fund (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
its clients; (vii) aggregating and processing purchase, exchange, and redemption
requests from its clients and placing net purchase, exchange, and redemption
orders for its clients; (viii) providing clients with a service that invests the
assets of their accounts in Class B Shares pursuant to specific or
pre-authorized instructions; (ix) establishing and maintaining accounts and
records relating to clients that invest in Class B Shares; (x) assisting clients
in changing dividend options, account designations and addresses; or (xi) other
similar services if requested by the Company.
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<PAGE> 9
CLASS K SHARES
Class K Shares are currently available only 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 thirty days prior to
the purchase order and (ii) such other open-end investment company was not
distributed and advised by Provident Distributors, Inc. ("PDI") or its
affiliates; (c) accounts opened for IRA rollovers from a 401(k) plan in which
the assets were held in any Pacific Horizon or Time Horizon Fund and subsequent
purchases into an IRA rollover account opened as described above, so long as the
original IRA rollover account remains open on the Company's books ("Qualified
IRA Rollovers"), (d) accounts under Section 403(b)(7) of the Internal Revenue
Code of 1986; and (e) deferred compensation plans under Section 457 of the
Internal Revenue Code of 1986.
Class K Shares shall not initially be subject to a sales charge.
Class K Shares shall initially be subject to a distribution fee payable pursuant
to the Distribution Plan adopted for that class which shall not initially exceed
0.75% of the average daily net asset value of outstanding Class K Shares.
Distribution expenses covered by the Distribution Plan include: (i) direct
out-of-pocket promotional expenses incurred by the distributor in advertising
and marketing K Shares; (ii) expenses incurred in connection with preparing,
printing, mailing, and distributing or publishing advertisements and sales
literature; (iii) expenses incurred in connection with printing and mailing
prospectuses and statements of additional information to other than current
shareholders; (iv) periodic payments or commissions to one or more Distribution
Organizations with respect to a Fund's K Shares beneficially owned by customers
for whom the Distribution Organization is the Distribution Organization of
record or holder of record of such K Shares; (v) the direct or indirect cost of
financing the payments or expenses included in (i) and (iv) above; or (vi) for
such other services as may be construed by any court or governmental agency or
commission, including the Commission, to constitute distribution services under
the 1940 Act or rules and regulations thereunder.
Class K Shares also shall initially be subject to an administrative
servicing fee payable pursuant to the Administrative and Shareholder Services
Plan adopted for that class which shall not initially exceed 0.75% of the
average daily net asset value of outstanding Class K Shares. Class K Shares also
shall initially be subject to a shareholder servicing fee payable pursuant to
the Administrative and Shareholder Services Plan adopted for that class which
shall not initially exceed
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<PAGE> 10
0.25% of the average daily net asset value of outstanding Class K Shares.
Administrative services covered by the Administrative and Shareholder
Services Plan include: (i) processing dividend and distribution payments from a
Fund on behalf of clients; (ii) providing statements periodically to clients
showing their positions in Class K Shares; (iii) providing the information to
the Funds necessary for accounting or sub-accounting; (iv) if required by law,
forwarding shareholder communications from a Fund (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to clients; (v) aggregating and processing purchase, exchange,
and redemption requests from clients and placing net purchase, exchange, and
redemption orders for customers; (vi) establishing and maintaining accounts and
records relating to clients that invest in Class K Shares; and (vii) other
similar administrative services that the Company may reasonably request to the
extent permitted under applicable law.
Shareholder services covered by the Administrative and Shareholder
Services Plan include: (i) arranging for bank wires; (ii) responding to routine
client inquiries concerning their investment in the shares; (iii) assisting
customers in changing dividend options, account designations and addresses; and
(iv) other similar shareholder services that the Company may reasonably request
to the extent permitted under applicable law.
Payments under the Distribution Plan and the Administrative and
Shareholder Services Plan are not intended for services if not permitted by the
Employee Retirement Income Security Act of 1974, as amended.
The total of all fees under the Distribution Plan and Administrative
and Shareholder Services Plan may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of a Fund's Class K Shares.
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<PAGE> 11
CLASS SRF SHARES
Class SRF Shares are currently available only to former shareholders
of Seafirst Retirement Funds investing in Eligible Retirement Accounts. Eligible
Retirement Accounts are accounts which were open prior to the date of Seafirst's
reorganization into the Company (the "Reorganization Date"), have remained open
continuously since that date and meet one of the following descriptions:
1)Individual Retirement Accounts that are exempt under Section 408(e) and are
maintained in conformity with Section 408(e) of the Internal Revenue Code of
1986, including a) rollover accounts and Simplified Employee Pension Plans ("SEP
Plans") for which Seafirst Bank or one of its affiliates serves as custodian or
b) IRA's opened after the Reorganization Date under a SEP Plan that was open as
of the Reorganization Date and has remained open continuously since that date,
and 2) qualified pension or profit sharing trusts that are exempt under Section
501(a) and that are maintained in conformity with Section 401(a) of the Internal
Revenue Code of 1986, including a) corporate pension or profit-sharing trusts,
b) pension or profit sharing trusts benefiting one or more self-employed
individuals, or c) accounts opened for new participants in a qualified pension
or profit-sharing trust that was open as of the Reorganization Date and has
remained open continuously since that date. Individual Retirement Accounts which
were open prior to the reorganization of the Bond, Blue Chip and Asset
Allocation Funds of the Seafirst Retirement Funds into SRF shares of the Company
and have remained open continuously since the reorganization may be rolled over
into Roth IRAs under Section 408(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), or other IRAs which become available as a result of
changes in the Code.
Class SRF Shares are not currently subject to a sales charge but shall be
subject to a shareholder servicing fee payable pursuant to a Shareholders
Services Plan adopted for that class which shall not initially exceed 0.25% (on
an annualized basis) of the average daily net asset value of the Class SRF
Shares.
Services covered by the Shareholder Services Plan adopted for the
class currently 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 Class SRF Shares. Support services
provided by Service Organizations may include, among other things: (i)
establishing and maintaining accounts and records relating to clients that
invest in Fund shares; (ii) processing dividend and distribution payments from
the Funds on behalf of clients; (iii) providing information periodically to
clients regarding their positions in shares; (iv) arranging for bank wires; (v)
responding to client inquiries concerning their investments in Fund shares; (vi)
providing the information to the Funds necessary for accounting or
subaccounting; (vii) if
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<PAGE> 12
required by law, forwarding shareholder communications from the Funds (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to clients; (viii) assisting in
processing exchange and redemption requests from clients; (ix) assisting clients
in changing dividend options, account designations and addresses; and (x)
providing such other similar services.
C. CONVERSION FEATURES
1. MONEY MARKET FUNDS
The Company does not currently offer a conversion feature to holders
of Pacific Horizon Shares, Horizon Shares, Horizon Service Shares, Class S
Shares, Class X Shares or Class Y Shares.
2. NON-MONEY MARKET FUNDS
CLASS A SHARES
The Company does not currently offer a conversion feature to holders
of Class A Shares.
CLASS B SHARES
Class B Shares acquired by purchase currently convert automatically
into Class A Shares, based on relative net asset value, at the end of the month
in which the ninth anniversary of the date of purchase occurs.
Class B Shares acquired through reinvestment of dividends or
distributions currently will convert automatically into Class A Shares at the
earlier of the end of the month in which the ninth anniversary of the
reinvestment occurred or the date of conversion of the most recently purchased
Class B Shares that were not acquired through reinvestment of dividends or
distributions.
CLASS K SHARES
The Company does not currently offer a conversion feature to holders
of Class K Shares.
CLASS SRF SHARES
Class SRF Shares acquired in the reorganization of Seafirst
Retirement Funds into the Company, and additional shares acquired through
purchase, exchange and/or the reinvestment of dividends and distributions
currently will convert automatically into Class A Shares of the same Fund on the
third anniversary of the Reorganization Date.
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<PAGE> 13
D. SHAREHOLDER SERVICES
1. EXCHANGE PRIVILEGES
MONEY MARKET FUNDS
Only holders of Pacific Horizon Shares are currently permitted to
exchange their shares in a Fund for like Shares of another Fund of the Company
or for like shares of any Time Horizon Fund provided, however, that (1) Pacific
Horizon Shares of the Prime Fund acquired through an exchange of B Shares of an
investment portfolio of Time Horizon Funds may only be exchanged for B Shares of
an investment portfolio of Time Horizon Funds; (2) Y Shares of the Prime Fund
acquired through an exchange of B Shares of an investment portfolio of the
Company may only be exchanged for B Shares of an investment portfolio of the
Company and (3) such other shares may legally be sold in the state of the
investor's residence. When Pacific Horizon Shares are exchanged for shares of
another Fund of the Company which are sold with a sales load, the applicable
sales load, if any, shall be deducted.
B Shares of Time Horizon Funds and the Company offered with a CDSC
may be exchanged for Pacific Horizon and Y Shares, respectively, of the Prime
Fund. Such exchange-acquired Pacific Horizon and Y Shares of the Prime Fund will
be subject to a CDSC upon redemption in accordance with the prospectus for B
Shares of Time Horizon Funds and the Company, respectively.
NON-MONEY MARKET FUNDS
CLASS A SHARES
Holders of Class A Shares are currently permitted to exchange their
shares for Class A Shares of other Non-Money Market Funds, for Pacific Horizon
Shares of the Money Market Funds or for like shares of any Time Horizon Fund.
Holders of Class A Shares who purchased their shares with a front-end sales
charge generally shall be permitted to exchange their shares without paying an
additional front-end sales charge on shares acquired through the exchange.
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.
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<PAGE> 14
CLASS B SHARES
Holders of Class B Shares shall initially be permitted to exchange
their shares for Class B Shares of other Funds of the Company, Class Y Shares of
the Prime Fund, or for like shares of any Time Horizon Fund without paying a
CDSC at the time the exchange is made.
CLASS K SHARES
Holders of Class K Shares shall initially be permitted to exchange
their shares for Class K Shares of other Funds of the Company or for like shares
of any Time Horizon Fund.
CLASS SRF
Holders of Class SRF Shares in Eligible Retirement Accounts are
currently permitted to exchange their shares for Class SRF Shares of other Funds
of the Company and Class A Shares of any other taxable, Non-Money Market Fund
offered by the Company or Time Horizon Funds without incurring the front-end
sales charge otherwise applicable on Class A Shares ("Eligible Exchange
Shares"). SRF Shares or Eligible Exchange Shares may also be exchanged for
Pacific Horizon Shares of the Prime Fund. Eligible Exchange Shares may further
be exchanged for Class A Shares in any taxable, Non-Money Market Fund offered by
the Company or a Time Horizon Fund without incurring the front-end sales charge
otherwise applicable, or for SRF Shares of a Fund. SRF Shares or Eligible
Exchange Shares held in an IRA account for which a Shareholder's surviving
spouse is the beneficiary may continue to be exchanged for SRF Shares or A
Shares in any other taxable Non-Money Market Fund offered by the Company or Time
Horizon Funds without incurring the front-end sales charge applicable on sales
of A Shares.
2. INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
MONEY MARKET FUNDS
Currently, the Company only makes IRAs, including IRAs set up under
a Simplified Employee Pension Plan and IRA "Rollover Accounts," available to
holders of Pacific Horizon Shares in each Money Market Fund other than the
California Tax-Exempt Money Market Fund and the Tax-Exempt Money Fund.
NON-MONEY MARKET FUNDS
The Company currently makes IRAs available to holders of Class A and
Class B Shares. Class K Shares are available to Qualified IRA Rollovers. Class
SRF Shares are available to participants in an Eligible Retirement Account.
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<PAGE> 15
3. AUTOMATIC INVESTMENT PROGRAM
MONEY MARKET FUNDS
Only holders of Pacific Horizon Shares of each Money Market Fund
currently have an automatic investment plan whereby a shareholder may purchase
Pacific Horizon Shares of a Money Market Fund at regular intervals selected by
the investor.
NON-MONEY MARKET FUNDS
CLASS A SHARES
Holders of Class A Shares currently have an automatic investment
plan whereby, a shareholder may purchase Class A Shares of a Fund at regular
intervals selected by the investor.
CLASS B SHARES
Holders of Class B Shares shall initially have an automatic
investment plan whereby, in general, a shareholder may purchase Class B Shares
of a Fund at regular intervals selected by the investor.
CLASS K SHARES
Holders of Class K Shares shall initially have an automatic
investment plan whereby, in general, a shareholder may purchase Class K Shares
of a Fund at regular intervals selected by the investor.
CLASS SRF SHARES
No automatic investment plan is currently available for Class SRF
Shares.
4. DIRECT DEPOSIT PROGRAM
MONEY MARKET FUNDS
Only holders of Pacific Horizon Shares currently have a direct
deposit program whereby a shareholder who receives payments from the federal
government may purchase Pacific Horizon Shares by having these payments
automatically deposited into his or her Fund account.
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<PAGE> 16
NON-MONEY MARKET FUNDS
CLASS A SHARES
Holders of Class A Shares currently have a direct deposit program
whereby a shareholder who receives payments from the federal government may
purchase Class A Shares of a Fund by having these payments automatically
deposited into his or her Fund Account.
CLASS B SHARES
Holders of Class B Shares shall initially have a direct deposit
program whereby a shareholder who receives payments from the federal government
may purchase Class B Shares of a Fund by having these payments automatically
deposited into his or her Fund Account.
CLASS K SHARES
Holders of Class K Shares shall initially have a direct deposit
program whereby a shareholder who receives payments from the federal government
may purchase Class K Shares of a Fund by having these payments automatically
deposited into his or her Fund Account.
CLASS SRF SHARES
No direct deposit program is currently available for Class SRF
Shares.
5. AUTOMATIC WITHDRAWAL PLAN
MONEY MARKET FUNDS
Only holders of Pacific Horizon Shares currently have an automatic
withdrawal plan whereby a shareholder may request withdrawal of a certain dollar
amount on a monthly, quarterly, semi-annual or annual basis.
NON-MONEY MARKET FUNDS
CLASS A SHARES
Holders of Class A Shares currently have an automatic withdrawal
plan whereby a shareholder may request withdrawal of a certain dollar amount on
a monthly, quarterly, semi-annual or annual basis.
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<PAGE> 17
CLASS B SHARES
Holders of Class B Shares shall initially have an automatic
withdrawal plan whereby a shareholder may request withdrawals of a certain
dollar amount on a monthly, quarterly, semi-annual or annual basis.
CLASS K SHARES
Holders of Class K Shares shall initially have an automatic
withdrawal plan whereby a shareholder may request withdrawals of a certain
dollar amount on a monthly, quarterly, semi-annual or annual basis.
CLASS SRF SHARES
No automatic withdrawal plan is currently available for Class SRF
Shares.
E. METHODOLOGY FOR ALLOCATING EXPENSES BETWEEN CLASSES
Expenses of each Fund will be apportioned to each class of shares
depending upon the nature of the expense item.
Specifically, before determining the daily dividend rates and
yields, the following expense items shall be calculated as follows:
1. GENERAL OPERATING EXPENSES
Operating expenses which are attributable to all classes of shares
("operating expenses") will be allocated among the classes of shares based on
their net asset value at the end of the day. Operating expenses will include
fees paid to Bank of America National Trust and Savings Association ("Bank of
America") under the Investment Advisory Agreement, fees paid to Bank of America
under the Administration Agreement and all other expenses such as custody fees,
transfer agent fees and audit fees, except those specifically listed below.
2. CLASS-SPECIFIC EXPENSES
SHAREHOLDER SERVICES FEES
In addition to their respective pro-rata share of operating
expenses, Horizon Service Shares shall initially bear a shareholder services fee
which is calculated at an annual rate not to exceed 0.25% of the average daily
net asset value of such outstanding shares at the end of the day, Pacific
Horizon Shares
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<PAGE> 18
shall initially bear a special management services fee which is presently
calculated at an annual rate not to exceed 0.32% (0.35% for the California
Tax-Exempt Money Fund) of the average daily net asset value of such outstanding
shares at the end of the day, Class A Shares shall initially bear a shareholder
services fee which is calculated at an annual rate not to exceed 0.25% of the
average daily net asset value of such outstanding shares at the end of the day,
and Class SRF Shares shall initially bear a shareholder services fee which is
calculated at an annual rate not to exceed 0.25% of the average daily net asset
value of such outstanding shares at the end of the day.
DISTRIBUTION AND SERVICES FEES
In addition to their respective pro-rata share of operating
expenses, Class B Shares shall initially bear a distribution and shareholder
services fee which is presently calculated at an annual rate not to exceed 0.75%
and 0.25%, respectively, of the average daily net asset value of such
outstanding shares at the end of the day. Class S Shares shall initially bear a
distribution and shareholder services fee which is calculated at an annual rate
not to exceed 0.75% and 0.25%, respectively, of the average daily net asset
value of such outstanding shares at the end of the day; Class X Shares shall
initially bear a distribution and shareholder services fee which is presently
calculated at an annual rate not to exceed 0.30% and 0.25%, respectively, of the
average daily net asset value of such outstanding shares at the end of the day;
Class Y Shares shall initially bear a distribution and shareholder services fee
which is calculated at an annual rate not to exceed 0.75% and 0.25%,
respectively, of the average daily net asset value of such outstanding shares at
the end of the day; and Class K Shares shall initially bear a distribution fee
which is presently calculated at an annual rate not to exceed 0.75% of the
average daily net asset value of such outstanding shares at the end of the day,
a shareholder services fee which is presently calculated at an annual rate not
to exceed 0.25% of the average daily net asset value of such outstanding shares
at the end of the day, and an administrative services fee which is presently
calculated at an annual rate not to exceed 0.75% of the average daily net asset
value of such outstanding shares at the end of the day. The total of all
distribution, shareholder services and administrative services fees may not
exceed, in the aggregate, the annual rate of 1.00% of the average daily net
assets of the Fund's Class K Shares.
Approved: June 22, 1998
- 18 -
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